Blockchain projects are primarily created by the private sector. Those in love with decentralized technology often go beyond being an investor and decide to invest their time as well if they own the required coding skills. Therefore, we have an environment where individual programmers contribute to the market with their skills, creating platforms and tools in the process.
But not anyone has the time to turn a great idea into reality. Developing a dApp or even an entire blockchain network requires teams of developers, designers, writers, and marketing experts. Unless on a voluntary or altruistic basis, the work performed here needs money to reach fruition.
Crypto projects generally cannot gain investments in the same way that startups can. However, the market has its own way of doing business: ICOs.
An ICO (Initial Coin Offering) is a type of investment round where teams raise funds from investors. Anyone can launch an ICO, and the only thing needed to invest in one is a compatible cryptocurrency.
The first wave of ICOs began in 2015 with Ethereum’s rise. Developers looking to build decentralized applications (DApps) on the Ethereum network had to raise funds first, and the way they did that was by hosting ICOs.
ICO campaigns involved buying Ethereum and exchanging it for the project’s native token. Each campaign had an ‘ICO price,’ meaning the value of a token per ETH before the project was launched and hit the market.
If the ICO does not reach a minimum goal, which is defined by the project’s team, the raised funds are returned back to investors. If the goal is indeed reached, then the team uses the funds to develop their idea into a fully-fledged decentralized platform.
Initial coin offerings are good for both developers and investors. While developers have the chance to raise funds and increase the potential success of their projects, investors have the opportunity to invest in a cryptocurrency at the lowest price possible. If an ICO is successful, its token generally tends to increase in value and surpass its ICO price by five times, if not more.
As a result, ICO-hunting became a commonly used investment strategy. Crypto investors would scour crypto websites to find the most promising ICOs and invest in them by conducting fundamental analysis (FA).
The disadvantage of ICOs is that a significant portion of them were scams. Developers announced ‘vaporwave’ ideas that were never planned to be delivered to begin with. An investor would purchase an ICO token and find weeks later that the team disappeared with the money.
This led to governments of various countries, such as China, outright banning ICOs to protect their citizens. Considering that ICOs represented a major hotspot for cryptocurrencies in the last bull run (2015-2017), the ban negatively affected the price of Ethereum and other cryptocurrencies. ICOs were estimated to have raised approximately $5 billion by the end of 2017, which makes sense why the crypto market was thrown out of balance when the ban hit.
Since the ban and the last bull run, ICOs are no longer a popular system for investing and raising funds. ICOs were replaced, in the meantime, by different coin offerings, which we will discuss in the next section.
Besides ICOs, developers have two other alternatives: IEO and IDO.
An IEO stands for initial exchange offering, and it was the first new type of funding mechanism to launch after the rise of ICOs. As the name implies, IEOs are held by cryptocurrency exchanges who oversee the token sale and regulate it.
The important feature of IEOs is that every project that applies for one is heavily moderated. Whitepapers are reviewed, teams are vetted, and even the smart contracts are checked for proper functioning.
Binance Launchpad was the first major exchange to deal with IEOs, and it has effectively revived coin offerings during the period of 2018 to late 2019. This type of offering helped bring back confidence and security to investors, as they now knew that they are not dealing with scams. Moreover, IEOs streamlined the process of investing and turned it into a much more user-friendly experience.
However, the disadvantages were that teams had to pay massive sums of money for listing fees. Additionally, the reviewing process got worse over time as exchanges spent less time on due diligence.
An IDO is a token offering held on a decentralized exchange. The system arrived in the midst of the 2020 DeFi craze and has effectively replaced IEOs.
IDOs are massively different compared to IEOs, as they focus on decentralization. Projects are not forced to go through a vetting process, nor must they pay listing fees to a centralized exchange. It is also important to keep in mind that the vetting process is replaced by the community, which votes on the next project to raise funds for. |
Due to the inherent features of decentralized exchanges, IDOs are quicker and provide immediate access to trading. Users also gain the benefit of holding the tokens directly on a wallet like MetaMask, and not having to store the newly bought tokens on the DEX itself.
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