Polkastarter IDOs: Crypto Fundraising, Reinvented (yet again)

BDC Consulting analyzed 39 IDO projects held on Polkastarter in the past 6 months and found that buying tokens at an IDO and selling them an hour later on Uniswap can yield over 2,000% in profits, while selling after a few weeks can increase the ROI to 2,700%. However, the long-term survival of the IDO model is under question.

The crypto industry is incredibly inventive when it comes to fundraising. Almost every year, the community gets excited about a new investment model, builds a massive hype around it, ends up disillusioned, and moves on to the next idea. We’ve gone through ICO, STO, IEO – and now it’s the turn of IDO, or Initial DEX Offering. 

IDOs are intended as a decentralized and transparent alternative to IEOs, which were accused of price manipulations and often resulted in huge losses for investors. Whereas before investors followed IEO announcements on major launchpads like Huobi Prime and Okex Jumpsmart, now it’s all about Polkastarter, Uniswap, BSCPad, and Duckstarter.

Crypto startups like IDOs because they are far cheaper than an IEO: you still need to supply initial liquidity to the DEX, but there is no exchange fee to pay and no due diligence. You can even run an IDO on several DEXes if you like – something that’s not possible with centralized exchanges. 

However, a fundraising model is solid only if it yields real returns for investors – as opposed to quick gains for speculators or scammers. BDC Consulting conducted research to understand how much one can really earn on an IDO, if it’s really so important to get in at the very start, and when one should sell the tokens to maximize returns.

Polkastarter DEX is built on Polkadot and has emerged as one of the largest IDO launchpads. It owes its popularity to its low swapping fees and cross-chain token pools, which allow users to trade tokens issued on different blockchains. Out of the 54 recent IDOs listed on CoinMarketCap (some of them in the ICO category, but on IDO launchpads), 14 (26%) were held on Polkastarter, as opposed to 6 each on Duckstarter and Balancer, 5 on Poolz, 3 on BSCpad, and 2 on Ignition. 

Image: Polkastarter

Analysts at BDC Consulting have looked into 39 projects that issued tokens on Polkastarter between the end of November 2020 and mid-April 2021, using CoinList data. For each of them, the team confronted the IDO price, listing price, all-time-high, and the price as of March 30. 

To understand the returns on an IDO, it’s worth saying a few words on how Polkastart IDOs work:

1) Every IDO pool has a maximum allocation, so the amount of funds that can be raised is capped – for example, $500k;

2) There is a limit on how many tokens each participant can buy, such as $300 or $500 worth of ETH;

3) Users have to be whitelisted and pass a KYC by submitting a copy of their ID and a selfie;

4) The number of whitelisted addresses usually exceeds the number of IDO allocations, so tokens are secured on a first come, first served basis (or sometimes using a lottery mechanics);

5) The IDO is scheduled for a specific time, such as 4:00 PM UTC, and lasts one hour and a half, though the pool usually sells out faster. The IDO price is fixed.

6) After an hour after the start of the IDO or once the pool is sold out (i.e. the fundraising cap is reached), the token is listed on Uniswap and/or Binance Smart Chain. The listing price can be many times higher than the IDO price. In the BDC Consulting study, the project with the largest divergence (51 times) was TosDis, offered for $1.25 at the IDO and listed at $115.52. 

7) Once the IDO ends, the buyers can claim their tokens and sell them on Uniswap if they wish.

Average listing returns for IDO investors: +2,347%. Across the 39 projects under study, buying tokens at the IDO price and selling them on Uniswap immediately after listing would have earned an investor over x23. However, this number is purely indicative, because in some cases there is a 20-30 minute gap between the listing and the moment when IDO investors can claim their tokens. 

To this you should add the 5-10 minutes required for the claim to be processed on the Ethereum blockchain. Private investors (if there are any) can claim the tokens earlier, giving them an advantage. As a result, the price at which an IDO participant can sell their tokens on Uniswap can be quite different from the listing price.

