Startups typically require initial financing to build a robust financial base before takeoff. This reality means that such budding entrepreneurs must pool investor funds to meet operational and growth costs. There are remarkable tools to meet this end in the era of decentralized finance. Two such efficient mechanisms gaining traction in the blockchain world are Initial Decentralized Exchange Offerings (IDOs) and the Initial Stake Pool Offering (ISPO) models.
In all cases, blockchain projects will receive support from the community and distribute their tokens to investors. Although projects get to raise funds, over and above everything, their operations become seamless since they also receive valuable investor support, build new partnerships, and diversify risks which in turn aids in maintaining the entrepreneur mindset.
Fundraising is all about bringing people from diverse jurisdictions together, especially vital when considering how blockchain rose in the first place. The involvement of experienced parties from specialized crypto funds or angel investors may provide guidance, which may inject more momentum for the project, driving it forward.
What is an Initial Decentralized Exchange Offering (IDO)?
IDOs are an evolution of Initial Coin Offerings (ICOs) — behind the great crypto pump of late 2017 — and Initial Exchange Offerings (IEOs) — made famous by Binance and other exchanges outside the United States.
Technically, IDOs provide an improvement from IEOs — which in turn improved on ICOs. In essence, they are a popular way of distributing tokens and raising funds for blockchain startups, mainly in DeFi.
The primary difference here is that instead of distributing funds on a centralized exchange, a project would disburse tokens to supporting investors via decentralized exchange liquidity. In Ethereum and other smart contracting platforms with account-type models, swapping protocols can easily create liquidity pools while depending on its community for liquidity.
An essential feature about IDOs is that they can offer better and immediate liquidity at almost any price level, thanks to their unique mechanics.
As such, they are an increasingly perfect choice for DeFi and blockchain startups who want to receive funds and get immediate liquidity on the exchange they aim to launch from.
At the same time, since the project is the minter of tokens, it is possible to avoid third-party discrimination and cut out scams that mired ICOs.
Besides, IDOs are considered a better way of fair minting since, unlike IEOs, where the project might be arm-twisted by the centralized exchange to issue a given percentage of their total supply for support or immediate listing.
Moreover, because IDOs launch on a decentralized exchange reliant on liquidity pools, projects don’t have to pay the often prohibitive listing fees which were demanded by centralized exchanges.
IDOs are a way of immediately securing tokens once disbursed for token receivers. All tokens are distributed to the investor’s address on generation. It presents an advantage, especially when there are risks of funneling funds to a custodial exchange that can be susceptible to hacking.
What is an Initial Stake Pool Offering (ISPO)?
This revolutionary crowd-funding mechanism is unique to the Cardano EUTXO smart contracting platform. Building on the benefits presented by IDOs, ISPOs are fairer, decentralized, and secure. Most importantly, ISPOs are more inclusive and the cool thing is, everyone, even investors from the U.S. can easily participate by simply delegating their ADA. ISPOs are evolving to be a perfect financing tool for participants who want to support their projects without investing their assets as it is virtually risk-free.
Instead, through ISPOs, projects leverage Cardano’s native reward incentive structure. In this arrangement, ISPO participants have to delegate their ADA to the project’s stake pool in Yoroi or Daedalus for the project’s token.
In this case, the variable margin is set by the stake pool operator at 100 percent while the Ouroboros protocol leaves all the rewards to the development team. If the variable margin is less than 100 percent, the protocol automatically redistributes rewards to ADA delegators while those who had also staked their ADA will receive token rewards.
There is no risk posed to the investor by delegating their ADA coins, unlike in IDOs, where they have to spend their capital to receive the project’s tokens.
Because ISPOs allow for delegation of ADA, it is an effective method of raising funds while simultaneously guaranteeing the security of the underlying Cardano blockchain. This is a refreshing way for investors, especially those who wish to commit to bulwark Cardano while simultaneously participating in fundraising operations for some of the network’s potential projects.
Through ISPOs, investors get early access to tokens before product launch, don’t spend their staked ADA, and further promote the project of their choice, helping them get funding. Additionally, the participant may get even more rewards besides receiving their tokens, depending on the project. On the other hand, the project receives required funding and distributes its tokens fairly, leading to more decentralization and even better engagement with the community.