In-depth analysis of the initial issuance method of tokens and economic model design

Original title: 《 In-depth analysis of token issuance: comparative analysis and summary of initial issuance methods 》

Original source:  Buidler DAO

Foreword

The economic model team hopes to study the overall process related to tokens. It mainly includes several parts: Economic model design; Token issuance; Token circulation management.

This article mainly discusses the content related to token issuance. With the development of blockchain and Web3 projects, FT and NFT are beginning to be included in the project. At present, the academic community and application fields have studied and developed the issuance of FT more, and the relevant research and accumulated cases on the role and issuance of NFT are not rich enough. Dr. Xiao Feng of Wanxiang Blockchain published "Three Token Models for Web3 Applications" which involves NFT-related knowledge. We also briefly analyzed the issuance of NFT in the last section of this article. The team will continue to conduct in-depth research in this sub-segment later.

Basic knowledge of token issuance

Token types

(1) Classification by the Swiss Financial Market Supervisory Authority

In 2018, the Swiss Financial Market Supervisory Authority classified tokens according to their potential different economic functions. This classification method has been widely recognized internationally. Referring to this more official and professional classification definition, tokens can be divided into the following three types.

Payment Token: refers to a means of payment for the transfer of money or value in order to obtain a certain item or service now or in the future. This token is more like what we call currency.

Utility Token: This type of token exists in a digital form and is mainly used for applications or services developed based on blockchain technology as an infrastructure. For example, the cost of consumed Gas.

Asset Tokens: This type of token is backed by certain assets, such as debt or equity that the token holder can claim from the issuer, a certain share of future company earnings or asset flows, etc. Therefore, in terms of its economic function, this type of token is similar to stocks, bonds or derivatives. If legal currency is regarded as an asset, one perspective of stablecoins is this type of token.

This classification method will produce intersections, and some tokens have two or three classification attributes.

This classification is more in line with observing tokens from the perspective of finance and currency. The tokens in a project generally have an evolution process. Usually, they first have application attributes. The prosperity of applications makes this token have the properties of a general equivalent (currency), and it will have more payment functions. Tokens that are widely used have good liquidity and value endorsement, so it is easy to develop value storage attributes, and thus more like assets.

(2) Classifications that focus on supervision: utility type and securities type (also known as: application type and equity type)

Tokens are essentially carriers of value. Blockchain technology is used to tokenize value, equity, and physical assets. Its connotation can be equity, such as dividend rights, ownership, and debt rights; it can be assets, such as the mapping of physical assets on the chain, corresponding to asset tokens; it can be currency, such as BTC and USDT, corresponding to payment tokens; it can be a circulation token in an application or service. This type of token is mainly issued for use within the application. Many dAPPs have issued their own tokens, corresponding to application tokens; it can also be anything valuable, such as creativity, attention, etc.

But in fact, some tokens are a mixture of multiple types, such as platform coins issued by exchanges, which are supported by part of the exchange's profits and have strong financial attributes, but at the same time, the exchange has also opened up many usage scenarios for them, which have use value.

Based on tokens, the concept of token economy was created, which is considered to have unlimited potential. Its main feature is to use the characteristics of the token itself to create a better ecosystem, a better value model, a larger user group, and to achieve a large-scale distributed form of value creation through tokens - this is the essence of open source collaboration.

This token classification model that focuses on supervision divides tokens into two major categories and four minor categories.

The first category: Utility Token.

Product or service token (Use of Product), represents the right to use the company's products or services.

Reward Token, users get rewards through their own behavior.

The second category: Security Token.

Equity Token, similar to the company's equity, bonds, etc.

Asset Token, corresponding to assets in the physical world, such as real estate, gold, etc.

This classification is more in line with the perspective of supervision. Utility Token can develop freely, and Security Token is regulated. However, if Utility Token involves financial activities and has securities attributes, it will also be regulated.

Note: Our previous article Four-quadrant Token Economic Model (I): Dual FT Model also discussed this in detail.

