The founders of cryptocurrency startups always look for new opportunities to raise funds and promote their project in the crypto community. The once hype ICO crowdfunding model is no longer trusted by investors. It has been replaced by new abbreviations such as STO, IEO and IDO. The latter deserves special attention. Stanislav Stolberg, Co-Founder & CTO of ScaleSwap.io, in an interview, told in detail what IDO is, how this type of crowdfunding is fundamentally different from ICO, and how to make money on it and not lose money.
- A huge amount of funds was attracted to this area, and almost every second person created startups. Unfortunately, not every project has fulfilled its promises to investors. What can you say about this period and what led to the decline of the ICO?
- Well, I’ll start with the fact that then I myself launched my own crypto startup PhotoChain. It was one of the first projects based on NFT technology years before the acronym became known to everyone in the hype of large deals and projects. We used it to certify digital assets (author’s and professional photos) on the blockchain. That is a great example of how important it is for an innovative startup to choose the right time to enter the market. I worked on PhotoChain in 2016–2018, and then the market was not yet ready for the active implementation and use of new types of blockchain technologies for real market cases. It was the time of the first visionary experiments on the use of blockchain, and people were just inspecting closely, trying on this technology and industry, and the market was much smaller than today. And only in 2020, after the first high-profile projects, NFTs became popular.
According to my observations, that time was wrong to launch many of the projects. The second reason is that 2017 was the first hype of decentralization, tokenization and understanding that certain technologies are of real value. For example, this is the ability to do wallet-to-wallet token transfer quickly, easily, quickly and without the problems that you face in the banking sector. And as you know, any technology passes the Hype Cycle. In the beginning there is a hype, then it decreases, then there is understanding and adaptation. Let’s take the Internet of the 90s and 2000s. Like the blockchain, it moved in cycles. In the beginning there was, if you remember, the Dot-com bubble, when everyone just created pages and called them startups. And the market was so overheated that everything collapsed and burst and billions were lost, but Amazon, Google, and other giants that we know came out of this Dot-com bubble. The blockchain experienced the same thing in 2017.
As in any new market which is essentially unregulated, a lot of players have appeared. Some people like me were in the wrong place at the wrong time, others wanted easy money, and some people deliberately scammed and deceived. What I’m trying to say is that the period of the blockchain cannot be called something unique, and it has already happened in history. ICOs have not died, they have been discredited because of the large number of scams and the attention of regulators.
- ICO was replaced by another fashionable abbreviation. How are IDOs fundamentally different from ICOs, STOs and IEOs? Has the essence remained the same, with just the name changed?
- An ICO, IDO and IEO are essentially the same thing. There is only an idea is to sell startup tokens. Mostly, only the names have changed. Remember how an ICO (initial coin offering) was carried out. A project sold tokens on its webpages. The investor sent them some coins, for example, Ether, and the project sent back its own coins.
Anyone could invest without restrictions. An IDO (Initial DEX Offering) is a way to sell tokens on a DeFi website. Basically, this placement is done through pool technology, like on Scaleswap, where the pool logic decides that the people involved will definitely receive their coins. They invest some tokens and receive others. The intermediary website acts as the guarantor. Previously, there were no pools and the project itself could decide if to send the tokens, and the project could make a mistake and send the wrong number of tokens, etc. And now the process is more technologically advanced and transparent. This is probably the main difference. The idea is the same, but the technical means and capabilities are different. IDOs are safer, plus a variety of tools have appeared: vestings, cliffs. They were not applied to ICOs. Now the process is closer to professional investing.
- What problems of previous crowdfunding models in the cryptocurrency market does IDO solve? Are there any advantages or at least guarantees for investors?
- Yes, the IDO can be called a new crowdfunding model. Why? The projects sell their tokens, which, in fact, are still illiquid, i.e. do not have a pair for some liquid tokens, for example, USDT. The goal is to get a budget, grow faster, prepare for going public and thus further develop in your tokenized business.
