IDO vs ICO vs IEO: Best Way to Raise Funds for Your Project
With an increased demand for cryptocurrency and related activities, companies have found a new way to raise funds for their crypto projects on the blockchain network. Crypto is now seen as a financial asset that can be invested and traded on various decentralized exchanges. Similar to an Initial Public Offering (IPO), companies can now raise funds for crypto projects online through an Initial DEX Offering (IDO), Initial Coin Offering (ICO), or Initial Exchange Offering (IEO). Funds raised via IDO vs ICO vs IEO are slightly different, but the main principle is the same – a crypto token or a coin is offered to investors in exchange for other cryptocurrencies before it gets listed on the decentralized exchange network.
Investors take on the opportunity to invest in crypto projects to get high returns in the future. Of course, these tokens or coins’ value is based on the project’s future performance.
There are other ways to raise funds for crypto projects, but these remain the popular ones. Here, we will look into each in detail and learn the essential differences between IDO vs ICO and IEO Vs ICO. These differences will help you make important decisions if you want to raise funds for your crypto projects.
What is an IDO?
An Initial DEX Offering or IDO is one of the current popular crypto fundraising models for crypto projects. It was introduced as a successor to older models such as Initial Coin Offering (ICO), Initial Exchange Offering (IEO), Security Token Offering (STO), and others. Introduced in 2019, the IDO model offers better security, liquidity, and availability features.
IDO has the benefit of immediate liquidity post-sale in terms of IDO vs ICO. Liquidity pools are an integral part of the IDO model that enables investors to prefer crypto projects under this model to others. However, the crypto fundraising models are still evolving with newer models like Initial Farm Offering (IFO).
How Does IDO Work?
The IDO crypto fundraising model lists the crypto projects on a decentralized exchange (DEX). As a result, the DEX acts as a platform to facilitate the sale of its tokens or coins. There are different DEX platforms, but most of them share a common working principle:
- The crypto project is first submitted on the DEX platform, after which the platform itself properly vets it. This ensures the project is legitimate and protects investors from fraud and scams.
- Once listed, the DEX ensures that a fixed supply of tokens is made available at a fixed price. It also ensures that the investors cannot buy more tokens after a limited amount to prevent pump and dump after inflating the prices.
- After that, anyone is free to invest their money into buying these tokens. Generally, investing is only open to those who are a member of the DEX platform or have a crypto wallet.
- After raising enough funds, a liquidity pool is created and locked for a certain period. The remaining funds are then provided for the project itself.
- Investors are then free to trade or keep the token for as long as they like in hopes of future profits or earning a passive income.
Pros of an IDO
As one of the newer crypto fundraising models, IDO offers various benefits to project owners and investors. The IDO model succeeded in a few fields where the earlier models had failed. Some of these benefits include:
Reliable Crypto Projects
One of the critical benefits of an IDO model is that the project is thoroughly vetted before it is allowed to be listed on the DEX platform. Hence, it builds trust and confidence for the investors to invest in the project as they will be less likely to be scammed by an unknown project.
Immediate Liquidity Post-Sale
As mentioned earlier, IDOs lock up a portion of the funds raised into a liquidity pool. This is done to prevent volatility and slippage of the project. This allows the project owners to get funds as and when a target is reached to continue working on the project’s development.
No KYC or AML
A decentralized exchange platform does not believe in control or other bias. Hence, anyone can invest in a crypto project if they have a crypto address and are a member of the DEX platform where the crypto project is hosted. However, some DEX platforms allow investors to trade after completing a few marketing tasks, such as buying, selling, or trading.
Suitable for Startups
Launching a new crypto project via the IDO model is easy and affordable compared to a large centralized exchange. In the former, crypto projects have to first pay exchange fees to get them listed on the exchange. However, the IDO model requires no such fees and can be listed on the DEX platform after it is carefully vetted. Hence, it is preferred by small crypto projects or startups.
Prevent Pump and Dump
The fixed supply and price of the crypto project tokens prevent investors from pumping and dumping. This is also an anti-whale measure commonly seen in the stock market. Buying tokens in bulk can inflate prices and cause problems for new investors who want to invest in the same project. As a result, the DEX platform ensures that no such activity occurs.
