Breakdown Of Startup Crowdfunding Options

With the rise of cryptocurrencies, many new projects are being developed to drive success in decentralized finance (DeFi). To boost the funds of these startups, some processes like ICO, ILO, IDO, and IPO are actively being used to raise capital, build a brand and attract more investors. 

In this blog, we will go through two of these processes, i.e., ICOs (Initial Coin Offerings) and ILOs (Initial Liquidity Offerings), and discuss their differences and details. 

Let us first start by discussing ICOs: 

What are ICOs? 

Initial Coin Offering is a popular fundraising mechanism for new ventures looking to establish themselves in the blockchain and crypto environment. In this, the blockchain or crypto startup provides cryptocurrency tokens that refer to some authority or service. For instance, in some cases, the tokens would give investors the authority to make and vote for crucial decisions. The investors who see the growth potential in the startup then buy these tokens to own a stake in the venture. This way, the startup attracts many investors who invest directly into the business without the requirement of any intermediaries. 

How do ICOs work? 

To raise money with ICOs, any crypto project would need to follow the following steps: 

Structuring The Coin:

The coin for the ICO process can be structured in three ways, depending on which one better aligns with the project’s goals. 

Static Supply & Static Price: This refers to a pre-fixed number of tokens with a fixed price for each. For example, the project could raise $1,000,000 by selling 1,000,000 tokens at $1 each. 

Dynamic Supply & Static Price: This refers to fixed prices with a fluctuating number of tokens depending on the investment.  For example, if they sell 1,000,000 tokens and people invest $2,000,000, the price per token would be $2. If only $500,000 is invested, the price per token would be $0.50.

Static Supply & Dynamic Price: This refers to a fixed number of tokens with fluctuating prices depending on the investment. For example, If people invest $1,000,000, they create 1,000,000 tokens. If people invest $500,000, they create 500,000 tokens. The supply of tokens grows with the amount of money invested.

White Paper Release 

To announce the process, the startup releases a white paper on a new website, which is a document containing all the details like the structure of the coin, project goals, strategies, team, tokenomics, duration of the ICO campaign, and more. This gives the public in-depth details about the project and encourages them to invest in the new venture. 

Token Sale

After the white paper release, the token is put on different types of sales like pre-sale, private sale, and main sale. Each sale would have the same or different type of target audience and benefits according to the company’s marketing strategy. 

Token Listing 

Once the sale is over, the token is listed on different cryptocurrency exchanges, where it enters a broad market where more users can buy, sell, trade, and exchange the tokens. 

Advantages of an ICO

Open Access to Tokens

During the ICO drives, anyone can buy the project tokens; thus, buying and selling happen anonymously, attracting many investors. 

Global Token Sales 

In a crypto and blockchain space, ICOs are accessible globally, and investors from different locations can buy and sell the tokens. 

Minimal Entry Barriers 

There are no prerequisites or geographical barriers to buying the coin or token, which allows investors to purchase the tokens hassle-free. 

The Potential of a High ROI 

ICOs allow investors to enter the business at an early stage, which would yield them lucrative returns in the future if the project becomes successful. 

To know more about ICOs, check out our blog on ICO Regulations. 

Disadvantages of an ICO

Below are the disadvantages of ICO: 

Due Diligence Challenges 

There are no strict rules to keep a check on the terms of smart contracts, which may cause many businesses to keep hidden terms and conditions that can prove to be harmful or disadvantageous for investors in the future. 

Regulatory Risks

Lack of regulations or confusion on ICO rules, including the taxes on profits or earnings, complicate the processes and hold investors from making informed decisions.  

Scams & Frauds 

The ability of ICOs to raise capital rapidly makes them highly vulnerable to fraud and scams. Therefore, investors must verify the details of the startup before participating in its ICO process. 

High Volatility 

Market fluctuations disturb the token prices, which can put investor’s money at risk and prone to losses. 

What are ILOs? 

