Token sales, or events for selling tokens, are a big and important part of the cryptocurrency industry. By creating an idea, a blockchain development team can place coins of their project on the market and receive investments for its implementation.
There are several ways to do this, and each has its pros and cons.
There are three main types of token sales that can be confidently called the most popular: ICO, IEO, and IDO. Other types of token sales exist, but they in one way or another repeat one of these three popular models with minor changes.
ICO, or Initial Coin Offering, is a format for selling tokens that became widespread thanks to Ethereum in 2014, although it appeared a year earlier. This event's name is very similar to IPO (Initial Public Offering of securities) and partially repeats the process of a new company going public, but in the case of cryptocurrency, investors receive not a share in the company but an asset created by the project.
ICO revolutionized crowdfunding because it allowed investing in blockchain projects using cryptocurrency. It is worth noting that the initial sale of ETH was successful for both the project team led by Vitalik Buterin and investors. According to CoinCodex, the coin was offered for purchase at around $0.31, and over 60 million tokens were sold. During the ICO, the founders collected more than $18.5 million in BTC, but from the investors' side, the picture looks even more colorful. If you look at the CoinMarketCap chart, you can see that at the peak in November 2021, ETH reached a value of $4724.31, which is roughly equivalent to a 15,240-fold increase in its initial price.
Inspired by such success, blockchain developers also began to conduct ICOs, and investors put money into their projects, but with the arrival of scammers, the reputation of this type of token sale plummeted.
Dishonest founders would collect money and disappear, leaving investors high and dry. This is why new types of token sales emerged, aimed at mitigating this problem.
An Initial Exchange Offering (IEO) is a token sale conducted through a centralized cryptocurrency exchange. This format is more complex but more stable than an ICO.
Unlike a regular crowdsale where creating a website and fundraising form is sufficient, the IEO process is controlled and takes place on a platform owned by the exchange. Developers must apply for the token sale but passing the selection process is no easy feat.
Firstly, they must undergo KYC, a procedure for confirming their identity. It's unlikely that a fraudster would willingly share their personal information with a centralized entity. Implementing this factor alone significantly increases the security level of an IEO, but that's not all.
Secondly, developers must demonstrate that their project has long-term potential, a sound business strategy, utilizes technology effectively, and has proper documentation in the form of a whitepaper. Typically, only honest projects possess this combination of characteristics, making it challenging to meet all the requirements.
Thirdly, developers usually pay for the listing, i.e., placing the token on the centralized exchange after the IEO. According to public data, this amount varies depending on the exchange and specific project, so it's impossible to give a precise figure. However, it's usually sensitive enough for the developer.
Thus, the founder becomes an investor in their own project and proves their intentions' seriousness. Once the project passes these stages, it's listed on the appropriate platform. These are often called launchpads, for example, an IEO conducted by the Binance exchange will take place on the Binance Launchpad.
It's important to note that the exchange not only sets conditions for the projects but also provides them with direct and indirect marketing support. Exchanges actively promote the projects that make it to their launchpads to their clients, who snap up tokens in hours, if not faster.
Moreover, the project itself is considered approved by the exchange, which means it's of high quality and has a chance for success. However, it's essential to emphasize that this does not guarantee an increase in the coin's price – the exchange does not bear responsibility for that.
So far, this type of token sale can be considered the most reliable in terms of protection against fraudsters. However, the exchange always controls the funds of investors and developers. Still, not everyone will be willing to pay a significant sum for a listing on a single exchange. What to do then?
An Initial DEX Offering (IDO) is currently one of the most popular methods for token sales. Unlike an IEO, the developer interacts with a decentralized exchange, or DEX. While the developer must still prove the quality of their project, both they and potential token buyers interact with smart contracts rather than a centralized service.
Founders send their project's token reserve to the exchange and also include native DEX tokens to create a liquidity pool for the new cryptocurrency pair. Typically, only those who have made it onto the whitelist can participate in a decentralized token sale. The requirements for this can vary, from simply leaving your cryptocurrency wallet address in the right place to completing several marketing activities.
An IDO may also take place for a closed circle of individuals, but the project creator ultimately decides this, unless specific conditions are set by the decentralized exchange. At the end of the token sale on the DEX, a Token Generation Event usually begins, during which coins are sent to recipients and the new token is listed on the exchange.
The choice of decentralized exchange for the token sale is often dependent on the blockchain on which the token operates. For example, an ERC-20 token will be listed on Uniswap, while a BEP-20 token will be listed on PancakeSwap.
It is important to note that the security of IDOs is still a question mark, as the decentralized finance segment is still developing and even smart contract-based platforms are susceptible to hacks.
Participation in any form of token sale carries significant risk. Launching new projects on a reliable centralized platform does not guarantee that investors will receive profits. Token sales can be considered one of the riskiest investment directions.