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Breakdown of crowdfunding options for startups

by xyonent
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With the rise of cryptocurrencies, many new projects are being developed to drive the success of decentralized finance (DeFi). To increase funding for these startups, processes such as ICO, ILO, IDO, and IPO are being actively used to raise capital, build a brand, and attract more investors.

In this blog, we will explain the two processes – ICOs (Initial Coin Offerings) and ILOs (Initial Liquidity Offerings) – and explain their differences and details.

Let’s first discuss ICOs.

What is an ICO?

Initial Coin Offerings are a popular fundraising mechanism for new ventures looking to establish themselves in the blockchain and cryptocurrency landscape. In this method, blockchain and cryptocurrency startups offer cryptocurrency tokens that represent some power or service. For example, the tokens may give investors the power to make or vote on important decisions. Investors who see the startup’s growth potential buy these tokens to own a stake in the venture. In this way, startups attract many investors who invest directly in the business without the need for an intermediary.

How does an ICO work?

To raise funds through an ICO, any crypto project must follow these steps.

Coin structuring:

Coins in the ICO process can be structured in three ways depending on what best suits the project’s goals.

Static supply and static price: This refers to a pre-fixed number of tokens and a fixed price for each – for example, a project could raise $1,000,000 by selling 1,000,000 tokens at $1 each.

Dynamic Supply and Static Pricing: This refers to a fixed price where the number of tokens fluctuates depending on the investment. For example, if you sell 1,000,000 tokens and people invest $2,000,000, the price per token will be $2. If they invest only $500,000, the price per token will be $0.50.

Static Supply and Dynamic Pricing: This refers to a fixed number of tokens whose price fluctuates depending on the investment. For example, if you invest $1 million, 1 million tokens will be created. If you invest $500,000, 500,000 tokens will be created. The supply of tokens increases depending on the amount of investment.

White Paper Release

To announce the process, the startup will publish a whitepaper on its new website, a document that will contain all the details: the coin structure, project goals, strategy, team, tokenomics, duration of the ICO campaign, etc. This will provide the public with more information about the project and encourage them to invest in the new venture.

Token Sale

After the release of the whitepaper, tokens will be put into different types of sales, such as pre-sale, private sale, main sale, etc. Each sale will have the same or different types of target audience and benefits depending on the company’s marketing strategy.

Token List

Once the sale has concluded, the tokens will be listed on various cryptocurrency exchanges, making them available to a broader market where a wider range of users can buy, sell, trade and exchange the tokens.

Advantages of ICOs

Open Access to Tokens

During an ICO, anyone can buy a project token, making the sale and purchase anonymous, which attracts a large number of investors.

Global Token Sale

In the cryptocurrency and blockchain space, ICOs are accessible globally, allowing investors from different locations to buy and sell tokens.

Minimal barriers to entry

There are no prerequisites or geographical barriers for purchasing coins or tokens, allowing investors to purchase tokens hassle-free.

High ROI potential

ICOs allow investors to get into a business at an early stage and stand to reap big profits in the future if the project is successful.

If you would like to know more about ICOs and their regulations, please check out the following blogs: ICO Regulation.

Disadvantages of ICOs

Below are the disadvantages of ICOs:

Due diligence challenges

With no strict rules for checking the terms of smart contracts, many companies may leave hidden terms that could be harmful or unfavorable to investors in the future.

Regulatory Risk

Lack of regulation and confusion regarding ICO rules, including taxes on profits and revenues, complicates the process and prevents investors from making informed decisions.

Scams and fraud

Because ICOs can raise funds rapidly, they are highly vulnerable to fraud and scams, which is why investors should verify the details of a startup before participating in the ICO process.

High volatility

Market fluctuations can cause Token prices to fluctuate, putting investors’ funds at risk and making them more susceptible to losses.

What is the ILO?

Initial Liquidity Offering (ILO) is another fundraising mechanism for new blockchain startups. It allows startups to issue tokens by combining them with existing cryptocurrencies on a decentralized exchange (DEX) without participating in an ICO process. This creates an initial liquidity pool where users can exchange their new tokens for existing cryptocurrencies. ILO is one of the most common ways of fundraising for a business, making the process reliable and smooth for a large pool of customers.

