The ICO model, first used in July 2013, conquered the cryptocurrency market in 2017. The combination of technological innovation, massive media attention, legislative gap, and high profitability created a great stir in fundraising.
The history and end of the ICO hype are well known: many projects turned out to be unfeasible or fraudulent, and many people lost their money.
Trust in fundraising methods in the cryptocurrency market was lost.
However, over the past four years, the models of initial offerings and launch of tokens have undergone significant changes.
1. IDO
IDO (Initial DEX Offering) is a token launch model through fundraising on a decentralized exchange. Just as traditional startups receive venture capital before launch, projects conducting initial offerings through decentralized exchanges (DEX) receive funding from individual investors.
IEOs and IDOs are similar methods of launching tokens, except for the platform on which the fundraising process takes place. In the case of an ICO, the project takes full responsibility for managing transactions and operations on the internal platform.
During an IEO, the centralized exchange conducts the "ICO" in-house.
IDO is an ICO and IEO in one frame, but a decentralized one replaces the centralized exchange. At the same time, IDO has advantages compared to the typical ICO and IEO:
- Independent decision to conduct IDO;
- Immediate liquidity of tokens;
- The immediate start of trading;
- Lower cost of implementation.
One of the first IDOs was RAVEN, which was held on the Binance DEX in June 2019. Now, however, the number of platforms offering IDO services has expanded significantly. My team of analysts at Listing.Help has worked on IDO launches with platforms like BSCPad, Duckstarter, MDEX, Poolz, BakerySwap, Polkastarter, Pancakeswap, and others.
2. Initial Uniswap Listing
Uniswap is a decentralized trading protocol that allows anyone to create trading pairs and trade ERC20 tokens. The main innovation of Uniswap is the use of an automated market makers, which significantly reduce the barrier to creating liquid markets for any asset.
During the initial listing on Uniswap, the team funds a liquidity pool with equal amounts of its own token and ETH. One of the first examples of implementation is UMA, a project building infrastructure for synthetic assets, which launched its token directly on Uniswap in April 2020. Since then, Listing.Help analysts have been watching the implementation of this model on other decentralized exchanges and blockchains.
It is important to note that although Uniswap is the most widely used product in DeFi, similar runs on Uniswap have drawbacks. Since the initial liquidity pool is the only offering of tokens, users cannot sell, which means the token price can only go up.
This is exactly what happened with UMA; despite the teams' claims that they were selling the token at $0.267 (its price at the seed stage), the token price rose to more than $2 within five minutes of the start of the sale. The trading bots traded ahead of the curve, inflating the price and eventually selling the tokens to retail investors at a hefty price.
3. Balancer Liquidity Bootstrapping
Balancer is a decentralized liquidity protocol built on Ethereum. One of its unique features is that it can support liquidity pools of up to 8 assets (Uniswap can only support two) and pools of unequal weight (Uniswap can only support 50:50 pools).
In March 2020, Mike McDonald of the Balancer team introduced Liquidity Bootstrapping Pools (LBPs). The feature of the idea is flexibility - teams can supply an unbalanced ratio of tokens in a pool (e.g., 80/20 XYZ/USDC).
In September, Perpetual Protocol became the first team to use LBPs to launch its PERP token.
Pools are also designed to avoid the frontrunner attack (the mentioned UMA project launch example) - they typically start with a high initial price and fall over time as participants are motivated to wait for the price to drop. For instance, Perpetual Protocol started with a PERP:USDC 90:10 pool and then slowly set it up to a 30:70 pool over three days, ensuring that the price would fall gradually.
The LBP model has proven itself because they give teams control over the parameters to ensure a smoother distribution. It also creates a liquid market and is quite effective at shaping the price.
4. Liquidity Mining
Liquidity mining refers to the distribution of tokens in which users earn a native protocol token by providing them with their capital. Liquidity mining differs from the strategies outlined above in that users do not buy tokens but are rewarded with them. It's a so-called Fair Launch.
The Compound platform created a modern liquidity mining fever in June 2020 by distributing COMP to lenders and borrowers on the platform.
Liquidity mining is a proven mechanism for distributing tokens to network users. It also helps to decentralize the network and is a great marketing tool for growth. The main drawback is that it is not a good tool for teams that need to raise funds as part of a project launch to keep it running.
A recent example of such an outcome is the events around the yearn.finance project. The project and its founders did not have enough funds to continue development, and the community decided to issue an additional $225 million in YFI tokens.
Seeking a balance between the founders' earnings and the depth of the project's technological development is one of the dominant ideas of yearn.finance project creator Andre Cronje.
The evolution of token launch mechanisms over the past four years shows how much innovation is currently happening in the ecosystem of Ethereum and other cryptocurrencies. That said, the subsequent evolution of the industry could spur new mechanisms as the Uniswap v3 update, L2 scaling solutions, and Ethereum 2.0 are just around the corner.
In addition, modern projects can combine the mechanics of launching and distributing their tokens (SingularityDAO project, Blockbank, etc.).
However, these mechanisms are only methods, and the final result depends on the project itself. Dapper Labs used CoinList to launch Flow and gave its community funds at a seed round price, which led to an increase in the company's reputation. Meanwhile, Curve held a decentralized Fair Launch, but decided to do it on not the clearest and transparent terms, losing the trust of part of the community.
The success of projects still depends on an engaged community, thoughtful economics, a top-notch team, and focused development. All of these factors in and of themselves matter far more than how a project is launched.
