Ordinarily, the word token means a thing serving as a tangible or visible representation of a fact, quality, feeling etc. However, the word token means a virtual currency token or a denomination in cryptocurrency. The word token also describes any cryptocurrency besides Bitcoin and Ethereum, and it is used to make a purchase, make investments, or store value.
Tokens are objects similar to coins, but they are not legal tender because a private entity issues the tokens for a specific purpose, and their elaboration usually uses low-value materials.
Tokens are created by cryptocurrency companies that want to raise money. Investors who are interested in the company tokens can purchase them. However, before cryptocurrency companies sell tokens to the public, there are transactions embarked on by the company; this is referred to as token launch.
Simply put, a token launch refers to a transaction or series of transactions in which the company sells Tokens to the public as part of a public product launch.
In this article, you’ll learn about this transaction(s). You will also know what a Launchpad is, how it works, and the different fundraising models such as ICO, ILO, and IDO and how they work.
What is ICO?
An initial coin offering (ICO) is one of the most popular ways a cryptocurrency company raises funds or money to create a new token app, coin, or service. Initial Coin Offerings (ICOs) or token sales are modes to raise external funding through the emission of tokens
Investors interested in cryptocurrency tokens can buy into the initial coin offer or receive the token issued by the company. This token issued represents the investor’s stake in the company or project. And the token enables the investor to access certain project features run by the issuer.
A cryptocurrency company or project organizer seeking to raise money or funds through an Initial coin offering (ICO) first has to determine how the coin will be structured. There are different ways ICO can be structured.
First, the company has to set a specific funding limit or goal, meaning each token has a predetermined price, and the total token supply is also fixed.
Secondly, an ICO can have a fixed token supply and a dynamic funding goal, which means that the amount of money raised in the ICO determines the overall price per token.
Third, ICOs may have a dynamic token supply but a fixed price, which means that the supply is determined by the amount of funding received.
Apart from structuring the ICO, the project organizer is expected to publish a white paper which can be likened to a prospectus. The purpose of publishing this document on the website of the token is to provide information such as;
- objectives of the project;
- the requirement that the project would satisfy once it was finished;
- the cost of the project in terms of money;
- how many of the virtual coins will be kept by the founders;
- payment methods and currencies are accepted, and;
- the length of the ICO campaign supply.
However, it must be added that due to a lack of regulation ICO market is highly susceptible to fraudulent acts resulting in substantial welfare losses for investors. Someone may go to any length to make you believe they have a legitimate ICO to steal your money. An ICO is probably one of the simplest funding channels to set up as a scam. Hence it is not recommended.
Benefits of ICO
- It is very easy to set up an ICO project compared to the other fundraising model.
- It is cost-effective and suitable for a small investment.
- Less interference from the government.
- Investors have control over their assets.
- Increased liquidity in a short period.
- Funds can be raised through bounty programs, private and public sales, and Airdrops.
Disadvantage of ICO
Despite the many advantages of investing in ICOs, you should also be aware of their drawbacks.
- A low success rate is common for ICO projects.
- The tokens will depreciate and eventually lose all of their value if the ICO project fails.
- ICO-related regulatory tools aren’t entirely accessible.
- There are different ways to commit fraud.
- It is simple to use by bad companies to disrupt ICOs.
What is IDO?
Initial Dex offering, the successor of ICO, is another method for fundraising by Cryptocurrency Companies. It is a permissionless crowdfunding platform that allows project organizers to launch their token(s) or coin through a decentralized exchange (DEX).
IDO model enables a token to be circulated and then make a price. It is to establish a community to confirm members’ identities and release the economic and operational mechanisms.
But the token is not priced before but by the secondary market based on the operational effectiveness and quality of the project. And this shows that the IDO model does not raise funds from the public. So there is no possibility of financial fraud.
Nevertheless, only high-quality projects can be launched in the IDO model. IDO doesn’t need to raise funds from users. It is not for money grabbing but for establishing a network with common values. It avoids the legal risk of financing by users.
It effectively solves the problem of the high risk of individual investors, providing investors with the contribution to the IDO community based on their preferences and recognition of the community. Favourable benefits will be achieved.
The first ever IDO was introduced in June 2019 by Paven Protocol and listed on Binance DEX.
How does an IDO work?
A project appeals to the general public for fundraising through a platform or Launchpad that offers IDO services such as Uniswap, Binance Dex and Polkastarter.
If the project meets the Launchpad platform requirement of the platform, it is selected to conduct an IDO. Investors then buy the token’s IOU (I owe you or acknowledgement of debt) to re-launch.
The public pays for the token in advance and receives them at the token generation event. Once these stages are completed, the token is listed for trading on a decentralized exchange.
What is ILO?
Initial Liquidity Offering (ILO) is a new mode of raising funds for businesses and projects. This mode is usually adopted by startups and sometimes by established cryptocurrency companies.
This method enables the startup to create tokens and sell them directly in the Defi-based Decentralized Exchange, thus, by the initial coin offering (ICO) process.
Initial Liquidity offering is a unique method to raise funds, making fundraising completely reliable and attractive to a wide range of investors.
How does an ILO work?