As for the advantages of IDOs, I will try to explain using ScaleSwap as an example. We (like other launchpads) can use different tools to regulate the conditions for transferring tokens to investors. For example, cliffs and vestings are now popular in the market. Simply put, investors do not receive all the tokens at once, but according to a certain algorithm, i.e. they cannot immediately sell all the purchased tokens and thus make the project fail. The main goal of most IDO participants is to multiply their funds by several times, earn the maximum and exit. This speculative mindset of most investors is the main problem with the DeFi sector and the startup market as a whole. Of course, the behavior of investors has changed since 2017, and all market participants have become more professional, but still most of them are focused on a short-term return on investment and dream of becoming millionaires tomorrow. They do not have an understanding that a startup, like a child, should be given the opportunity to develop and grow. For this reason, projects attract the main funding in private rounds from large investment funds and large private investors, which is approximately 90–95% of the sold tokens. And only 5–10% is accounted for by IDOs. This is where smaller investors come in. The distribution takes place similar to pools using new tools. Why is that? The goal is to limit the sale of tokens, since everyone knows that retail does not have “diamond hands” (they don’t hold tokens for a long time). They are quickly ready to sell everything in order to make at least 10% of the profit. For this reason, projects do not want to give retail investors all the tokens at once, as was the case during ICOs. Still it must be remembered that many retail investors who came during the ICO days have become large funds and large investors today.
The main advantage of IDOs is that large launchpads focus on the selection and analysis of projects, carefully watching tokenomics. For example, if we take ScaleSwap, 3–5% of incoming projects reach the community, and 95–97% are screened out by analysts at some stage of verification. We ourselves have launched only 10 projects so far, 2 of which have become so-called unicorns (market cap > 1 bln), covered the costs of investors in other projects and gave a high “X”. We hope the success rate will continue to grow. Participants in the IDO market are developing daily, and projects are growing. Thanks to our experience, we have become even more attentive to startups than before.
- And what about the shortcomings and weaknesses of this crowdfunding model?
- The weak side is that no matter how well the launchpad selects projects, we cannot eliminate all the risks that something will go wrong after the IDO. In the cryptocurrency sector, as in the traditional startup business, only a few percent of projects survive. As far as I remember, the statistics are 5% of success, and 95% are eliminated. In the blockchain world, this figure is even less, 1–2%, but 98–99% do not come to success. Now I’m talking about all the projects that enter the market.
- Is it possible to say that investing in projects is a high-risk investment? What are the main risks for investors and what should they be afraid of?
- Yes, IDOs are high-risk investments because, in fact, they are not supported by anything. There is no law that would protect such investors, because legally they are not investors. They are buyers of utility tokens (vs security tokens).
It is also worth considering that we are in the early stage investment market. In such a market, it is difficult to give any guarantees. Why? Because there is a risk of losing everything. For this, there are high-quality players in the market, such as analysts, media, experienced investors, launchpads themselves that try to reduce these risks.
We built an analytical team in ScaleSwap, a team of business developers, who, using their experience and developed criteria, try to make a qualitative assessment. They try to analyze incoming projects for potential future success. We do this with all responsibility, as much as we can, and only selected projects are presented to our community. But I should stress again that in such a market, neither we nor the investor are completely safeguarded against the possibility that the project will not survive or fulfill promises, will not grow and will not become a unicorn.
- Are there any clear criteria that allow you to identify scams in the early stages? What project parameters should investors be guided by before investing money?
- Before deciding whether to invest in a particular project, you need to study several parameters: the idea, team, tokenomics, funds, the launchpad where IDO is planned to be held, and the unlocks in all the rounds:
- Talking about a team, you need to check the information about it carefully, that is their experience, previous projects, reviews, etc. If there is no information about the team, or only there are names, without the possibility of finding them on social networks, usually on Twitter or LinkedIn, take notice of this and understand that the project needs a more careful study.
- A good way to decide whether to join a project is to study its tokenomics. If you understand what it is and learn how to read it, you can greatly increase your chances of choosing a quality project.
- The third step to take is to check the content posted on the project website and social media—what information is posted, who its partners are, and whether there is confirmation of the partnership on the websites of the latter.
- We carefully look at the funds that support the project and information about them.
- It is also advisable to look at public “Ask Me Anything” (AMA) sessions with the founders, and if the project has reputable supporters, and which launch sites or exchanges have confirmed the project.
Unfortunately, even everything described above cannot guarantee that the intentions of the project are 100% sincere. However, given several levels of due diligence, it becomes safer to take the next step. I want to reiterate that investing in projects at an early stage means that you are willing to take the risk of a project failure and, therefore, be rewarded if the token succeeds and grows.
- Why, despite the fact that many crypto enthusiasts have badly failed with project investments in the past, IDOs inspire more confidence in them and they prefer this crowdfunding model, even as compared, for example, with newfangled IEOs.
- I cannot confirm such statistics. I can only say one thing: investors who have encountered the blockchain market, have seen what opportunities crypto technologies provide, always remain in this market because they understand that it is the speed and transparency of transactions, the absence of bureaucracy, the ease of use of tools, etc. Such investors participate in both IDOs and IEOs (Initial Exchange Offerings). In fact, the second differs from the first only in that the exchange acts as an intermediary.
