Traditional crowdfunding models were successful, yet with certain drawbacks regarding high fees, non-transparency, geographical limitations, and fraud cases. More than this, traditional platforms are often centrally ruled, and this really can make it hard for both innovation and the scope of projects that get funding. Such challenges make it tough for many creators and entrepreneurs to raise the resources needed to bring ideas to life.
These are the exact issues crypto crowdfunding platforms based on blockchain have solved. With that in mind, decentralized and blockchain-based alternatives to Kickstarters and GoFundMe are emerging. Conceptually, they pave a route for open, limitless, and effective crowdfunding—through smart contracts and cryptocurrencies. In this way, such platforms democratize the process of raising funds by cutting out middlemen, reducing fees, and ensuring more money flows directly to creators and entrepreneurs.
Crypto crowdfunding acts as a game-changer in changing the manner in which projects are funded today by providing a decentralized, transparent alternative model. Here’s how:
- Lower Fees: Crypto Crowdfunding Sites drastically bring down transaction costs via the blockchain. Applications that would have required intermediaries to perform are automated by smart contracts, ensuring that more money goes directly to the project creators from funds raised.
- Global Reach: Cryptocurrencies are devoid of geographical boundaries, and thus people from the world over can contribute to projects. This enlarged geographical reach increases the prospective pool of backers, further allowing creators to stake a wider audience base for their works.
- Transparency and Security: Since this is an immutable ledger, all transactions that happen on blockchain are transparent and traceable. This builds an element of trust between the creators and the backers and reduces the risk associated with fraud. Smart contracts also do not allow any funds to be released until predefined conditions are met, hence safeguarding both parties.
- Empowering Innovators: By removing the need for centralized control, crypto crowdfunding platforms are making it possible for a greater diversity of projects and ideas to secure funding. This democratization creates an environment where innovation can really happen and a much broader spectrum of ideas can come into being.
- Tokenization: A large number of crypto crowdfunding campaigns provide tokens or other digital assets to the backers in lieu of their support. These tokens can take the form of ownership stakes in projects, early access to products, or other rewards that stand as an added incentive for backers.
Understanding What Are ICOs, IEOs, and IDOs?
In these different dimensions of space, so much innovation in technology has turned into crowdfunding tools with new money. Three key models the industry uses most often are Initial Coin Offerings, Initial Exchange Offerings, and Initial DEX Offerings.
Initial Coin Offerings (ICOs)
Set-ups in which companies as well as start-ups raise their investment capital by selling their personal tokens to investors who want to take part in the cryptocurrencies market long before the project was ready ever are a popular method. Only members of the team should be involved in its running the whole way. It is the following:
- Direct Fundraising: The project introduces the tokens on theirown website’s dedicated sales page, and these are sold online either to anyone or a selective group of investors. This direct manner enables the project to get the necessary funds to embark on a different journey without involving any intermediary agents.
- Investor Motivation: Investors buy these tokens with the expectation that they will increase in value in the future with rising market success.
- Lack of Regulation: Among the most important components of ICOs, the lack of regulation is at the very top. In most cases, however, the ICOs are not regulated which fact gives birth to a wide field for scam attempts. Therefore, research is necessary even before investing in ICOs.
- Success Story: A very fine case of an ICO that succeeded is the ICO of Ethereum, which was done in 2014 and it got on board 18.4 million dollars at the price of 0.31 cents per ETH. All this money helped Ethereum to grow into a leading blockchain platform.
- Popularity and Decline: During the 2017 bull market frenzy, Initial Coin Offerings (ICOs) reached their peak. Still, their glory dimmed when they became less popular rather due to greater regulation attention and some other options for raising money that were emerged instead.
Initial exchange offerings (IEOs)
IEOs are distinguishable from ICOs because they are performed through a central cryptocurrency exchange instead of directly by the project. Here’s what makes IEOs special:
- Centralized platform: In the IEO phase, a project collaborates with an already existing cryptocurrency exchange to offer its tokens for sale. The exchange serves as a go-between, conducting the sale on behalf of the project.
- Safety: Investors often see IEOs as a safer investment since before the exchange, a project is investigated. Nevertheless, this perceived protection is sometimes not a certainty, and therefore, it is important to carry out research properly as well.
- Reaching out to investors: IEOs are generally presented as opportunities for young companies to derive from the exchange’s user base an larger pool of potential investors.
- The Story of Success: A good illustration of an IEO is the example of the Fetch.AI IEO which collected $6 million in February 2019 on the Binance IEO Launchpad Lab. This showed the efficacy of the IEO approach in bringing in a lot of investment.
Initial DEX Offerings (IDOs)
IDOs are just like IEOs, but the launchings are conducted on a decentralized platform using DEXs or launchpads instead of centralized platforms. These are IDOs in more detail:
- Decentralized Platform: In an IDO, the project first lists the token in a DEX where people directly use a liquidity pool for exchanging. This approach of decentralization goes along with the main features of the blockchain, which are listed as follows.
- Direct Trading: Traders are now able to buy tokens directly from the exchange without having to go through intermediaries, thus lowering costs both for them and the project.
- Success Story: A well-known case of a good IDO is the UMA protocol which was launched on Uniswap in April 2020. This airdrop made UMA to apply the decentralized part of Uniswap and be able to get to a wide range of investors.
- Liquidity Pools: IDOs need to have a liquidity pool where tokens are combined with either stablecoin or other cryptocurrencies. As a result, it works efficiently and always guarantees the existence of the market for the tokens. This, in turn, can increase the liquidity and, as an outcome, will let a buyer trade at an equal distance from the pair.