As we have seen in previous lessons, there are many similarities between the three main token offerings; ICOs, IEOs, and IDOs. Each type of token offering has its own comparative advantages and disadvantages. In this lesson, we examine the pros and cons of each type of offering to give you a holistic picture of these types of fundraising events.
ICOs popularized the token offering as a form of investing in crypto because people believed it was a great way to invest in early-stage crypto startups. ICOs were seen as more inclusive than other forms of fundraising because anyone could buy tokens at pre-launch prices instantly with no middleman. However, the popularity of ICOs waned considerably because of the abundance of scams that began to populate the space. ICO investors had to blindly put faith into the team and code of the fundraising project and it led to people losing money and to inviting the scrutiny of regulatory bodies. ICOs were soon prohibited in a number of jurisdictions.
IEOs, on the other hand, are managed by the CEXs that host them and therefore averted the plague of scams that gripped ICOs. From the ashes of the ICO, was born the IDO which stands today with IEOs as the most common forms of token offerings in the crypto space. Let us look at these two types of token offerings in more detail.
What are the advantages of an IEO?
Trust – Exchanges place high standards on projects who wish to have a token offering through them and choose only those that can ensure the feasibility of the project’s goals. Investors are more assured that the vetting process of the exchange is sound.
- Reliability - The CEX is responsible for collecting funds and distributing the tokens to investors.
- Security – CEXs protect users' funds from the risk of theft, corruption, or any other scam.
- Ease of use - CEX platforms may be considered easier to use than decentralized platforms, especially for beginners.
- Reputation - a project that passes the stringent due diligence processes of the CEX may be seen as more reputable in the eyes of potential users
- Broad user base - Leading CEXs have considerably larger user bases than their decentralized counterparts allowing the project to reach more potential investors and users.
- Regulatory compliance: CEXs handle the KYC/AML processes to meet all legal regulations.
- Marketing support: the CEX supports in enhancing the appeal of the launching project’s platform and token.
- CEX Listing: Typically, the IEO will be followed by a listing of the token for trade on the CEX which is often expensive to the launching project.
What are the disadvantages of an IEO?
- Strict requirements - Exchanges work to ensure that companies do IEOs not only to fundraise but also create value.
- Expensive - Having your IEO on a leading CEX is a costly venture.
- Risks - There are no guarantees of success and many risk factors need to be assessed before choosing to invest in an IEO. Investors should always perform their own due diligence when assessing the viability of any investment opportunity.
What are the advantages of an IDO?
- Trust - Investors do not need to put complete faith in the fundraising project as they trust the DEX or launchpad has performed due diligence on the project to avoid scams.
- Accessibility - IDOs are more accessible for projects and prospective investors alike as launchpads and DEXs do not have steep capital requirements to access the platform.
- Security - most launchpads and DEXs have instituted insurance policies to prevent IDO investors from being harmed by scams or projects that do not meet their listing and development targets.
- Reputation - Projects that launch on tier-1 launchpads may be more reputable in the eyes of potential investors.
- Broad user base - While typically smaller than leading CEXs, launchpads and DEXs have a diversified set of prospective investors and platform users.
- Regulatory compliance - This depends on the DEX or launchpad hosting the IDO. If they require KYC/AML compliance, they will be more regulatory compliant than those that do not have such requirements.
- Marketing support - Launchpads and DEXs aid in the growth of brand awareness and community through various marketing campaigns.
- Liquidity - IDOs help projects raise enough liquidity to list its token on a DEX. ****
What are the disadvantages of an IDO?
- Lighter due diligence - It's much easier for a disreputable project to fundraise through an IDO than it is through an IEO with a large, regulated exchange.
- Ease of use - Potential investors who are not seasoned decentralized veterans may struggle with the nuances of decentralized infrastructure that is necessary for participating in an IDO.
As we can see, IDOs launched on reputable launchpads have managed to capture most of the advantages provided by IEOs and have grown to become an effective source of alternative fundraising opportunities.