Highest ROI at listing: 9,191% (Polkamon). The project with the highest listing-to-IDO price ratio was Polkamon, whose $32.52 listing price was 92.91 times higher than its $0.35 IDO price. Thus, the users who participated in the IDO and sold their PMON on Uniswap immediately earned an ROI of 9.191%. 

Lowest ROI at listing: 67% (eMoney Public). The +67% ROI of eMoney Public looks modest compared to the thousands of percentage points yielded by other IDOs, but it is still much higher than the ROI of investing in Bitcoin or Ethereum over the same period. However, this fact points only to the level of hype surrounding IDOs rather than to specific merits of IDO tokens.

Average returns as of March 30: 2,761%. As it turned out, holding tokens for a few weeks can yield more than selling them immediately as they are listed on Uniswap. IDO investors with ‘strong hands’ made an average of x27 on their contribution. 

Not all investors were that lucky, however: some projects experience massive price declines after the listing. For instance, FIRE dropped from $10.28 to just $0.554, while DAOVentures dropped from $5.88 to $1.59. 

Highest IDO ROI as of March 30: 11,060% (SuperFarm). Those who bought SuperFarm tokens at the IDO on Feb 23 and held on to them until March 30 earned a whooping 11,060% on their investment as the token appreciated from $0.025 to $2.79.

It’s interesting to note that the ROI on IDO tokens has been rising. This could indicate that investing in IDOs will remain profitable in the coming months :

Image: BDC Consulting

In a stark contrast with IDO investors, those who bought tokens on Uniswap once they were listed earned an average of 36%, or 65 times less than those who joined the IDO. 

Granted, 36% in a couple of months is still a great result, but this average value hides vast differences between the winners and the losers. The project that enjoyed the highest price increase between listing and March 30 was Ethernity (+704%), while the worst performer among the 39 projects in the study was DAOventures with -73%. 

IDOs are not magic money machines – nothing in crypto is. For every investor who makes x23 on Polkastarter, there are many who end up in the red. It’s crucial to realize that the IDO model is fraught with problems, the three most serious ones being the following:

Extreme volatility. In an IEO, the price is fixed for the duration of the offering and only starts to fluctuate after the listing, which happens some days after. But in an IDO, a token is listed on Uniswap as soon as the original pool sells out. From this point on, the price swings every time a trade is made, because the AMM algorithm adjusts it depending on the supply in the liquidity pool. Thus, the project team loses control over the price minutes after the IDO begins.

Front-running. As there is no order book and no matching engine, traders can get their transaction processed faster by setting higher gas fees. It works, but it drives up the average gas fee in the network, negatively affecting the rest of Ethereum users. In this sense, you could say that IDOs are wasteful – real gas-guzzlers, like cars in the 60’s.

An even more cunning scheme is using bots to buy lots of tokens at the very start of an IDO, while they are cheap, then spam the blockchain to prevent other users from buying them until the price rises – at which point the bot offloads the tokens. 

Rug pull scams. Running IDO scams is scaringly easy, because users often forget to double-check that liquidity is locked. Scammers list tokens that mimic a highly-anticipated project, wait until swapping gets going and the price rises, then withdraw all the liquidity from the pool. 

The study by BDC Consulting revealed that in early 2021, IDOs easily outperformed Bitcoin, Ethereum, and even BNB in terms of ROI. However, this fact points only to the level of hype surrounding IDOs rather than to any specific merits of IDO tokens. 

The conclusion that emerged from the study is that one should try to get whitelisted and join the IDO and then sell the tokens right after listing. While the average return on the tokens held for a few weeks after the listing is higher (+2,761% vs +2,347%), there is a risk that the price will drop. 

Of course, this investment strategy can be damaging to the projects themselves, because it favors speculation, not long-term investment. Yield farming is one way to encourage IDO buyers to hold tokens in the long term, but it’s unsustainable, as Vitalik Buterin himself pointed out. As users sell their rewards, the market gets flooded with tokens, and the price eventually drops. 

If the IDO model is to succeed in the long term, project founders should either discourage token dumping by setting listing prices closer to the IDO price, or look for more sustainable ways to retain investors. Otherwise IDOs might soon join ICOs in the dustbin of blockchain history.