The cryptocurrency market is very creative when it comes to raising funds for new projects. In the traditional financial sector, fundraising is limited to taking out loans or seeking the help of venture capital (VC). However, this strategy ends up harming the founders of new projects in the long term.

The cryptocurrency space is diverse, and the financing options available to new projects allow them to raise funds while engaging the community. Blockchain and crypto startups can issue their tokens in exchange for fiat currency or other cryptocurrencies. The funds raised are redirected to the growth of the project.

The three popular ways that crypto projects raise funds are an Initial Coin Offering (ICO), an Initial Exchange Offering (IEO), and an Initial DEX Offering (IDO). Below, we explain each of these methods, along with their advantages and disadvantages.

Initial Coin Offering (ICO)

An initial coin offering is a form of crowdfunding. An ICO is similar to an initial public offering (IPO) in the stock market. ICOs were the first way cryptocurrency and blockchain startups started raising funds from investors.

In an ICO, a company will offer its blockchain based token and any investor can buy these tokens using popular cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) or using stablecoins like Tether (USDT). The tokens offered by the company can subsequently be traded on a decentralized exchange (DEX) or a centralized exchange (CEX).

The history of ICOs dates back to 2013, when Mastercoin launched the first ICO. The platform managed to raise around $600,000 from the process. Ethereum, the second largest blockchain network by market cap, too launched an ICO in 2014. The ICO raised $18 million in 42 days.

The great thing about ICOs is that they allow companies to raise funds without going through the lengthy process of getting regulatory approval. While this is advantageous to the project, it presents significant risks to the investor. Below are the pros and cons of ICOs as a funding method:

advantages

One of the main benefits of ICOs is that they make it very easy for a company to raise funds. Furthermore, they also provide significant benefits for ICO managers. These administrators generate tokens based on the term of the ICO and then distribute them to individual investors.

If a project is viable and has potential, an ICO can provide you with the necessary funds to push it to new heights. Such was the case with Ethereum, where the project used the funds to achieve growth. Those who invested in the ICO and held on to the tokens over the years also made huge profits.

Cons

The fact that ICOs are not regulated makes them very risky for investors. A project will entice investors to participate in an ICO by promising them high returns. However, most of the projects end up being fraudulent and the developers end up running away with the investors’ funds.

The US Securities and Exchange Commission has warned about the potential dangers of ICOs for an investor. However, the potential for staggering returns has made some people fall in love with projects that never really got off the ground or projects that were abandoned. Therefore, before investing in an ICO, take the time to conduct a thorough background check on a project to assess its vitality.

Initial Exchange Offering (IEO)

An Initial Exchange Offering is similar to an ICO in many ways. However, there is one key difference: an ICO is offered on a cryptocurrency exchange platform. exchange platforms are the companies that facilitate the trading of digital assets.

The cryptocurrency exchange platform will be like a third party in this process. The project will seek the services of an exchange, which are typically offered for a fee, and the exchange will float the tokens on behalf of the project. Similar to ICOs, an IEO allows an investor to buy the tokens before they are officially released on the market, creating room for huge profits.

Because the cryptocurrency exchange will make this process easier, projects that want to raise funds through this method should make sure to provide all the details that will make their projects appear more authentic. The project must submit a proposal that will be rigorously reviewed by the exchange that supports it. Exchanges must perform due diligence to preserve their reputation.

IEOs offer several benefits to projects, and one of them is that they can attract many investors. The fact that they are vetted by exchanges also means that once the presale ends, the token will be listed on the exchange, increasing its liquidity as soon as it enters the market.

advantages

The main benefit is that projects have to pass due diligence. This reduces the risk of an investor falling victim to scam projects on the cryptocurrency market.

The other benefit is that a token traded through an IEO will have higher liquidity on the exchange where it has been traded. The token will immediately gain access to a large user base, increasing in value as the level of demand grows. In addition, the stock listing will also act as a marketing strategy.

Cons

While an IEO is less risky than an ICO, there is a tradeoff. An IEO is more centralized, limiting your access to the token to a specific exchange. To participate in the IEO, you need to create an account on the exchange platform. This might not be ideal for investors who prefer the fully decentralized aspect of the crypto market.

Although the project has been examined, this does not protect it from the volatility of the crypto market. In addition, the SEC has also warned that some IEOs can be just as risky as ICOs if they don’t comply with federal securities laws.

Initial DEX Offering (IDO)

A DEX initial offering is one of the recent strategies developed in the crypto and blockchain space to allow projects to raise funds. IDOs allow blockchain projects to raise funds after selling their tokens on decentralized exchanges (DEXs).

IDOs, although the latest development, have become increasingly popular crowdfunding models for decentralized finance (DeFi) and decentralized applications (DApps).

the first GONE was held by RAVEN on Binance DEX in June 2019. IDO was a success and since then more have emerged on the market, including IDO Universal Market Access Protocol and IDO SushiSwap.

Projects that want to raise funds through an IDO offer their tokens on DEX. DEXs offer a higher level of decentralization than CEXs. Some of the most popular DEXes are Uniswap and PancakeSwap. However, there are more of these exchanges on the market.

The projects use various currencies such as Bitcoin, Ether, and USDT to create a liquidity pool. Anyone who has a Web3 wallet compatible with the exchange can invest in the token. The great thing about DEXes is that there is no need for Know Your Customer (KYC) requirements or any identification.

IDOs have characteristic differences from IEOs and ICOs. The project will not own any of the tokens raised during the fundraising process in an IDO. Furthermore, IDOs are decentralized in the sense that there is no strict set of rules and regulations that these projects must follow.

IDOs have seen significant growth in recent months due to their diverse nature. Since the first IDO of RAVEN, this new funding method is now replacing traditional funds in the blockchain sector.

advantages

One of the main benefits of IDOs is that they increase liquidity for decentralized exchanges (DEX). Decentralized exchanges control less trading volumes in the crypto space than centralized exchanges. Through IDOs, DEXs are expected to be able to fill this gap and gain control of a large portion of cryptocurrency trading volumes.

Furthermore, IDOs provide a more decentralized way for projects in the cryptocurrency and blockchain sector to raise funds. IDOs also support DeFi protocols and liquidity pools, giving them access to one of the rapidly growing and popular spaces in the blockchain sector.

Cons

IDO’s crowdfunding strategy is still new to the space. It is yet to gain the kind of traction that ICOs and IEOs have seen in recent years. This can be a disadvantage for projects that want to raise funds through IDO because less funds are usually raised from the process.

On the investor side, there is limited knowledge about IDOs. DEX launch platforms can be difficult for the average investor to understand. These launch pads are often technical and ease of use can be difficult for those without the proper knowledge.

Conclution

New projects are constantly emerging in the crypto space. Most of these projects need financing, and ICOs, IEOs, and IDOs present the perfect opportunity to raise the necessary funds to achieve success.

However, crowdfunding carries significant risks for the investor. The digital asset sector is less regulated compared to the traditional financial sector. There is always a risk that some of the projects that raise funds are not genuine and investors end up losing money. Therefore, it is best to do your due diligence before investing in these crowdfunding platforms.