Initial Liquidity Offering (ILO) is another fundraising mechanism for new blockchain startups. It allows startups to launch their tokens by pairing them with pre-existing cryptocurrencies on decentralized exchanges (DEX) without participating in the ICO process. This creates an initial liquidity pool where users trade the new token in exchange for a pre-existing cryptocurrency. ILOs are one of the most popular ways to raise funds for a business, which makes the process trustworthy and smooth for a large pool of customers. 

How do ILOs work? 

The following are how ILOs work:

Token Creation & Setting Up A Liquidity Pool 

To start with the ILO process, the project creates a new token and submits a certain number of tokens into a liquidity pool on a decentralized exchange (DEX). Also, the same number of other already established tokens, such as Ethereum, have been added. Users can now trade between the new and already-established tokens using this liquidity pool. 

Using Automated Market Makers (Amm) 

To facilitate this exchange, Automated Market Makers (AMMs) are smart contracts that automatically proceed with the trade and adjust the prices of tokens according to demand and supply. 

Launching The ILO & Immediate Trading 

After the setup, the ICO is launched, which is the official announcement that the token exchange will be accessible to investors. ILOs do not require any centralized exchange platform. Therefore, investors can buy, sell, and hold the tokens immediately. 

Price Dynamics 

The price of the new token will be determined by how users trade. If more users buy the tokens, the price will increase; if more users sell them, the prices will crash. 

Lower Fees

Due to the inclusion of smart contracts, the gas fees of trading on the decentralized exchange (DEX) are minimal compared to the conventional fundraising approaches. 

Advantages of an ILO

Below are the advantages of an ILO: 

Faster Sale

With the implementation of AMMs, ILO facilitates faster sales, as when the tokens are released into the liquidity pools, the investors can buy them instantly. 

Instant Access and Rapid Liquidity 

As soon as the token is released, developers and investors can buy it without waiting. Moreover, as the project is carried out on DeFi-based DEX exchanges, their liquidity increases rapidly. This makes the liquidity market more compatible and allows traders to trade easily. 

Unbiased Method For Token Trading 

ILO mechanism is unbiased for the investors as it allows them to buy the tokens early and sell them to the public when prices go up. This provides loyalty bonuses and unmatched profits to them. 

Cost-Effective Model 

ILO is considered to be a cost-effective method compared to other techniques. It is also quite fruitful for the users as it allows the early contributors to utilize the initial liquidity to raise profits and lead the project ahead. 

Disadvantages of an ILO 

The following are the disadvantages of ILOs: 

Impermanent Loss

Due to sudden fluctuations in token pricing, the liquidity creators on the DEX platform can lose the value of their deposited assets, leading to impermanent loss. 

Complexity 

Participation in ILOs requires understanding how decentralized exchanges work, which makes it complicated for new investors. 

Market Volatility

Even with the benefits of liquidity pools, the pricing of tokens fluctuates and disturbs supply and demand dynamics created under the liquidity pool. 

ICO vs. ILO 

Now that we know about ICOs and ILOs, let us move forward to discuss the difference between Initial Coin Offerings (ICOs) and Initial Liquidity Offerings (ILOs) through the table: 

Final Words

ICOs and ILOs are both highly trusted and used in fundraising ways in the crypto landscape. However, they both align with the different needs and expectations of the business owners, and they have different risks and benefits associated with them. On the one hand, ICOs are simpler and streamlined for fun raising but are associated with more risks and liquidity concerns in the future. On the other hand, ILOs provide immediate liquidity but are more complex and vulnerable to losses than ICOs. 

Before choosing the right method of fundraising that best suits your business requirements, one must consult a reliable ICO and ILO development company that can guide you better and prevent you from losing money in vain. If you are looking for one such company, worry not! Because Blocktech Brew is the all-in-one company you need! 

To get a free consultation about ICO and ILO development regarding your idea, Do reach out via email at business@blocktechbrew.com and discover unusual ways to grow your business!