The cryptocurrency market is constantly changing the ways projects raise capital. In 2017, the industry experienced an ICO* boom: new projects issued tokens, raised millions of dollars, and promised investors a chance to participate in the next major crypto trend.
* ICO (Initial Coin Offering) — an initial token sale conducted independently by a crypto project. Investors purchase the asset directly from the team, expecting the project to develop and the token’s value to increase over time. However, neither an exchange listing nor the emergence of a liquid market is guaranteed in advance.
However, it quickly became clear that this freedom had a downside. Projects disappeared together with investors’ money, tokens never reached exchanges, and ambitious promises often remained nothing more than statements in a white paper.
The next stage was IEO* — token offerings conducted under the supervision of centralized cryptocurrency exchanges. They made token sales more structured, but at the same time brought an intermediary back into the system.
* IEO (Initial Exchange Offering) — an initial token offering organized by a centralized cryptocurrency exchange. The platform acts as an intermediary between the project and investors, selects token sale participants, and, as a rule, subsequently lists the token.
As the market began actively moving toward DeFi, the next logical step emerged — IDO, or Initial DEX Offering. Instead of a centralized exchange, there is a smart contract. Instead of a traditional listing, there is a liquidity pool on a DEX. And access to a new token can often be obtained directly through a cryptocurrency wallet.
What is an IDO?
IDO (Initial DEX Offering) is an initial token sale conducted through the infrastructure of decentralized platforms. Simply put, a project issues a new asset and offers it to investors through a DEX or a specialized cryptocurrency launchpad.
The main difference from previous models is that a centralized exchange does not necessarily need to be involved in conducting the token sale.
A significant part of the process can be automated through smart contracts: they accept participants’ funds, distribute tokens, control limits and vesting, and after the offering is completed, the new asset can receive a trading pair on a DEX almost immediately.
This is why crypto IDOs became especially popular during the DeFi boom of 2020–2021.
One of the first well-known examples of an IDO is considered to be the Raven Protocol offering on Binance DEX. Later, the project’s token also appeared in Uniswap liquidity pools.
In subsequent years, hundreds of new assets were launched through IDOs, and some of them demonstrated multiple-fold growth after entering the market. For example, Bloktopia (BLOK) tokens increased by approximately 550% compared with the IDO price, AstroSwap (ASTRO) by 330%, and My Neighbor Alice (ALICE) by approximately 300%.
However, this is also where one of the pitfalls of IDO statistics lies: successful launches are easy to remember, while a large number of tokens quickly lose most of their value after the token sale.
The popularity of IDOs has also led to the emergence of many derivative formats. One of them is the Initial Farm Offering (IFO)*.
* IFO (Initial Farm Offering) — a token launch model in which participation in the token sale is linked to providing liquidity or using farming mechanisms. A user locks assets in a smart contract or pool and gains the opportunity to purchase or earn new tokens.
From ICO to IDO: how token sales have evolved
To understand why the crypto market needed IDOs in the first place, it is worth looking at the evolution of token sales.
The first mass-market model was the ICO. A project only needed to create a token, publish documentation, and offer investors the opportunity to send ETH, BTC, or another cryptocurrency in exchange for new coins.
For the market at the time, this looked almost revolutionary: a startup could raise funding directly from its audience, bypassing banks, venture capital funds, and stock exchanges.
However, the low barrier to entry quickly became a problem. During the ICO boom, a huge number of projects entered the market that existed only on paper. Some had no working product, others had no real team, and some were created solely to raise funds. Against this backdrop, investor confidence began to decline.
Centralized cryptocurrency exchanges proposed their own solution — IEO. Instead of selling tokens directly, the project delegated the organization of the offering to an exchange. The exchange reviewed the team’s application, determined the terms of the token sale, and opened the sale to its users.
On paper, the model looked considerably more reliable. Investors gained access to a familiar platform, while the project received access to a large audience and a potential listing.
However, IEOs introduced another problem: dependence on centralized infrastructure. Centralized exchanges could charge high fees, restrict user participation, impose mandatory verification, and independently determine the terms of the offering.
With the development of DeFi, the market once again attempted to remove the intermediary. This is how initial DEX offerings emerged.
How does an IDO differ from an ICO and an IEO?
The main difference between the three formats lies in who controls the offering infrastructure.
