Funding Your Web3 Project: How to Choose Between ICOs and IDOs.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as professional financial or legal advice. Always consult with a qualified professional before making any financial or legal decisions. Seriously, I was a Liberal Arts major.

What Are They?

The choice between an Initial Coin Offering (ICO) and an Initial DEX Offering (IDO) isn't just about raising capital;However, they differ in key aspects like platform, accessibility, and regulations. Here's a breakdown:

Platform:

• IDO: Leverages Decentralized Exchanges (DEXs). These are peer-to-peer networks where users directly trade cryptocurrencies without a central authority. Here's how Coinbase defines a DEX:

A decentralized exchange (or DEX) is a peer-to-peer marketplace where transactions occur directly between crypto traders. DEXs fulfill one of crypto’s core possibilities: fostering financial transactions that aren’t officiated by banks, brokers, or any other intermediary. Many popular DEXs, like Uniswap and Sushiwap, run on the Ethereum blockchain.

• ICO: Traditionally conducted on the project's website or a dedicated platform. There are different types of ICOs (static, dynamic) and they are usually accompanied by a "whitepaper" explaining the project. You can read more about ICO's on Investopedia as well as several warnings:

"With very little regulation of ICOs in the U.S. currently, anyone who can access the proper technology is free to launch a new cryptocurrency. But this lack of regulation also means that someone might do whatever it takes to make you believe they have a legitimate ICO and abscond with the money. Of all the possible funding avenues, an ICO is probably one of the easiest to set up as a scam."

It is so easy to set up tokens that even I have done it (though I've never launched them to the public). However, as Investopedia goes on to say, "Even if anyone can establish and launch an ICO, that doesn’t mean everyone should. So if you’re thinking about organizing an initial coin offering, ask yourself if your business would substantially benefit from one."

Accessibility:

Here, accessibility refers to who can participate in your offering.

• IDO: These are generally more accessible because anyone with a compatible crypto wallet can participate in an IDO on a DEX.
• ICO: May have limitations. KYC (Know Your Customer) procedures and geographical restrictions might be imposed by the project or platform.

Regulation:

• IDO: Currently operates in a less regulated space due to the decentralized nature of DEXs. However, regulations might evolve in the future.
• ICO: More susceptible to regulations. Depending on the jurisdiction and the token's utility, ICOs might be subject to stricter regulations similar to securities offerings. (See what I mean about talking to a financial professional? If you aren't 100% certain what kind of regulations apply, who might be applying them, and even terms like "securities," you may be heading for trouble. Artifinne.com writes (along with the usual disclaimers) that:

"If you answer “Yes” to any of the following questions, then you will probably need to make your project KYC-compliant...

1. Are you launching a Web3 project for an already established, well-known brand?
2. Does your project involve money changing form at any point? (I.e. Fiat to virtual money and/or virtual money to crypto?)
3. Does your company typically need to provide invoices for each sale for tax and accounting reasons?
4. Does your project involve any currency OTHER than a cryptocurrency?
5. Do you need to send the product you are selling to a physical address or blockchain address?

Liquidity:

Before we jump in, let's review what "liquidity" is. According to Binance,

Liquidity refers to how easily an asset can be bought or sold without significantly impacting its price. The more liquid an asset, the easier it is to buy or sell, while less liquid assets may take more time and effort to convert into cash.

• IDO: Tokens launched on a DEX gain immediate liquidity after the IDO, as they can be readily traded on the exchange.
• ICO: Liquidity for ICO tokens might take time to develop, depending on if, when and where they are listed on an exchange.

Cost and Speed:

• IDO: Generally faster and cheaper for projects due to the streamlined nature of DEXs.
• ICO: Can be more expensive and time-consuming due to potential listing fees and regulatory hurdles. Let's look at the post-ICO process in just a little more detail. Once the ICO fundraising period ends, the project distributes the purchased tokens to participating investors. The project may then attempt to get listed on a cryptocurrency exchange. This attempt will be affected by several things such as: the requirements of each exchange (functionality, trading volume, and compliance). Currently, "compliance" is a bit of a moving target as this can include not only compliance to the exchange policies but various government bodies as well. Exchanges are more likely to list tokens with a demonstrated demand from investors and a healthy trading volume.

Exchanges often charge listing fees, which can add significant costs to your project.

