Initial Coin Offering (ICO) vs. Initial Liquidity Offering (ILO): Choose an Optimal Fundraising Method for Your Token

Do you know when the first crypto token was launched? You will be surprised to learn that in 2009, the initial concept of the crypto token was introduced, and the first appearance of the crypto token was seen at the beginning of 2010. Bitcoin was known as the pioneer of the crypto foundation and laid the foundation for developing various cryptocurrencies.

As people witnessed the popularity of Bitcoin and experienced the potential of blockchain technology, they started experimenting with the launch of their crypto tokens. They are exploring the uniqueness of utility, security, stablecoins, NFT, governance, and wrapped tokens.

But what's the next step people take after token development? How do they raise their funding initially? Initial Coin Offerings (ICOs) are one of those fundraising models that people generally prefer. However, to eliminate the shortcomings of ICOs, the latest fundraising model, Initial Liquidity Token (ILO), has been launched. Let's explore these topics in detail and learn more about their definitions, usefulness, impact, and major differences they carry.

What is an ICO?

In crypto, an initial public offering (IPO) is equivalent to an initial coin offering (ICO). It is the most popular way to raise funds by selling a new form of digital cryptocurrency. Few ICOs offer high-yielding returns for investors as they are free of any regulatory bounds that prevent them from seeking investment directly from the public, venture capitalists, banks, and stock exchanges.

To learn more about ICO markets and the potential and risks associated with ICOs across global markets, read the ICO Regulations.

How does an Initial Coin Offering (ICO) work?

When a cryptocurrency project works towards raising its funds through an ICO, certain predefined requirements must be structured accordingly.

Static Supply and Static Price:

In this step, a company must set a specific funding goal or limit, meaning each token sold in ICO would have a preset price and fixed token supply.

Static Supply and Dynamic Price:

This ICO can have a static supply of tokens with a dynamic funding goal. This means the amount of funds received determines the overall price per token that will be accepted.

Dynamic Supply & Static Price:

Some ICOs can have a dynamic token supply, but a static price means the amount of funding received will determine the supply of tokens.

Benefits of Initial Coin Offering

Global Access to Tokens

ICOs don't consider geographical barriers and are known as confined traditional fundraising methods. ICO open the door to a worldwide pool, attract potential investors, and elevate investors' interest in token launches.

Lower Costs & Reduced Bureaucracy

ICOs streamline the fundraising process, reduce the intervention of intermediaries and administrative costs, and regulate hurdles associated with traditional equity or debt financing.

It enables businesses to gain a larger portion of raised funds for project development and growth.

Fosters Early-Stage Investment

ICOs offer unique opportunities for early-stage stakeholders to gain substantial returns as soon as the project matures. The early-stage investment attracts diverse investors keenly interested in the ICO launch.

Enables Token Utility

ICO helps with project fundraising; it ensures the seamless launch and distribution of tokens, setting specific utility within the project's ecosystem. Here, tokens facilitate transactions, service accessibility, and governance rights, fostering productive connectivity.
Improves the Traditional Funding Gaps

ICO has emerged as viable in traditional funding ways, but it needs to fit conventional investment criteria. ICO is a secured capital-raising method that adds life to the vision set by token developers.

Disadvantages of Initial Coin Offerings

• Regulatory Risks: Certain loopholes in ICO could lead to legal challenges and regulatory scrutiny.
• Scams & Fraud: With the ICO launch, the project can become scammy and fraudulent for investors.
• High Volatility: The token price showcases the extremely high volatility in the market post-ICO launch.

What is an Initial Liquidity Offering (ILO)?

Initial liquidity offering is a crowdfunding model that allows projects to raise funds effectively by selling tokens on decentralized exchanges (DEX). If the project employs ILO fundraising methods, they doesn't need to undergo the ICO process.

People seeking liquidity contributors to obtain the new tokens can participate in the ILO process. They secure tokens in return for the liquidity they add to the pool, raising automated market makers (AMM) to launch their new tokens. Considering the risk associated with the token purchase, the investor gets a bonus in return, known as yield.

How does an ILO work?

Every crypto token needs enough liquidity to raise its market value. However, it takes longer to obtain liquidity once the developers or token owners release it on a CEX (centralized exchange).

ILO utilizes decentralized exchanges for instant trading with automated market makers using token-generated liquidity pools.

When the token developers are willing to launch their project right into ILO, the investors can start project trading as soon as it launches. Once the ILO starts operating well, the investors start selling tokens at a higher rate.

The gas fees, implemented on a smart contract while liquid exchange, are minimal compared to conventional fundraising approaches.

Benefits of Initial Liquidity Offerings

Faster Sale

The most prominent benefit of ILO is that it enables faster sales of tokens. As soon as the tokens are released, decentralized exchange employs the AMM mechanism to buy and sell the tokens immediately.

Instant Liquidity

As the tokens employ ILO methodology and carrier on the DeFi-based DEX exchanges, the liquidity of the tokens shoots shortly. This ability of ILO keeps the market more compatible with tokens and enables contributors to get their hands on the assets.

Unbiased Method

ILO method is unbiased for the investors; it allows private investors to buy many tokens initially when the sales go live. So they can resell the tokens to the public, maximizing their profit's value.

Affordable Model

ILO is one of the most proficient yet cost-effective fundraising methods that Initial Coin offers, among other fundraising techniques. It allows contributors to utilize initial liquidity to raise money for the project ahead.

Quick Trading

ILO methods don't let the developers or project owners wait to buy or sell their tokens. The token enters the sale as soon as it is published on DEXs.

Disadvantages of Initial Liquidity Offering

• Impermanent Loss: The liquidity creators can face impermanent loss due to the immediate fluctuations in token pricing.
• Complexity: The management and understanding of the liquidity pools can be complex for new investors.
• Market Volatility: The pricing of the token can be volatile and influenced by the supply, demand, and dynamics created under the liquidity pool.

Initial Coin Offering vs. Initial Liquidity Offerings

Fundraising Method

• ICO: Selling tokens directly to investors
• ILO: Providing liquidity to DEXs for token trading

Liquidity

• ICO: May face liquidity issues post-ICO
• ILO: Ensures immediate and continuous liquidity

Regulation

• ICO: Subject to varying degrees of regulation
• ILO: Less regulatory clarity, still evolving

Trading

• ICO: Tokens may need to be listed on exchanges
• ILO: Tokens are immediately tradeable on DEXs

Risk of Scams

• ICO: Higher, due to the direct sale of tokens
• ILO: Lower, as liquidity provision is more transparent

Volatility

• ICO: High, especially post-ICO
• ILO: High, but mitigated by liquidity pools

Final Words

The ICO and ILO are among the most highly trusted and widely adopted fundraising methods in the crypto landscape. However, they meet diverse needs and expectations set by the business owners, considering all the risks and benefits associated with the methods. ICOs are more elementary and seamless but have higher risk percentages and liquidity concerns. Whereas ILO provides immediate liquidity, it could have even higher chances of complexity than ICO and carry a high risk of impermanent losses. Whether ICO or ILO, if you are looking to develop any of these, contact Blocktech Brew. If you're looking to opt for an ICO or an ILO, it depends on the project's efficiency and its specific needs, considering the regulatory environment and your preferred target audience.