Traditional finance allows startups to raise funds through specific methods, including but not limited to taking investments from angel investors or VCs, going public through initial public offerings (IPOs), or obtaining loans from the shareholders or accredited institutions. However, blockchain technologies introduced new crowdfunding models, which paved the way for the blockchain startups to raise funds for their projects more easily, in exchange for cryptocurrencies or fiat currencies.
We are happy to announce that we are starting our initial offering series with this post!
In this first post, we will focus on essential differences among the main cryptocurrency-based crowdfunding models, namely Initial Coin Offering (“ICO”), Initial Exchange Offering (“IEO”), and Initial Decentralized Exchange Offering (“IDO”), as follows:
| Characteristic | ICO | IEO | IDO |
|---|---|---|---|
| Definition | Crowdfunding through which startups issue and offer their blockchain-based tokens, coins, or apps, in return for investment at a discounted price | Crowdfunding through which tokens and cryptocurrencies are sold to individual investors via the intermediary of a centralized cryptocurrency exchange (CEX), which manages the token sale and facilitates trading | Popular crowdfunding model for DeFi projects and DApps, through which tokens and cryptocurrencies are sold to individual investors via the intermediary of a decentralized cryptocurrency exchange (DEX) or launchpad and which relies on liquidity pools where traders swap tokens |
| Fundraising model | Highly centralized | Highly centralized | Decentralized |
| Platform on which fundraising is conducted | The token issuer’s own website (including the whitepaper and the team that will implement the project) | CEX | DEX / launchpad |
| Crowdsale counterparty | The project team | CEX | The project team |
| Individuals/platforms creating and running smart contracts | The project team | CEX | Collectively by DEX and the project team |
| Vetting procedure | None, everybody can launch an ICO (if it’s legal in the relevant region) | Rigorous vetting process conducted by CEX before listing the tokens on the platform | No permission is required; however, vocal community members vet the project, and projects must comply with the DEX/launchpad’s standards |
| Investor protection | None, unfair distribution among the investors (the project team offers more favorable terms for insiders and early investors), and anyone can participate in the ICO while it is uncertain whether the project will be delivered in line with the white paper | Yes, the CEX adopts measures to vet the project and requires investors to register with the platform and pass the identity verification process | Yes, equitable and fair distribution thanks to smart contracts |
| Regulatory scrutiny | An unregulated environment with many risks (e.g., if such tokens are considered a security, they must be registered with the Securities and Exchange Commission (SEC) or other regulatory authorities) | Regulated by CEX | None |
| Marketing | The project team must allocate many marketing resources to attract the public | The CEX actively markets the tokens | The marketing campaign is conducted by both launchpad and the project team |
| Platform the token will be listed | The project must find an exchange on which the token will be listed, following the ICO (which process will be very costly) | CEX | DEX |
| Intermediary fees | None (however, the project team needs to pay high amounts to list the tokens on a CEX in return for an exchange fee) | Yes, the CEX collects commission (listing fee + percentage of token sales) both for launching and trading the tokens, and such commission increases while the market develops | None, only gas fee for running the smart contracts |
| KYC / AML scrutiny | Not necessarily; however, trust issues raise since some projects provide misleading information | Yes, conducted directly by the CEX while registering the platform | Not necessarily; however, trust issues raise since some projects provide misleading information and there is no control mechanism (individuals with web3 wallets can invest without any identification or KYC requirement) |
| Security | Very insecure since the token sale is made on the project’s own platform without adequate security measures | Very secure, the CEX hosts all trading; however, vulnerable to identity and information theft | Anonymous and highly secure transactions with no risk of identity and information theft |
| Trading & liquidity | Very slow since the startup must find an exchange to list the tokens, and lock-up periods are usually adopted | Following the IEO, tokens are listed on the CEX for trading; however, such CEXs have a limited number of tokens to trade | Immediate liquidity and trading following the sale on the DEX, and there is unlimited token stacks to exchange (however, even popular DEXs are struggling with liquidity problem compared to the CEXs, and the steeper learning curve for DEXs discourages the investors) |
| Potential amount to be raised | Substantial | Small compared to ICOs | Small compared to ICOs |
While the foregoing constitutes the main initial offering models, different structures have also been introduced in line with the needs of the blockchain community, such as Security Token Offering (STO),1 Initial Farm Offering (IFO)2 and Initial Game Offering (IGO),3 latters of which are evolved from the IDO structure.
Throughout this series, we will analyze the preceding initial offering models respectively, and in greater detail!
Stay tuned!
Resources,
- Complex and highly regulated crowdfunding model, where tokens are usually equity or asset-backed and represent ownership which is recorded through blockchain.
- One of the recently developed crowdfunding models where investors participate in presale events on a DEX to raise funds for DeFi projects, through the farming feature.
- A crowdfunding model where the investors purchase NFTs and in-game tokens of a blockchain-based game at the early stage in exchange for the launchpad’s native token.
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