The evolution of ICOs through DeFi

New crypto projects, like all startups, need funding to get off the ground. ICOs, or Initial Coin Offerings, have long been a method for fundraising and token distribution. However, during the ICO frenzy of 2018 only 8% of tokens made it to the market stage, thanks in no small part to intervention by regulatory authorities.

Since then, new cryptocurrency companies have explored several other kinds of TGEs, or Token Generation Events, to launch their offerings. Many of these have created a whole new ecosystem for project launches, with the decentralized finance (DeFi) space pioneering some of the most innovative solutions to date.

ICOs pave the way

ICO’s were first imagined as the cryptocurrency equivalent of the Initial Public Offerings (IPOs) seen in traditional financial markets. However, ICOs do not share the same regulatory status as IPOs, nor the same ownership of the listing company in the form of shares, nor are they legally recognized in many jurisdictions.

ICOs had their heyday during the big cryptocurrency boom of 2017/2018. By late 2018, Forbes reported that investors injected over $20 billion into fledgling cryptocurrency projects.

Some companies that launched via an ICO have since grown to become the biggest and most successful cryptocurrency companies in the world — not least Ethereum. Now known as the “world’s computer”, Ethereum’s native currency — Ether (ETH) — is now valued at more than $1,700 per coin, up from around $0.31 at its ICO.

After a spate of scams in 2017 and 2018, however, ICOs attracted the attention of various global regulators under consumer and investor protection laws, including the United States Securities and Exchange Commission (SEC), slowing down the over-exuberance of investors and the propensity of bad actors to launch projects with little underlying value.

STOs and regulated token offerings

STOs, or Security Token Offerings, can act as a bridge between ICOs and IPOs, since STOs offer tokens as a regulated security. Like IPOs, STOs must be legally connected to a registered company offering real assets, voting rights, and dividends. In addition, STOs are issued under the jurisdiction of securities regulations, which affords investors protective legal rights

While they are restricted in China and South Korea, there are a host of places — the USA, UK, and EU included — where STOs are permitted and regulated. That being said, STOs are less popular since regulation is expensive, and tokens issued through STOs can be more difficult to trade due to stricter enforcement of regulation.

The summer of LGEs

For some, LGEs, or Liquidity Generation Events, provided a neat solution for TGEs in the burgeoning world of DeFi. Popular during the DeFi summer of 2020, LGEs differentiated themselves from other offerings by incorporating yield farming via liquidity pools into fundraising tokens.

An LGE works as follows: a smart contract collects different tokens from investors over a set fundraising period. Once this period ends, a liquidity pool is created using these tokens. Then, a limited number of liquidity pool tokens are minted and distributed to investors, with a percentage funneled towards project development.

CORE launched the first LGE in 2020 and was highly successful. It has, however, proved the exception rather than the rule, with many LGEs failing, and some turning out to be fraudulent. The ease with which these frauds could be pulled off was aided by the anonymous and non-KYC nature of LGEs, with both development teams and investors allowed to shield their identities.

The rise of IEOs and IDOs

Since the popularity of LGEs has dwindled in DeFi, IEOs and IDOs have risen to join ICOs as predominant forms of TGEs, with investors less and less keen to participate in offerings from anonymous, unproven, and often inexperienced development teams.

IEOs, or Initial Exchange Offerings, are similar to ICOs, but these offerings are only available through centralized exchanges like Binance or Coinbase. Registering an IEO can cost between $150,000 and $1 million, with projects and their owners subject to strict due diligence disclosures.

IDOs, or Initial DEX Offerings, operate in the same way as IEOs, but these token events are offered on decentralized, peer-to-peer exchanges like Uniswap or Sushiswap. IDOs offer investors several advantages over IEOs:

  • No exchange fees
  • No trade limits
  • Lower listing fees
  • No exclusivity to one exchange

IEOs and IDOs both offer investors something ICOs cannot: the guarantee of instantaneous trading. Since tokens are already listed on the exchange, investors can immediately begin trading tokens for profit.

Enter launchpads

Launchpads, or platforms where new projects can raise capital while providing investors and users with early access to token sales, are becoming an increasingly popular way of raising early funding.

The rise of new launchpads such as Launchpool affords investors more peace of mind as featured projects are usually vetted by the platform and are typically backed and sponsored by public teams before the commencement of public fundraising. This creates more accountability and improved security compared to that seen during the ICO craze of 2017/2018, or the LGEs from anonymous developers seen during the DeFi summer of 2020.

The contemporary norm for fundraising, which streamlines the process for projects and investors, has pushed the crypto space in an exhilarating, merit-based direction that is both competitive and fruitful. This has helped to foster innovation and provide investors with increasing opportunities to support exciting new projects.

YIELD App offers the easiest way to invest in DeFi using crypto or traditional currencies, regardless of your financial or technological level of expertise.

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