Cons of an IDO
Despite its many benefits, IDO still has a few shortcomings. Although they are not much, they may matter to some investors and project owners. These few drawbacks include
Due Diligence of Projects
Since the DEX platforms vet the crypto projects, the process is not necessarily shared with the investors. Moreover, different DEX platforms may have different vetting processes that may or may not benefit the investors. In the end, investors should do their research on a project before investing. Moreover, the popularity of a DEX platform also ends up playing an important role where investors can trust the projects listed on their exchange.
Lack of Control
Although it is easy to get a crypto project listed on the DEX platform, they offer little control to the project owners regarding token price changes or KYC regulations. Most may not be an issue, but some project owners need that control to handle their fundraising goals better.
No KYC or AML
In continuance of the above point, the IDO model doesn’t require investors to go through a KYC or AML. As a result, it is impossible to check if an investor is engaging in money laundering of illegal funds or whether they are using their funds to evade their economic responsibilities. For now, some countries have made investing illegal in a crypto project if the token is considered a security.
What is an ICO?
Introduced in 2013 as the first crypto fundraising model, Initial Coin Offering (ICO) became a popular method for raising funds for crypto projects. Like IDO, it started by offering a limited supply of tokens for investors to buy. These tokens could be later traded or exchanged for other cryptocurrencies at the time.
The ICO model helped many startups raise funds as there was no vetting process to get their crypto listed on the exchange platform. However, this led to many frauds and scams, leading investors to lose money. Moreover, tokens were sold before they were even listed on the platform. Hence, a crypto project’s success on an ICO model primarily depends on the investors’ interest in the project. As a result, only a few projects earned them money, while many others cost the investors as they were frauds or performed poorly.
How Does ICO Work?
Since its inception, ICO crypto fundraising models have been relatively easier to use since there is no vetting process for getting the project listed on an exchange platform. Project owners only had to pay a fee to get it listed. Hence, it had the following working principle:
- To begin with, crypto projects must provide a pitchbook called a white paper to list their reasons for fundraising. These included details like
- Project name
- Project’s goals
- Fundraising target
- Number of tokens available for investors
- Types of payment accepted.
- Duration of the ICO campaign
- Startups and crypto project owners must pay an exchange fee to get it listed on their preferred platform.
- Then, the amount and price of the tokens are decided, after which they are distributed to the investors.
- Once enough investors are onboard with the project, the tokens can be traded across the platform in exchange for other cryptocurrencies.
Regarding IDO vs ICO, ICO had free reign over the type of tokens it could offer the investors. Most crypto projects started by offering utility tokens that allowed the investors to enjoy future access to the project’s services or other utilities. As a result, they were not exactly an asset the investors could sell later if the project did well. Alternatively, tokens were also offered as security, allowing the investors to enjoy a monetary gain in the future as its value would depend on external assets such as company shares.
Pros of an ICO
Although IDOs are more beneficial when it comes to IDO vs ICO, they have a few benefits over the former. Some of these benefits include
Potential for High Returns
In comparison between IDO vs ICO, ICO has a higher probability of giving high returns to the investors. However, this statement mostly holds for early investors who have bought the tokens during the initial stage. Moreover, the high returns depended on the overall performance of the crypto project. This depended again on the number of investors who wished to buy its token.
Easy for Smaller Companies and Startups
Due to the lack of a vetting process, any crypto projects could be listed on an exchange platform after paying the exchange fees. As a result, it was convenient and easy to set up.
Accessible to Anyone
As the point states, it was easy for anyone to invest in an ICO if they had a crypto wallet. Hence, there were no restrictions for the investors.
Cons of an ICO
With its few benefits, ICOs came with significant disadvantages. Some of these drawbacks of the ICO fundraising model include
Scams and Frauds
Due to a lack of vetting process for crypto projects, fraudsters and scammers could rob investors of their money via fake promises and other illicit methods such as pumping and dumping.
Expectations for high returns come hand in hand with hefty losses. As mentioned earlier, a token’s value was mainly based on its trading volume and the project’s performance. Hence, many projects failed due to low performance or lost value over time due to investors’ trading behavior.
What is an IEO?
An Initial Exchange Offering (ICO) was introduced in the same year as an IDO in 2019. Like an IDO, it was introduced as a successor to the ICO crypto fundraising model. Here, an exchange platform oversees the overall fundraising. Hence, they are responsible for selling tokens, vetting the crypto projects, and publicizing the crypto project.