Purpose of Token Issuance

From the existing cases, there are two main purposes of Token issuance:

(1) Distribute Tokens to users (promote user application use)

(2) Raise funds

Two types of Tokens: FT and NFT:

(1) FT is more in line with the characteristics of currency. The above two goals are the most obvious. The issuance of FT requires finding a group of people who recognize the value of FT. The value of FT lies in the description of the future of the project.

(2) NFT can also achieve the above two goals, but due to its characteristics and development history, there is not much content that can be analyzed. (We will have a special section to discuss the issuance of NFT later)

Indicators for the evaluation of token issuance

Based on the purpose of token issuance, we have preliminarily summarized several indicators. Generally speaking, compliance issues should be listed first, but due to the early characteristics of the development of the blockchain industry, supervision and compliance are also being explored, and some situations are not clear, so compliance issues are temporarily placed in the second item.

(1) User coverage of token issuance: High-value Web3 users are a common method. According to the characteristics of the application, other screening methods are also needed, and according to planning and execution, the coverage of target users is maximized. The areas that tokens should cover are calculated differently for each application

(2) Compliance issues: According to the nature of the token and the policies of major countries, a compliant issuance method or compliance verification is adopted

(3) Fund raising indicators: On the premise of meeting compliance and coverage, whether the fund raising reaches the planned plan is a major assessment indicator. This indicator has two dimensions: total amount and granularity.

For the lock-up period of the issued tokens, we believe that it is a task in the design stage and the later liquidity management stage, and is not an assessment indicator in the issuance stage.

Initial issuance of tokens and issuance of tokens during project development

In the case of token issuance, there are several types of research standards:

(1) Initial issuance total amount (initial total amount is 0 and initial total amount is not 0)

(2) Fixed total amount and variable total amount (this dimension only affects the later liquidity analysis and is not discussed in this article)

The figure below is an economic model representative of an initial circulation amount of 0 and a fixed total amount. This type of economic model design uses Bitcoin as a token and does not have the problem of early token issuance. The later currency issuance based on the difficulty system is not within the scope of this article and will be classified as a study and research in later liquidity management.

Token model with a fixed total amount (initial circulation is 0)

The following figure shows that the initial total amount is not 0, and it is necessary to use the token issuance method to raise funds or reach users more accurately. Taking Ethereum as the token, it is the token issuance method we studied, such as ICO, IEO, IDO and other content scopes, and the scope of action is shown in the red circle in the figure. For the number of tokens that exceeds the actual application, it is necessary to use economic means to freeze liquidity.

Token model with a fixed total amount (initial circulation is not 0)

For the tokens issued by PoW, PoS and other methods during the project operation, we believe that it is a task in the later liquidity management stage, and we will not discuss this part of the token issuance.

Token Issuance Method IxO

There are two major categories of Token issuance methods: private placement and public offering. The issuance we discuss here is public offering, and private placement does not involve these methods.

Let's first use a sentence to briefly summarize several common digital currency issuance methods: the method of directly launching on the public chain is the most primitive ICO; sending it directly to the user's wallet for free is Airdrop; issuing through a centralized digital currency trading platform is IEO, issuing in cooperation with financial regulators is STO, and issuing on a decentralized exchange DEX is IDO.

Private Equity

Private equity funds refer to investment funds that raise funds from specific investors in a non-public manner and invest in specific targets. Private equity funds are recruited by means other than mass communication, and the initiators gather funds from non-public multiple entities to establish investment funds for investment.

In the field of tokens, private placements are generally investment institutions or individuals in this field, and usually they can be negotiated offline like traditional financing. This form of token financing later developed into SAFT. SAFT stands for Simple Agreement for Future Tokens, which is a token issued by blockchain developers to finance the development of blockchain networks. It is similar to futures and gives investors the right to obtain corresponding tokens after the development of the blockchain network is completed.

SAFT has been adopted by many well-known projects due to its strong compliance, such as Telegram and Filecoin. SAFT is particularly suitable for utility tokens, which are not securities after they are launched, but are an investment agreement for network construction through fundraising. The use of SAFT can make its compliance procedures clearer.

