Over the last four years, we’ve seen a wide range of fundraising approaches grow popular. ICOs, ITOs, STOs, and IEOs are all forms of initial coin offerings. An Initial DEX Offering (IDO), on the other hand, is a novel sort of financing concept. The IDO concept is based on decentralized liquidity exchanges like Uniswap, Bancor, or Balancer.
Let’s delve in!
What Exactly is an IDO?
A liquidity exchange differs from a conventional decentralized exchange. An order book is used in a normal decentralized exchange to match makers and takers. The use of a decentralized order book frequently leads to substantial slippage as described. As a result, normal decentralized exchanges do not draw as many visitors.
To address this issue, developers created decentralized liquidity exchanges. A liquidity exchange is based on liquidity pools, which traders may use to swap tokens.
A USDC/ETH pool, for example, allows traders to exchange USDC for Ether and vice versa. Simultaneously, investors provide liquidity to this pool by depositing USDC and Ether. As a result of its mechanics, a liquidity exchange provides rapid liquidity at any price level.
This feature is ideal for new projects who wish to issue a token and gain instant liquidity. Liquidity is critical to the life of a token.
The fundraising technique is quite similar to the Initial Exchange Offering (IEO), in which projects launch a token through a controlled exchange (CEX). A CEX, on the other hand, comes with tight rules, such as:
- Not listing a coin on rival exchanges
- Providing a large token stack to an exchange or paying a large price to employ the IEO model
- Being unable to exert control over the limits of your fundraising
Let us now look more closely at the advantages of the IDO paradigm.
The Advantages of the IDO Model
The following are four advantages of the IDO crypto paradigm.
1. Prompt Liquidity
To begin with, a project’s token gains immediate liquidity. History has demonstrated that a lack of liquidity may be terrible for the economy.
As a result, a liquidity pool guarantees liquidity at all price levels with no slippage. It should be noted that the project must first gather some initial liquidity for its liquidity pool in order to facilitate swapping.
2. Trading Immediately
Investors can begin trading a project’s token as soon as it is launched. As a result, we can try to purchase a new token as soon as feasible and then sell it at a better price during the IDO.
Instead, this benefit is negative. The bonding curve model is used by liquidity pools. In simple words, when someone swaps an item, we lower the price of the newly added asset while raising the price of the other one.
3. Cheaper Fees
We’ve all heard that some exchanges charge anywhere from a few thousand to a million dollars to list a project’s coin. Furthermore, many exchanges are strict about which tokens they offer. We may claim that this is censorship. However, that is outside the scope of this document.
If a project employs a liquidity exchange, the deployment of a new smart contract costs just a few euros in gas fees. This smart contract is in charge of the liquidity pool as well as the asset’s token.
Issues with the IDO Model
While the IDO crypto concept appears to be highly promising, keep the following problems in mind.
Inadequate Control Mechanisms
The first issue is a lack of control mechanisms. You want to keep some kind of control over your fundraising, just like you would with any other type of fundraising. A liquidity exchange, on the other hand, is not designed to serve the IDO model. As a result, the price may begin to shift when the first individual exchanges a token for your project’s token.
Asides this, there’s the issue of whales. They have the ability to purchase a big chunk of your project’s tokens. This type of conduct might be dangerous for governance tokens. It’s a simple technique to get control of a project.
Furthermore, no interaction with KYC capability exists. It is critical to capture personally identifiable information for investors in order to conduct lawful fundraisings.
As a result, fundraisers have no control over who buys how many tokens. They also have no clue how much money they’ve raised as a result of the bonding curve model.
Emergency Price Movement
The first individual to purchase a token causes the token price to rise instantaneously. As a result, only a few people will be able to purchase the token at the current token price before it skyrockets.
- Create a bot that purchases a project’s tokens as soon as they are listed on Uniswap.
- Spam the Ethereum network. After you’ve purchased a big number of tokens, begin selling your bag to other investors to earn a rapid profit.
This method was found and reported on Twitter by Roman Storm. It’s a serious issue since bots are far more efficient than people. Again, the IDO paradigm fails to provide a fair and open tokensale.
Liquidity Rug Pulls
Finally, let’s talk about the issue of liquidity rug pulls. Investors must decide fast whether to participate in a fresh swap listing since the price begins to change instantly.
This allowed scammers to list phony tokens with similar ticker symbols to the actual token.
Following that, these bogus listings attempt to get some early liquidity so that the token creators may flee with the Ethereum received from the liquidity pool. Investors are left with a worthless token as a result of this form of liquidity rug pull.
Is the IDO Model Sustainable?
Some of the challenges we find with traditional IEO or ICO funding are addressed by the IDO approach. It does, however, leave several security gaps that we may attack, such as:
- By purchasing a huge number of tokens, whales can obtain significant control over a project.
- Immediate price change does not establish a level playing field for investors.
- Due to the urge to invest immediately, investors often make mistakes such as investing in liquidity scams.
To summarize, the IDO crypto concept is intriguing enough to warrant more investigation in order to improve its robustness. For example, by incorporating KYC capabilities or improving control procedures. One such control mechanism may be the ability to set a fixed price for tokens in your pool until the fundraising campaign is complete. This technique allows you to have more control over who buys your tokens and how many tokens they may buy.