In an ICO, the project team itself plays the key role. In an IEO, it is the centralized cryptocurrency exchange.
In an IDO, it is a smart contract, DEX, or specialized decentralized launchpad.
This also leads to other differences.
To participate in an IDO, users often do not need to create an account on a centralized exchange: connecting a compatible cryptocurrency wallet is enough. Tokens can be distributed automatically, while trading can begin immediately after a liquidity pool is created.
However, the idea of a completely unrestricted and anonymous IDO no longer always reflects reality today. Many major launchpads require KYC*, use participant whitelists, restrict access based on jurisdiction, or distribute allocations* depending on the number of platform tokens held by the investor.
* KYC (Know Your Customer) — a procedure for verifying a user’s identity before granting access to certain platform features or allowing participation in a token sale. Typically, the user provides personal information and confirms it with documents, such as a passport. In some cases, they may also be required to take a selfie or undergo automated facial verification. KYC helps the platform confirm that the participant is a real person and comply with legal requirements and restrictions applicable to certain jurisdictions.
* Allocation — the number of tokens assigned to a particular participant for purchase during a token sale. This limit is especially important when demand exceeds the number of tokens available for sale. For example, a project offers participants 1 million tokens, while total demand amounts to 5 million. In this case, the platform may distribute the available supply among investors and assign an individual allocation to each participant. If a user is allocated 2,000 tokens, they will not be able to purchase more than that amount during the token sale.
Therefore, a modern IDO is better described as decentralized offering infrastructure rather than a complete absence of rules.
Why did IDOs become popular?
IDOs offered several attractive features at once.
For a project, an IDO is a relatively fast way to bring a token to market. There is no need to wait for approval from a major centralized exchange, and some of the processes can be automated using smart contracts.
For users, the advantage of an IDO lies in direct access to new assets.
After the token sale is completed, the project can immediately create a liquidity pool and open trading on a DEX. This significantly distinguishes IDOs from older ICOs, where weeks or even months could pass between the token sale and its appearance on an exchange.
In addition, decentralized platforms operate globally and can technically be accessible to a much wider audience. However, this accessibility has also become one of the main problems of the IDO format. The easier it is to launch a token sale, the lower the barrier to entry becomes not only for promising projects but also for questionable teams.
The downside of IDOs
At first glance, IDOs solve several problems associated with older token sale models. However, decentralization does not automatically mean investor protection.
A smart contract may execute its programmed logic perfectly, while the project itself may still fail.
The team may have no working product. The token may turn out to have almost no practical utility. A large portion of the supply may be controlled by early investors. And a small liquidity pool may result in sharp price movements even from relatively modest trades.
Therefore, the main IDO risks are not limited to technology. They include:
weak screening of some projects;
high concentration of tokens among the team and early investors;
* Rug pull — a fraudulent scheme in which the creators of a crypto project first attract users’ money and create the appearance that the token is functioning normally, and then suddenly withdraw funds from the liquidity pool or sell a large portion of their tokens. As a result, liquidity disappears, and the asset’s price may collapse almost to zero. Other token holders are then often unable to sell their assets at the previous price and lose a significant portion of their invested funds.
There is another problem associated with IDOs: attractive statistics showing returns for early investors do not always reflect the realistic possibility of achieving such profits.
A token may briefly show several-fold growth under conditions of low liquidity, while selling a large position at that price may be practically impossible.
How does an IDO work?
Despite differences between platforms, most IDOs follow roughly the same structure.
1. The project creates its tokenomics
Before entering the market, the team must define the economics of the future asset. It determines how many tokens will be issued, what portion will go to investors, how much the team will receive, what volume will enter free circulation, and how the tokens will be unlocked. This is the stage at which the crypto project’s tokenomics* are formed.
* Tokenomics — the set of economic rules governing a token. It determines the total supply, distribution among participants, ways the asset can be used, the unlock schedule, mechanisms for issuing new tokens, and token burning.
For investors, tokenomics is often more important than an attractive project presentation. For example, if only a few percent of the total supply enters circulation after an IDO, while most of the tokens remain with the team and funds, future unlocks may have a significant impact on the asset’s price.
2. A vesting schedule is determined
Participants are not always able to sell all their tokens immediately after the offering. This is where vesting* is used — the gradual unlocking of assets.