Based on the evaluation indicators of token issuance, we summarize the effects of private placement:

(1) Coverage of token issuance: The coverage is very poor, and all of them are investors, not users

(2) Compliance issues: Generally, they are compliant

(3) Fund raising indicators: Generally, they will achieve better results, and the amount will be larger. The granularity of funds is difficult to control, and all of them are large users

ICO (Initial Coin Offering)

ICO (Initial Coin Offering) Initial public offering of digital currency

ICO is the initial token offering, which originated from the concept of initial public offering (IPO) in the stock market. It is the act of a blockchain project issuing tokens for the first time to raise general digital currencies such as Bitcoin and Ethereum. When a company issues cryptocurrency for the purpose of financing, it usually issues a certain number of encrypted tokens and then sells these tokens to people who participate in the project. These tokens are usually used to exchange for digital currencies such as Bitcoin and Ethereum, and of course they can also be exchanged for legal currency.

ICO is a project financing method derived from the digital currency and blockchain industry. The first ICO that can be checked came from the Mastercoin project (now renamed Omni), which announced in July 2013 on Bitcointalk (the largest Bitcoin and digital currency community forum) that it would conduct ICO crowdfunding through Bitcoin, generate corresponding Mastercoin tokens and distribute them to crowdfunding participants. In essence, this ICO is a barter behavior, that is, participants exchange Bitcoin for tokens in the Mastercoin project. At the beginning, ICO was just a community behavior of digital currency enthusiasts. With the continuous development of digital currency and blockchain, more and more people began to accept and participate. Most ICOs are conducted through Bitcoin or other digital currencies.

In the field of blockchain, ICOs began to be widely used after Ethereum supported the issuance of ERC20 tokens based on the Ethereum system, and the phenomenon of ICOs has exploded. The largest financing project is EOS, which adopts a daily bidding issuance method and has raised about 4 billion US dollars in nearly a year.

Advantages of ICO:

It provides an online, digital currency-based way to raise funds. It is simple, convenient, and also convenient for the issuance of new tokens. ICO relatively well completes the two main tasks of fund raising and token issuance.

Problems of ICO:

Project operating risks:Most of the projects participating in ICO are in the early stages, have poor risk resistance, and are prone to operating risks. Therefore, most ICOs are similar to angel investments, facing risks in the early stages of a project and prone to investment losses.

Financial risks: Investors may face the risk of fund-raising fraud and investment losses during the process of investing in ICOs. Currently, ICOs are in the early stages of the project and lack supervision. Some startups may take advantage of the hot market to create false project information and use ICOs to commit fund-raising fraud.

Regulatory and legal risks:Currently, ICO fundraising is mainly based on BTC and ETH, which is still in a state of regulatory vacuum and lacks relevant laws and regulations. Since 2017, countries have increased supervision and control over ICOs, but various disguised IXOs also play a similar role to ICOs.

Currently on CoinMarketCap, ICO is generally referred to as the first token issuance in a broad sense, including IEO, IDO and other methods. As shown in the figure below: The ICO Calendar at the top is a broad ICO, and the ICO in the Upcoming Project is the ICO described in this section.

Based on the evaluation indicators of token issuance, we summarize the effects of ICO:

(1) Coverage of token issuance: There is no restriction on participation conditions, and the coverage is the widest. It is necessary to design participation rules to screen out real customers. Due to investment needs, ICO often attracts many non-application investment customers, rather than angel users who actually use the application. (Usually combined with airdrops, there will be better results)

(2) Compliance issues: Although KYC and other content were added later, ICO is considered illegal in most regions

(3) Fund raising indicators: Generally, it will achieve relatively good results. In terms of fund raising, if ICO does not achieve good results, other methods will also be difficult to achieve good results. The granularity of funds is difficult to control, and there can be large users

 Airdrop

Airdrop is a way of distributing digital currency. Initially, digital currency only had one way, which was Bitcoin mining. But later, the distribution methods of altcoins and forked coins appeared, in addition to mining, can also be distributed by airdrop. Airdrop is literally a gift from thin air. The development team gives you digital currency for free. The currency is directly sent to your address without you having to mine, buy, or hold the original currency before the fork. You can get the currency for free without any conditions. Of course, more airdrops are based on some conditions, such as accounts holding certain digital currencies. The rules of the airdrop are determined by the issuer. It can be that you will be given a certain number of coins as soon as you register, and there are also many distributions through snapshots.

