Entrepreneurs in the crypto industry don't want to wait in a queue to get the attention of venture capitalists. Instead, they have found more promising ways to raise funds for their projects. From the infamous initial coin offerings (which were eventually banned in China) to initial stake pool offerings — there are several innovative methods that crypto projects can use to raise funds for their projects.
Tag along as we round up some of these common fundraising methods and explain how they work.
Initial Coin Offering (ICO)
An initial coin offering is the crypto equivalent of an initial public offering (IPO). Only, instead of shares, crypto projects sell their newly introduced cryptocurrencies. Investors purchase these coins in the hope that the value of the cryptocurrency will increase in the future.
The process begins when a company launches a whitepaper explaining the project's goals, mining procedures, distribution methods and so on. Based on this document, investors can make a judgement call on the scope of the project and purchase coins in accordance.
ICOs have received a lot of flak from the industry due to the number of fake projects that have used this method to raise funds, only to disappear with the accumulated wealth.
Security Token Offering (STO)
When tokenised digital securities—also called security tokens—are sold on a crypto exchange to raise funds, it is known as a Security Token Offering or STO. A security token is a unique token issued on a permissionless blockchain. It represents a stake in an enterprise and can be traded for real financial assets, such as equities.
Tokenised Security Offerings need to be fully compliant with regulatory governance. This requires much more preparation and compliance work on the part of the project launching the STO and is one of the reasons why they are more trustworthy than ICOs.
Initial Exchange Offering (IEO)
Initial exchange offerings are another fundraising event wherein crypto start-ups raise funds by selling tokens. However, unlike ICOs, a crypto exchange manages the entire process on behalf of the company. In return, the exchange holds onto a proportion of the tokens sold as a fee.
Since the exchanges sell the tokens, there is a greater trust in the process than ICOs. These exchanges are regulated and conduct due diligence, know your customer checks, and anti-money laundering processes before releasing an IEO on their platform.
Besides this, the project also benefits from the exchange's large client base. However, as compared to ICOs, IEOs can be pricey.
Initial Dex Offering (IDO)
An IDO is very similar to an IEO. However, instead of using a centralised exchange as a launchpad, IDOs use a decentralised trading platform. Also, instead of approvals from an exchange, it is the community that scrutinises projects and tokens of an IEO.
This ensures that projects can receive much faster access to funding. DEXs also offer a far more cost-effective token sale as they do not charge hefty fees.
Initial Stake Pool Offering (ISPO)
ISPO is a relatively new way of fundraising via Cardano's staking pool. It was first used by MELD, a non-custodial crypto bank, which described it as a 'liberating' way to raise funds. In an ISPO, investors delegate their ADA tokens to stake pools.
The project holds onto the ADA generated through staking and issues a proportional amount of its native currency in excahge.
Instead of buying or selling their tokens (like every other fundraising method), the investors stake their holdings. It's way more secure for investors because they don't have to give up their ADA to receive the rewards. The tokens they stake still belong to them and stay in their wallets.
First Published: Jul 18, 2022 7:10 PM IST