Security:

• IDO: Investors and founders should always be cautious, as DEXs can be vulnerable to hacks and scams. Also, ensure neither you nor your potential investors don't confuse DEXes with CEXs such as QuadrigaCX or FTX. Neither of those were Decentralized Exchanges. They were both Centralized Cryptocurrency Exchanges (CEXs).
• ICO: Security risks can vary depending on the platform and project. Investors should exercise caution as with any ICO.

How to Choose Between an IDO and an ICO

When choosing between an Initial Coin Offering (ICO) and an Initial DEX Offering (IDO) for funding your web3 project, there are several factors to consider and reconsider:

Regulatory Compliance

ICOs have faced increased regulatory scrutiny in many jurisdictions due to concerns over investor protection and compliance with securities laws. This method has significantly dipped in popularity since about 2019.

IDOs, on the other hand, are generally considered more compliant as they are conducted through decentralized exchanges (DEXs) which have implemented measures like KYC/AML (anti-money laundering) checks.

Access to Investors

ICOs traditionally allowed anyone to participate, while IDOs are often limited to whitelisted investors and those holding the DEX's native token. This can limit your potential investor pool, but also filters out less committed participants.

Marketing and Promotion

Successful ICOs required significant marketing efforts and costs to attract investors, especially as the Web3 market space grows more crowded. It used to be you could just pop up a Discord server and Telegram group and potential investors would be eager to snap up your tokens at launch. Founders just getting started may find it prohibitively expensive to scale beyond a few early adopters.

IDOs leverage the existing community of your chosen DEX platform, potentially reducing your marketing costs. This leans into Metcalfe's Law and the network effect. I personally believe it is always best to start your marketing (remember half of marketing is listening) before you ever code a single line of your token.

Token Distribution

ICOs involved creating and distributing new tokens during the offering. With IDOs, your tokens need to be created and listed on the DEX beforehand, which adds an extra step. Spend a good deal of time thinking about distribution before making a choice. To paraphrase Reid Hoffman:

“... while the entrepreneurial instinct is to build the product and then figure out distribution, you should figure out product and distribution together”

With great distribution, you can fix the product after receiving user feedback. If no one’s using your product or investing in your token, it doesn’t matter!

Choosing a DEX

If you've decided to go with a DEX, Coinmarketcap posted a how-to article with a section on "vetting a DEX." It was written in 2019 but is a great starting place. Essentially, it's important prioritize factors beyond just trading volume. The dancing dollar signs can be distracting but go deeper. Look for platforms that offer targeted visibility within your project's niche, ensure complete transparency with verifiable project details, provide user-friendly interfaces with fiat on-ramps for wider participation, and empower users with features like staking pools and governance incentives to drive engagement and investment.

Know your audience and plan your growth. Talking about "user-friendly interfaces" is great but actually go out and test them with people of varying tech skill levels as well as varying knowledge of crypto in general. Make it easy. Now, make it even easier.

Alternatives & Specific Use Cases

In addition to ICOs and IDOs, there are a few more acronyms you should be asking a licensed financial and/or legal professional about (again, I am neither).

Over the Counter Markets

Projects looking for alternative trading options outside of exchanges, might look at Over-the-Counter (OTC) markets where large investors can directly buy and sell tokens. OTC markets have some advantages like better privacy, customization, and liquidity for larger trades. However, they also come with increased risks due to lower regulation, and less transparency. For start-ups, you will need a lot of legal advice to play in this area which will bump your costs up.

Initial Exchange Offerings (IEO) and Security Token Offerings (STO) might be the right fit.

Initial Exchange Offerings (IEOs)

An Initial Exchange Offering (IEO) is a token sale conducted on a centralized cryptocurrency exchange (CEX). After the FTX debacle, these exchanges are highly scrutinized and increasingly regulated. They are often faster but more expensive.

Security Token Offerings (STOs)

If your project is looking to tokenize a real-world asset (RWAs) such as real estate, equity, or other assets, you may need a Security Token Offering (STO).

Other examples of securities include things like stocks, bonds, mutual funds, and derivatives.

Summary

Let's focus just on ICOs and IDOs for now and look at how you might select which is right for your token launch. IDOs are generally considered more regulatory compliant and can leverage existing DEX communities, but may have a more limited investor pool (for now anyway). ICOs are easier to create and allow broader investor access but require more marketing efforts and will probably face higher regulatory hurdles especially crypto-adoption increases.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as professional financial or legal advice. Always consult with a qualified professional before making any financial or legal decisions. Seriously, I was a Liberal Arts major.