In the early days of blockchain development, there were not many conditions for airdrop selection, but in the Web3.0 stage, many projects have made some progress before airdropping, so airdrops can be made to users who have made contributions, and airdrops can also be used to guide users to complete related tasks. For example, Arbitrum's airdrop design.

Advantages of airdrops

Distributing new tokens to the desired user group facilitates the circulation of new coins and promotes their application. Since airdrops do not involve financing, there are generally no regulatory issues.

Directed airdrops are made to real users of the application, and users are guided to complete related tasks.

Disadvantages of airdrops:

The airdrop method lacks the financing function and simply completes the issuance of currency.

Based on the Token issuance evaluation indicators, we summarize the effect of the Airdrop method:

Token issuance coverage: By setting airdrop conditions, it is possible to have a relatively good coverage

Compliance issues: There are basically no compliance issues

Fund raising indicators: It does not meet the requirements for raising funds. But the intensity of the release is well controlled

IEO (Initial Exchange Offerings)

IEO Initial Exchange Offerings

Initial Exchange Offering IEO refers to a way to raise funds for new projects through a digital currency trading platform.

IEO is usually supported by a trading platform, so the project party who chooses this scheme to raise funds must take its project plan seriously. In most cases, IEO proposals are strictly reviewed by the trading platform involved in the issuance. In a sense, the trading platform is using its own business reputation to guarantee the approved IEO projects.

Through IEO, potential investors can buy assets before they are listed on the trading platform. On the trading platform that promotes token sales, registered users who provide KYC (identity authentication) information can purchase tokens before they are open for trading on the open market.

Advantages of IEO:

The IEO initial exchange issuance has more obvious benefits than the previous ICO. The token is directly listed on the trading platform, which promotes the circulation of the token. For ordinary investors, the project coin can be listed on the exchange and participate in transactions faster. Secondly, the project party also benefits, because the direct IEO on the exchange is equivalent to expanding the audience to the users of the entire exchange, expanding the audience of investors. For truly high-quality projects and early entrepreneurs, IEO is not only a good way to raise funds, but also saves a lot of expenses and energy to go online on the trading platform, and focus on project research and development and community operations. For exchanges, the most intuitive benefit of IEO is to expand trading volume and daily activity. Fans of the project will become new users and their funds will flow in as the project progresses, and some of them may eventually become regular users of the exchange. Such activities are more attractive than traditional operating methods such as invitation rebates and trading competitions.

Disadvantages of IEO:

Issuance cost. Generally, exchanges will have listing fees, and the amount is not small. It is a burden for some early projects.

IEO has certain audit requirements for projects, so the threshold is high for many project parties.

Based on the Token issuance assessment indicators, we summarize the effect of the IEO method:

Token issuance coverage issues: It can only promote users with trading needs, and cannot cover angel customers of real products well. It is best to use it cross-use with airdrops

Compliance issues: Generally, exchanges guarantee compliance

Fund raising indicators: Relatively good, and more abundant funds can be raised through transactions. However, there are cases where market makers pull the market and early investors exit prematurely. Poor control of fund granularity

Compared with the first ICO, IEO has expanded the group of trading users and is conducive to financing.

STO (Security Token Offering)

STO, namely Security Token Offering, means the issuance of securities tokens. Securities are valuable certificates of property rights, and the holder can use this certificate to prove his ownership or debt rights and other private rights. The US SEC believes that securities are those that meet the Howey test, that is, the Howey Test: A contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. Generally speaking, in the view of the SEC, all investments with "income expectations" should be considered securities.

STO is a kind of financial asset or rights in reality, such as company equity, debt, intellectual property, trust shares, and physical assets such as gold and jewelry, which are transformed into encrypted digital rights certificates on the chain. It is the digitization of various assets, rights, and services in the real world.