Why do some investors prefer IDOs? The main reason is that in the case of IEOs, there are more opportunities to manipulate. DeFi, on the other hand, is good in that if you protect yourself correctly, it is more difficult to deceive an investor. If there is a good platform and a proven smart contract, everything works according to the logic of smart contracts. Smart contracts are a machine, a terminator. You can’t reprogram it. And there is a human factor in IEOs. We do what we want.
- Might IDOs soon completely replace IEOs and ICOs?
- I would like to believe in it. I don’t know when this will happen, but we are working on it. We are introducing new tools, such as seeds and private pools for retail investors. We are improving the selection of projects, etc. But I think the most important thing is to detect and exclude centralized platforms. Centralization is essentially the opposite idea of decentralization. Ideally, everything should be as decentralized as possible. The market is still far from it. Everything can be manipulated, but IDOs are much closer to how things should be than ICOs or IEOs.
The only reason why people use centralized exchanges is because they have fiat money withdrawals. DEX doesn’t have that. We might make the first DEX platform that will have this capability. I’ve been thinking about this for a long time. You will edvidently also need to pass KYC, and many do not like it, but in any case it will be very convenient.
- And if we talk about IDOs from the point of view of the founder of a startup, is this crowdfunding model more profitable or could it be easier? What benefits can be highlighted?
- As I said above, with the help of IDOs, a small part of the amount needed for the project is collected: 5%, sometimes 10%. The collected funds do not allow to fully finance the project. From this we conclude that IDOs exist not only for getting funded. Its main point is to make a product or startup popular among numerous retail investors. The allocations are most often small (50–500 dollars) and, let’s say, 100–200 applicants get into the pool, but 10,000 want to get in. And some of them then go to the exchange or exchanger and buy the coin there. Thus, the price of the token grows. Therefore, I would say that today IDOs are not so much a financing tool as a marketing component for promoting a project on the market.
- In terms of making money in the crypto industry, can IDO be considered as hype and profitable as it used to be with ICOs? Or has the interest of crypto enthusiasts in tokenization faded a bit?
- Cryptocurrency, like any other industry, is subject to the so-called seasonal changes: winter, spring, summer. Now we are, rather, in a crypto winter. I can’t say that the interest has faded, but it is not growing and new capital is not coming into the cryptocurrencies. At the same time, I am absolutely sure that the next phase of market development will soon come, which will bring new startups, new ideas and new projects. There will be development, anyway.
Recall 2017. It was a hype, the biggest hype, then there was a devaluation in 2018. Growth began again in 2021, and in 2021 there was a crazy jump due to DeFi and NFT projects. Now there is a recession because the market is oversaturated. In fact, we are now working on the next cycle, waiting for a new boom market.
- What criteria for a successful IDO can you single out? How should one conduct an advertising campaign and organize the workflow so that the project is guaranteed to “skyrocket”?
- Of course, there is no saying about guaranteed skyrocketing. Too many factors influence the success of a startup. But there are basic components leading to success to a considerable degree. First, the team must be experienced and equipped. There must be complete mutual understanding among them. The team should include development, sales and marketing specialists, analysts, developers, etc. In the beginning of the journey, these functions are often performed by one or two people.
I can also share my observation regarding technology projects that they need an experienced Chief Technical Officer within the team, not outsourced. Even if they have a great CEO, a professional marketer, but no CTO, the likelihood that they will go bust is very high. I believe that the success of a tokenized Web3 tech startup, for the most part, depends on the development team, and there must be a cool CTO inside the team.
- Why, despite the seeming simplicity of the process, do many projects fail miserably? What could be the reason for the lack of investor interest? What are the biggest mistakes startups make?
- The founders of tokenized startups seem to make even more mistakes than those of traditional ones. Why? Because today it is easier to raise money and get capital in the cryptocurrency market. Therefore, projects often waste money, spend it for wrong purposes and do not improve the idea.
I won’t say anything new. If the founder has made a market analysis, has a clear vision of his business, has set goals and understands how to achieve them, he will be able to motivate the team to work and achieve meaningful results. In this case, everything will work out. Basically, everything breaks down when the project lacks something or someone. If everything is there, but the technology is outsourced, a failure is very likely because the founders who do not have their own CTO do not understand anything about technology. And contractors build not for themselves, but for the client, and that is not so high quality, so the deadlines are constantly changed, and everything is dying. If, for example, there is only a strong team, but there are no experienced salespeople and business developers, it is a failure again. They may come up with a great product and implement it that only the team will need, no one else around it, and it cannot be sold. That is, it’s all about the team, their different skills and the balance between abilities and competencies.