The offer of new, cheap and promising tokens on DEX exchanges, firstly, attracts buyers and helps the newly minted project raise money for development, and secondly, it allows speculative investors to get a good income (but this is not for certain).

Early presale of tokens, IDO, is a common practice in the Crypto World. It attracts buyers and helps the newly minted project raise money for development. Speculative investors love such projects, because sometimes they get a big income from them. In this article, we will learn what IDO is, how to participate in it, and what pros and cons are there.

What is an Initial Decentralized Offering (IDO)?

The initial decentralized offering is the process of early sale of tokens on decentralized exchanges (DEX). Small blockchain startups use the services of DEX to sell their tokens. IDO is a popular way to attract investments to a crypto project, the concept is similar to IPO – issuing shares on the stock market.

IDO usually includes 2 stages:

1. Presale of tokens to a limited number of users. 
2. Launch of trading. After creation, tokens are placed in the liquidity pool. 

How does IDO work?

With the help of decentralized exchanges (DEX), the implementation of tokens becomes quite simple. The project team issues its tokens on the selected platform, and then the exchange is selling and transferring tokens. Users buy them, which helps financing the project. The main advantage of this promotion method for the developer lies in the automatization of the process. On DEX exchanges everything works on smart contracts, so there is no need to deal with every transaction.

Here are a few principles of how IDO works:

• The project goes through a testing process on the selected DEX. If it’s approved then developers are allowed to conduct IDO, in case of failure of the “exam”, they will not be able to create the IDO. 
• To purchase IDOs tokens, users need to be on the list of verified investors (White paper). Verification requires a crypto wallet address or the completion of tasks specified by the project.
• The income from the sale of tokens is distributed to the project team, minus fees for the liquidity pool.
• After the purchase, the tokens can be exchanged when they are unlocked. Coins might be freezed for several months, or maybe for years – it depends on the project.

Pros and cons of IDO

This method of attracting investments for the crypto project has a number of advantages:

• Trust. The investor and the developer do not work directly, but through an intermediary exchange, so the investor does not need to trust the smart contracts of the project.
• Liquidity. The pools block part of the raised funds in order to provide a liquid market for trading tokens after the sale.
• No personal data. To complete a transaction, you do not need to provide personal data, an active crypto wallet is enough. Any user can enter the project.
• Simplicity. Even little-known projects can attract investors through IDOs.
• Small risks. IDOs allow you to buy a limited number of tokens, so more users can invest in the project. This minimizes the risks.

Some disadvantages of IDO are:

• Lack of quality protection. Anyone can enter the project. There is no guarantee that someone does not launder money or conduct fraudulent transactions using IDO.
• Lack of verification. Through initial decentralized offerings, it is easier to distribute poorly rated tokens.

As you can see, IDO involves some risks. We came up with some advice that might help you to stay safe, if you’ve decided to participate in IDOs. Firstly, choose your exchange carefully. Projects with high potential are usually published on well-known popular exchanges. Also, do not invest until you study the project. It is necessary to carefully read all available information about the founder and the team. Usually, profitable projects are created by professionals with successful cases. Be mentally prepared to lose the invested amount. The golden rule of an investor is that you should invest money that you can afford to lose. IDO is not the way to earn money in which you need to invest the latter. Not even because of the scam, but the payback period.

Conclusion

IDO is attractive for both – developers and investors. Developers like the idea of the automated process of raising funds for their project. And investors hope to profitably sell assets after the launch of trading. Traders need to be extremely careful in choosing exchanges and projects. Numerous scam schemes are pretending to be the IDO. And you should not expect instant profit from IDO. Some projects pay off in a few months or even years.

Would you like to learn more about the Crypto World? Then you should check out our blog! You might like our articles “Stablecoin War” and “Stop Loss And Take Profit”.

The easiest way to buy or exchange coins is to use SimpleSwap services.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.