STO is between IPO and ICO, and is a way for regulators to manage digital currencies in the same way as IPO. On the one hand, STO is regulated by securities regulators in various countries because it recognizes its securities characteristics. Although STO is still based on the underlying blockchain technology, it can be connected with the regulatory standards through technical updates; on the other hand, compared with the complex and time-consuming IPO process, like ICO, STO's underlying blockchain technology can also achieve more efficient and convenient issuance of STO.

The Origin of STO

ICOs continue to break, the myth of blockchain technology is broken, and events such as no assets, no credit, cutting leeks, capital plates, and running away continue to occur. Fundamentally speaking, these events occurred because ICO has no assets and value as a basis, and only relies on publicity, depicting the future and meaningless consensus. The lack of direct supervision of important links such as ICO and exchanges is also an important reason. STO is based on real assets and actively embraces government supervision in an attempt to break the ICO dilemma.

After seeing the new species of blockchain, the U.S. Securities and Exchange Commission (SEC) decided to include Token in securities supervision. This move once dealt a severe blow to the digital currency and blockchain industries, thinking that they would suffer a catastrophe.

However, the subsequent development is that more and more countries and regions have begun to follow up and have successively issued their own regulatory policies-although these regulatory policies even have certain differences in the definition of STO itself, they have gradually made the market realize that supervision is not a catastrophe, but a legal identity that can be developed and grown openly. So we see that from blockchain projects to traditional industries, from capital tycoons to securities industry professionals, and various asset owners, they are actively paying attention to this industry and even rushing into this industry.

In a sense, STO and the blockchain, token, and token economics behind it are currently in an unclear and controversial situation. The sword of Damocles raised by regulation is more like a beacon to cleanse its bad reputation and guide its progress.

The STO regulation initiated by the United States has gradually triggered follow-up by many countries and regions around the world. The global regulatory system has shown a relatively clear trend in the chaos.

STO advantages:

1. Intrinsic value: ST has real assets or income as value support, such as company shares, profits, and real estate.

2. Automatic compliance and fast settlement:ST obtains regulatory approval and permission, automates KYC/AML mechanisms, and achieves instant settlement.

3. Ownership division into smaller units:Accelerate the division of asset ownership and lower the entry threshold for high-risk investment products, such as real estate and high-end art.

4. Democratization of venture capital:Expand the way to raise funds.

5. Asset interoperability:The standardized protocol of assets will make it easier to interoperate between assets of different qualities and different fiat currencies.

6. Increase liquidity and market depth: You can invest in less liquid assets through STs without worrying about redemption issues. Market depth will also increase through the following channels:

The rise in digital asset prices has created billions of dollars of incremental wealth that will be invested in the market

Programmatic market makers like Bancor have increased the liquidity of long-tail STs

Asset interoperability agreements will promote cross-border asset circulation

7. Reduce regulatory risks and strengthen due diligence. Applicable to regulatory offer exemptions, write the regulations of various countries on KYC and AML into smart contracts, and it is expected to achieve automatic programmable compliance.

8. ST is expected to reduce the circulation cost of assets. Reduce transaction friction in the process, such as using smart contracts to achieve automatic compliance and fund collection, putting contract and accounting report data on the chain, increasing asset divisibility, and achieving T+0 clearing and settlement.

9. It is regulated by the Securities Law SEC, in compliance with legal compliance, and safer.

10. 24-hour trading.

STO issues

1. There are strict transfer and sale regulations. Referring to the description of the Polymath ST-20 standard, ERC-20 tokens have no restrictions on the circulation and trading of assets. Anyone can transfer a bunch of ERC-20 tokens to anyone else. But for security tokens, this is not allowed. The purpose of ST-20 is to ensure that the issuer can ensure that the token can only circulate among people who have passed KYC, which has the effect of narrowing the scope of the trading population.

2. It cannot become a means of payment on the platform like Utility tokens.

3. There are huge regulatory barriers to the circulation of Security Tokens across platforms.

4. Excessive asset liquidity may bring huge price fluctuations. STO may allow a startup to directly become a public listed company with many ST holders. Since startups face many uncertainties and ups and downs, these uncertain signals may cause Token prices to fluctuate violently.