How does the ILO work?

Here’s how the ILO works:

Creating a token and setting up a liquidity pool

To start the ILO process, a project mints a new token and sends a certain number of tokens to a liquidity pool on a decentralized exchange (DEX), along with an equal number of existing tokens, such as Ethereum. Users can now use this liquidity pool to trade between the new token and the existing tokens.

Use of Automated Market Makers (Amm)

To facilitate this trading, Automated Market Makers (AMMs) are smart contracts that facilitate transactions automatically and adjust the price of tokens according to supply and demand.

Start of instant trading with ILO

Once set up, the ICO will begin and will be officially announced so that investors can access the token exchange. ILO does not require a centralized exchange platform, so investors can buy, sell and hold tokens instantly.

Price Trends

The price of the new token will be determined by how users trade it: if more users buy the token, the price will rise, if more users sell the token, the price will crash.

Lower fees

Due to the incorporation of smart contracts, gas fees for transactions on decentralized exchanges (DEXs) are minimal compared to traditional funding methods.

Benefits of the ILO

The benefits of ILO include:

Faster sales

The implementation of AMMs allows ILO to facilitate faster sales as investors can instantly purchase tokens once they are released into the liquidity pool.

Instant access and fast liquidity

As soon as the token is released, developers and investors can buy it without waiting. Moreover, the project will run on a DeFi-based DEX exchange, so liquidity will grow rapidly. This will increase the compatibility of the liquidity market and make it easier for traders to trade.

A fair way to trade tokens

The ILO mechanism is fair to investors, allowing them to buy tokens early and sell them to the public when the price rises, allowing them to earn loyalty bonuses and unparalleled profits.

Cost-effective model

ILOs are considered to be a cost-effective method compared to other technologies, and are also highly beneficial to users, as early contributors can use their initial liquidity to profit and drive the project forward.

Shortcomings of the ILO

The disadvantages of ILO are:

Temporary loss

Rapid fluctuations in token prices may cause liquidity creators on DEX platforms to lose the value of their deposited assets, leading to temporary losses.

complicated

Participating in an ILO requires understanding how decentralized exchanges work, which can be complicated for new investors.

Market volatility

Despite the benefits of liquidity pools, token pricing can fluctuate, disrupting the dynamics of supply and demand created by liquidity pools.

ICO vs ILO

Now that we understand what ICO and ILO are, let’s use a table to explain the difference between Initial Coin Offering (ICO) and Initial Liquidity Offering (ILO).

side ICO International Labour Organization
Funding method Tokens will be sold directly to investors via various sales methods. It facilitates token trading by providing liquidity to decentralized exchanges.
Liquidity You may face liquidity issues and delays. It ensures immediate and sustainable liquidity for the future.
Regulation ICO regulations vary by country and region. Regulations are still unclear and are currently under review.
transaction As part of the ICO process, your tokens may need to be listed for exchange on various platforms. Tokens are instantly tradable on the DEX.
Risk of fraud Direct token sales and rapid fundraising attract a large number of scammers. Provision of liquidity will be more transparent and less prone to fraud.
Volatility It is high and shows large fluctuations. It remains at elevated levels, but is being mitigated by support from liquidity pools.

The last word

ICOs and ILOs are both highly trusted and used means of fundraising in the cryptocurrency world. However, both meet different needs and expectations of business owners and each has different risks and benefits. On the one hand, ICOs are simple and streamlined for fundraising but come with more risks and liquidity concerns in the future. On the other hand, ILOs offer instant liquidity but are more complicated and vulnerable to losses than ICOs.

Before choosing the fundraising method that best suits your business requirements, you should consult a reliable ICO and ILO development company, so that you can get better guidance and avoid losing your money in vain. If you are looking for such a company, don’t worry! Block Tech Brew The all-in-one company you need!

To receive a free ICO and ILO development consultation on your idea, please contact us by email. business@blocktechbrew.com Discover unusual ways to grow your business!

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