* Vesting — a predetermined token unlock schedule. For example, an investor may be allocated 100,000 tokens but receive only 10,000 on the launch day. The remaining tokens will be unlocked in portions over the following months.
This mechanism helps reduce selling pressure immediately after the token enters the market. At the same time, vesting creates future risk points: large unlocks can significantly increase the token supply.
* Launchpad — a specialized platform for launching new crypto projects and conducting token sales. It helps organize token sales, establish participation rules, and distribute allocations among investors.
Large platforms usually conduct their own project selection process, although the depth of this review may vary considerably.
Participation requirements also differ. Some IDOs use lotteries. Others distribute tokens proportionally to the amount invested. Some require users to hold or stake the launchpad’s own tokens.
4. The token sale begins
After the offering begins, participants connect a cryptocurrency wallet and contribute funds.
The smart contract then automatically calculates the allocation size and the number of tokens each user should receive.
If demand exceeds supply, the platform may reduce the final allocation for each participant.
Users receive the token either immediately after the IDO or gradually, according to the vesting terms.
5. A liquidity pool is created
After the sale is completed, the project usually creates a trading pool on a DEX.
For example:
TOKEN/USDT
or
TOKEN/ETH
It is through this pool that market participants begin buying and selling the new asset.
Unlike traditional centralized exchanges, where trades are executed through an order book, many DEXs use an automated market maker (AMM)* model.
* AMM (Automated Market Maker) — an automated trading mechanism used by many decentralized exchanges. Instead of the traditional model, where every trade requires matching a buyer with a seller, users trade against a liquidity pool — a reserve of two tokens that have been deposited into a smart contract in advance. For example, an ETH/USDT pool contains both ETH and USDT: a user can deposit USDT and receive ETH in return. The price is calculated automatically using a specific algorithm and changes depending on the ratio of tokens in the pool: the more one asset is purchased, the more expensive it becomes relative to the other.
In this case, the price changes depending on the ratio of assets within the pool.
This is why the size of the initial liquidity is highly important: the smaller the pool, the stronger the impact individual trades can have on the token’s price.
6. The project may list on centralized exchanges
For many teams, an IDO is only the first stage.
If the project develops successfully, the next step may be a listing on centralized platforms. This gives the token access to a new audience and additional liquidity.
Tokens of many projects that initially made active use of decentralized infrastructure later appeared on major centralized exchanges.
However, the fact that a token is listed on a centralized exchange does not mean that its price will necessarily increase. It only expands the market where the asset is traded.
Which platforms conduct IDOs?
Several major platforms on the market specialize in launching new crypto projects. One of the best-known is DAO Maker.
More than 170 project token sales from the Ethereum, BNB Chain, and other blockchain ecosystems have been conducted through the platform, with the total amount raised estimated at approximately $107 million.
Each platform has its own mechanics. Some require users to hold the platform’s token, others require staking it, while certain projects use lotteries or multi-tier allocation systems.
As a result, two IDOs can differ significantly from one another even if they formally belong to the same format.
What should you check before participating in an IDO?
IDOs often attract investors with the opportunity to purchase a token before it reaches the broader market.
However, a low starting price alone says nothing about whether an asset is undervalued. It is much more important to understand exactly what the investor is buying.
Before participating, it is worth examining:
who is behind the project;
whether there is a working product;
what function the token performs;
how the token supply is distributed;
what percentage of tokens will be in circulation after launch;
when major unlocks will begin;
whether the smart contract has been audited;
how much liquidity will be added to the DEX;
whether that liquidity is locked;
what share of the supply is controlled by the team and early investors.
Special attention should be paid to Fully Diluted Valuation (FDV)* — the valuation of a project assuming that all planned tokens are already in circulation.
* FDV (Fully Diluted Valuation) — a metric showing how much the entire crypto project would theoretically be worth if all planned tokens were already in circulation at the current market price. FDV is calculated by multiplying the price of one token by the total or maximum token supply. For example, if a token costs $2 and the project plans to issue 1 billion tokens in total, the FDV would be $2 billion. This metric helps estimate the project’s future valuation scale: even if only a small portion of tokens is currently in circulation, subsequent unlocks may significantly increase the supply and affect the price.
Sometimes, a low market capitalization at launch creates the impression that an asset is cheap, even though its fully diluted valuation, taking future issuance into account, may already amount to hundreds of millions or even billions of dollars.