5. STO innovation may just pile up risks at the end.

6. Competition with traditional finance:

Compete with traditional financial products. From the perspective of investors, although the information disclosure is higher, it is not necessarily that as a security token (ST), it is safer than the utility token. It still depends on the quality of the target, development prospects, financial health, etc.

Compete with traditional financial funds. At present, the amount of funds and the number of investors that high-quality assets can access in the existing securities capital market far exceed STO

Compete with traditional financial institutions. Securities financing platforms that only accept qualified investors have actually existed in the United States for many years, ranging from equity crowdfunding to real estate investment crowdfunding. For example, the real estate investment platform Fundrise allows qualified investors to invest in partial income rights of various projects, but without tokens. For example, Sharepost allows qualified investors to purchase equity in various startups Pre-IPO, which is also based on the existing technical architecture

Competing with the traditional financial environment. The maturity of traditional financial supervision and law far exceeds STO

7. Institutional investment decisions are relatively mature and rational. There is no secondary market for retail investors. Liquidity should be discounted rather than premium. Generally speaking, it is difficult to say that the valuation will be higher

8. Security tokens rely on financial intermediaries for risk assessment and pricing to better match assets and funds. ST needs to put off-chain asset ownership and information on the chain and circulate in the form of tokens under the regulatory framework. At present, the value of security tokens (ST) is not based on on-chain activities or decentralized networks. It is a token certificate that maps equity or debt under the premise of compliance with supervision, and has little to do with distributed networks and blockchain underlying technologies.

STO is to use the current traditional methods of IPO and securities management to manage the issuance of digital currencies, which is very difficult and challenging, because the characteristics of digital currencies are very different from traditional securities, and regulatory policies must be changed and adjusted.

Based on the Token issuance assessment indicators, we summarize the effects of the STO method:

Token issuance coverage issues: only users who meet regulatory requirements can participate, and it cannot cover angel customers of real products well. Even customers holding digital currencies cannot participate.

Compliance issues: Compliance

Fund raising indicators: Generally, due to restrictions, fund raising is not good. Granularity is also difficult to control

Other IXO

IFO Initial Fork Offerings

The first fork issuance of digital currency is generally based on the fork of mainstream currencies such as Bitcoin. The forked currencies involved in IFO are based on the original Bitcoin blockchain, and another chain is split according to different rules. For example, the first fork of Bitcoin gave birth to a new digital currency called BCH (Bitcoin Cash). "Fork" not only retains most of the Bitcoin code, it also inherits the data before the Bitcoin fork.

Forks are often used together with airdrops. The new coins generated are airdropped to old users, allowing old users to gain benefits and accelerate the recognition and circulation of new currencies.

How many fork coin models are successful? Blockchain projects still depend on the project party for sustainable development. Teams using the IFO method are often speculative and it is difficult for the project to develop well.

IMO Initial Miner Offerings Digital Currency First Miner Offering

IMO, the first mining machine offering, is to issue tokens by issuing mining machines.

A company or team constructs a specific blockchain and uses a specific algorithm. Only the dedicated mining machine sold by the company or team can mine the tokens on this blockchain. Usually, this mining machine has application functions and obtains value sources in the continuous use of the mining machine.

The IMO financing model, in simple terms, is to issue a dedicated mining machine and generate new digital currency through mining. There have been some IMO cases, such as Thunder Wanke Cloud-Chaink (formerly Wanke Coin WKC), the traffic treasure box of the traffic ore under Kuaibo-traffic coin (LLT), and the later Baofeng Boku Cloud-BFC points.

This method can be used for applications that require hardware equipment support and projects that rely on hardware operation business models. It can accurately find early angel users and incentivize them.

IBO (Initial Bancor Offering) First Exchange and Issuance

Before understanding IBO, first understand Bancor. This word comes from the concept of a super-sovereign currency proposed by Keynes and Schumacher between 1940 and 1942. In the plan proposed by Keynes, Bancor can be used as an account unit in international trade, denominated in gold. Member countries can exchange gold for "Bancor", but cannot exchange "Bancor" for gold. The currencies of various countries are priced in "Bancor".