An ILO offers a new token to buyers who contribute to the liquidity pool in exchange. However, for buyers to be interested in the token, it must be attractive, and the AMM (Automatic Market Marker) must function well.
In exchange for their money, the liquidity contributors (buyers) will receive the new token for the liquidity they contributed for the AMM to work for the token. Bonuses called yields are often offered to the buyers because of the risk they took to buy the new token.
Typically, the liquidity contribution is made in the form of stablecoins with highly stable values. If token owners sell a significant amount of the new token through the AMM to receive the stablecoin held in the pool, the liquidity pool for the token may become skewed.
Pros of an ILO
- ILO is an open-source model; hence it does not require sales of tokens in the DEX.
- The listing process is economical compared to other fundraising methods like ICO, IDO and IPO.
- Trading is superfast. It starts immediately after tokens are directly launched in a DEX.
- The ILO liquidity pool ensures easy liquidity for the token at any price.
What is Launchpad?
Launchpads are fundraisers for any crypto projects. It is a platform that allows buyers or investors to buy a token in a Launchpad and get exposure directly to new and exciting projects.
The Launchpad technically filters projects before allowing investors and buyers to access them, which helps safeguard investors by screening out scams and rug-pulls common in other non-Launchpad platforms.
Crypto Launchpad ensures that the founders of projects are visible and do not disappear. Thus, investors need not worry about scams.
A Launchpad is also known as a crypto incubator. Crypto Launchpad provides access to token to access to token sales in the early stage. And this enables investors to achieve bargain prices before they are available publicly.
Some examples of crypto Launchpad
Polkastarter is a Polkadot network-based Launchpad protocol. It enables project owners to launch secure, decentralized ICOs and is equipped with technology that enables cross-chain token exchanges intended to prevent market manipulation by prominent single actors (commonly known as whales). The platform has 106 projects launched, making it one of the most prolific Launchpads.
The Polkastarter was founded by Miguel Leite, Tiago Martins, and Daniel Stockhaus. The CEO is Stockhaus, a seasoned tech entrepreneur. Martins, the CTO, is an enthusiastic product creator, while Miguel is a Blockchain enthusiast and Ethereum maximalist.
In mid-2020, TrustSwap, another decentralized launchpad and protocol, was established in Canada. It aims to mainstream smart contracts and enable “customizable transactions” in Defi and throughout the entire crypto industry.
The platform’s native token, SWAP, offers multi-chain swaps of the next generation and other features for dividing payments and subscriptions. Users can convert any token into an ERC-20 token using its Smart Swaps feature to gain access to more Defi DApps.
3. Binance Launchpad
One of the world’s oldest and most popular cryptocurrency exchanges, Binance, has an exclusive platform for launching tokens called Binance Launchpad.
It provides a one-stop shop for initiatives to raise capital and gain visibility. It has aided some of the most successful token launches, including Fetch, AI, Celer Network, and BitTorrent. By 2022, it had reached over 3.5 million participants and raised over US$90 million for over 64 projects.
4. Ethereum Launchpad
Ethereum Launchpad enables users to develop their Ethereum-powered cryptocurrency before launching it in an initial coin offering (ICO). The Ethereum Blockchain powers the Launchpad, which controls token sales with smart contracts.
TrustPad is a decentralized, multi-chain platform for fundraising that is highly secure. Its KSP offers numerous and varied ways for early-stage investors to gain knowledge about a project’s operations, enabling a frictionless limit order experience. It works with various users and projects, including small and medium-sized businesses and private citizens.
3 benefits of Launchpad
Launchpad offers several benefits for both the projects and investors. These benefits include:
- It is beginner friendly, as any project organizer or team can put their projects on crypto Launchpad as long as they meet the requirements for entry.
- Launchpad is very safe. It is not susceptible to security breaches as they do not hold user funds. Instead, investors have access to their funds or assets.
- Super-fast delivery of tokens. Investors do not need a waiting period before using their tokens for trading.
Which is better, ICO or IDO?
From the foregoing, it is deducible that an Initial DEX offering is a better option for both project organizers and investors. It offers fast trading, uninterrupted liquidity and, importantly, has a lower cost for list projects with no user restrictions.
IDO is a preferred option to launch a new crypto project compared to the ICO model because it is more transparent and open. Unlike the Initial coin offering is highly susceptible to fraud and scams.
What is the difference between an ICO, IDO, ILO and Launchpad?
One of the significant differences between an ICO, IDO, and ILO is the marketplace for the sales of tokens. ICO usually sells its tokens on the website of the project developer or organizer. In contrast, IDO and ILO are available for sale on a decentralized exchange.
Launchpad, on the other hand, is enabling platform that acts as a bridge between investors and project developers. ICO, IDO, and ILO are referred to as types of Launchpad.
From the preceding paragraphs, it can be seen that a token launch involves a series of business transactions by a cryptocurrency company before it can launch a token.
A cryptocurrency company has various Launchpad options to raise funds for crypto projects. ICO, IDO and ILO are among the varieties of options available to them.Although, ICO is gradually fading from the crypto space of the risk associated with it. Its usage is on the decline. Conversely, ILO and IDO have minimal risk and are beneficial for investors and project developers.
See you soon,