The IEO model was built to trust investors who wanted to invest in a crypto project and avoid frauds and scams that were prevalent in the ICO model. When it comes to IEO vs ICO, investors had to go through KYC and AML to be able to invest in a project. Hence, it provided a degree of transparency that allowed many popular crypto projects to succeed today.
How Does IEO Work?
The very first step in an IEO crypto fundraising model is that the project owners have to submit a white paper to the exchange platforms. It has to clearly state the background of the members involved in the project, outline the technology behind it, point out the unique selling points, and the complete tokenomics of the project. After that, the IEO’s working principles include:
- The exchange platform will decide whether a project is fit to be listed on the platform or not.
- Once listed, the investors must go through the process of KYC and AML to get started with buying tokens of the crypto project.
- Although publicizing the project is done by the exchange platform, project owners can also lend a hand through their marketing channels.
Pros of an IEO
Compared to IEO vs ICO, IEO came with many benefits, which helped build a better crypto fundraising model. Some significant benefits include:
Build Confidence between Investors and Project Owners
The IEO solved the first problem of an IEO model: building confidence among the parties involved in the fundraising process. It required the projects to have a proper white paper to avoid frauds and scams from being listed on the exchange platform. As a result, it gave legitimacy to crypto projects.
Better User Experience
Since the crypto projects were hosted on IEO platforms, investors could easily buy, sell, and trade tokens. IEO platforms were also much better designed than ICO platforms. Hence, there were low chances of human error.
Easy to Participate
Once the investors have provided their KYC and AML, they are free to invest in their choice of crypto projects as the platform has payment support for the latest cryptocurrencies on the blockchain network.
Cons of an IEO
Although IEO is better than ICO when it comes to IEO vs ICO, there are still a few drawbacks that may affect the investors and project owners differently. Some of these drawbacks include
Since the crypto projects are listed on a centralized exchange platform, they must pay listing fees or a percentage of the tokens as a commission.
Questionable Vetting Process
Many centralized exchange platforms differ in a few areas. One of these areas includes the vetting process, after which the crypto project is listed on the platform. Since it is not primarily known, crypto projects can be hosted on the platform after a poor vetting process. This can cause investors to incur losses in the future if the project does not perform well or fails. Hence, it is always advised to do proper research on any project before investing.
Pump and Dumps
Crypto projects are hosted on centralized platforms that can cause them to be a victim of pump and dump. This occurs when investors buy a large number of tokens to raise their prices, only to dump them later. As a result, it hurts the investors who invest in the project at later stages.
Difference between IDO vs ICO vs IEO
|Fundraising Model||The Decentralized Exchange (DEX) platform handles the funds.||The funds are handled by the project owners themselves.||The Centralized Exchange (CEX) platform handles the funds.|
|Vetting of Crypto Projects||The vetting process is undertaken by the DEX platform.||There is no vetting process as the project owners make the sales themselves.||The vetting process is done by the CEX platform.|
|KYC/AML Requirement||Not required||Not required||Required|
|Smart Contracts||Created and run by the DEX.||Created and run by the projects.||Created and run by the CEX.|
|Token Listing||DEX lists the project’s tokens and creates a liquidity pool for a certain percentage of the same.||The project owners have to find an exchange platform to offer the tokens for sale.||The tokens are made available and listed by the CEX for sale.|
|Marketing||Both the project owners and the platform undertake the marketing process.||The project owners are responsible for their marketing.||The CEX undertakes the marketing process.|
Conclusion: IDO vs ICO vs IEO
Among the different crypto fundraising models, IDO is mainly preferred as a way to raise funds for crypto projects due to its decentralized nature. It solves most of the problems faced by ICOs and IEOs. Hence, whether IDO vs ICO or IEO vs ICO, the ICO model has become outdated, and it isn’t easy to find legitimate projects under this model. The vetting process available in both IDO and IEO helps the investors to get a clear idea of the project and to make the final decision to spend their money or not. As stated earlier, it is always best to research before investing in a project. You could also invest only a portion of the money you are comfortable enough to lose. This will help prevent frauds and scams that have become prevalent with the ICO model. Hence, IDO, IEO, and other modern models are more trustworthy.
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