However, due to the fact that the United States was the only one in the world after World War II, the British plan represented by Keynes was not adopted at the Bretton Woods Conference. Back to the Bancor protocol, the Bancor protocol was proposed and applied by the Bancor Network project, aiming to use a formula to set the exchange price between digital assets. The Bancor protocol makes automatic price discovery and autonomous flow mechanisms on smart contract blockchains possible. These smart tokens have one or more connectors that connect to networks holding other tokens, allowing users to immediately purchase or liquidate smart tokens for connected tokens directly through the smart token contract at a price that is continuously calculated to maintain a balance of buy and sell transactions.

In a standard IBO issuance, the project party needs to first pledge a certain value of another token as a "reserve" according to a set ratio, and then the issuance and circulation of tokens are completely realized through smart contracts. The funds of the project are locked in the smart contract and are subject to everyone's supervision at any time. Therefore, the IBO model has derived the following advantages.

An example of IBO is the sidechain project of EOS - FIBOS. Because of the new concept of IBO, FIBOS raised 850,000 EOS in just one week after its mainnet was launched at the end of August of that year.

The theory of IBO is the underlying theoretical forerunner of applications such as DEX. In DEX and IDO, the exchange between different digital currencies is smoother.

IDO-related knowledge

From Coinmarketcap and other relevant industry information, IDO is the current main issuance method. In this section, we will study IDO-related content in detail. From the figure in Section 2.1, we can see that most projects in 2023 adopted the IDO method.

Basic concepts

IDO, the full name of which is Initial DEX Offering, refers to the initial issuance of tokens based on decentralized exchanges (DEX). IDO promotes token sales through decentralized exchanges (DEX). Cryptocurrency projects provide tokens to DEX, users invest funds through the platform, and DEX completes the final distribution and transfer. These processes are automatically operated through smart contracts in the blockchain.

In 2019, IDOs began to gain traction due to their low to zero fees and decentralized nature. As a result, IDOs have become the primary platform for projects to seek fundraising outside of private and early seed rounds. Since the first IDO in 2018, 2,365 IDOs have been conducted, raising more than $1.6 billion (source: CryptoRank, December 2022). For some detailed information about IDOs, please browse the references for more information. The summarized statistics linked below are more comprehensive.

https://blog.bybit.com/en-US/post/a-deep-dive-into-the-ido-landscape-blt6b833275fde1a848/

Although IDO is issued on DEX, according to different specific methods, it can be roughly divided into the following channels:

Issued through traditional   DEX platforms, such as Uniswap, Balancer's LBP, SushiSwap, DODO crowdfunding pool building, etc.;

Through   Token issuance platforms, such as PolkaStarter, DuckStarter, Bounce, Mesa, etc.;

Issued through  DAO platforms, such as DAO Maker;

Other new channel gameplay: The ITO method created by MASK is announced and issued with the help of social platforms such as Twitter. (Twitter is the entrance, and the underlying layer is still the traditional DEX)

Because the IDO segmentation method is different, there are some differences in the process. If it is on a traditional DEX platform, there is generally no audit problem. If it is with the help of an issuing platform, the issuing platform will complete the relevant audit work. Some projects have already generated tokens (generally in the form of ERC-20), and there is no need to use the token issuance capabilities provided by the issuing platform.

Generally, if a project wants to raise funds by issuing tokens, many processes are the same. The routine is as follows:

Build a business plan

Prepare promotional materials (such as official website, project white paper, etc.)

Choose a token issuance method (here can be ICO, IEO, IDO, etc.)

Prepare according to the selected issuance method. (e.g. issuing ERC-20 tokens, relevant audit materials)

Token issuance completed

Raised funds received

For choosing the issuance method of IDO, the general process is: choose one method from several forms of IDO. Generally, the most common choice is to use the token issuance platform for issuance, and we will also explain it in this way. The method of choosing the issuance platform will vary depending on the platform.

Generally, the platform will have a review process:

(1) After completing the review, the project party can carry out IDO on DEX. The project party supplies tokens at a fixed price, and users lock funds in exchange for tokens. Investors will receive tokens later in the token generation event (TGE).

(2) There is usually a whitelist of investors. Investors may need to complete marketing tasks to join, or only need to provide a wallet address.

(3) Part of the funds raised are used to create a liquidity pool for the project's tokens. The rest of the funds are left to the team. Investors can trade tokens after the TGE. The liquidity provided is usually locked for a period of time.

(4) During the TGE phase, tokens are transferred to users and the liquidity pool is open for trading.

IDO Advantages:

Has the characteristics of decentralized trading (open, transparent, and good liquidity)

After the primary market issuance is completed, it is convenient to start the secondary market

Provides investors with the opportunity to participate in early projects

I personally think that the reason why IDO is popular now is that there is no need to worry about regulatory issues.

Disadvantages of IDO:

Generally there is no KYC or AML. There are many fake projects in the early stage, and the same principle as the early fake trading pairs.

IDO on the issuing platform often requires the token of the issuing platform to participate, which increases the cost of participants.

DEX has poor scalability. There are projects that have raised more than 1 billion US dollars in ICO and IEO. For DEX, it has not happened so far, and the amount of IDO is generally small.

IDO faces the balance between regulation and innovation, as well as the trade-off between decentralization and risk control in its development and change.

Based on the token issuance assessment indicators, we summarize the effect of the IDO method:

The coverage of token issuance: It can only cover users with trading needs in decentralized exchanges, and cannot cover angel customers of real products well. It is best to cross-use it with airdrops.

Compliance issues: Generally, DEX exchanges guarantee compliance, or this method abandons compliance issues.

Fund raising indicators: Relatively good, it can raise more abundant funds through transactions. The fund control is good, and the amount of a single participant can be set.

Compared with the first IEO, the group of IDO trading users was not large in the early stage, and with the development of decentralized exchanges, the effect will gradually be better than that of centralized exchanges.

IDO issuance channels and platforms

In the previous section, we have explained several common channels of IDO, as follows:

Issued through traditional  DEX  platforms, such as Uniswap, Balancer's LBP, SushiSwap, DODO crowdfunding pool building, etc.;

Through  Token  issuance platforms, such as PolkaStarter, DuckStarter, Bounce, Mesa, etc.;

Issued through the DAO platform, such as Dao Maker;

Other new channel gameplay: The ITO method created by MASK is announced and issued with the help of social platforms such as Twitter. (Twitter is the entrance, and the underlying layer is still the traditional DEX)

See the ranking of IDO on the Cryptorank.io website. https://cryptorank.io/ido-platforms-roi

The following figure is a screenshot of 2023-5-30. Take a look at the total number of IDOs on each platform and the value return.

According to Cryptorank historical data, these IDO platform tokens have increased by hundreds or even thousands of percentage points from issuance to the highest price in history. Among them, the token of GameFi platform increased by 4946.3%, which makes it one of the representative cases with the highest increase in IDO tokens. This shows that excellent IDO platforms often have tokens with higher growth potential, which also makes it one of the most popular targets for blockchain investors.

Several typical IDOs Platform

https://daomaker.com/launchpad

https://governance.polkastarter.com/

https://bscpad.com/

https://dashboard.trustswap.org/

https://starterlabs.xyz/#/home

https://enjinstarter.com/index.html

https://occam.fi/

https://bullperks.com/

https://pancakeswap.finance/

Comparison of several major issuance methods

NFT issuance involved in the economic model

Two purposes of token issuance:

1. Issue tokens to users (promote users to use applications)

2. Raise funds

NFT can also achieve the above two goals. NFTs can be sent to users directly by sending them to the destination wallet address or by issuing them to users through the NFT trading market. For the use value, it is more reflected in the recognition of the value of NFTs. Many NFTs are presented in the form of collections, reflecting a meme cultural factor. Usually, you only need to find someone who recognizes the value among a large number of people.

The function of raising funds can be achieved by selling NFTs, especially equity-based NFTs, because users are more likely to buy NFTs because of their expectations of future returns.

Other members of the economics team will conduct in-depth research on this sub-field and publish relevant articles to output research results

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