With the rise of cryptocurrencies, many new projects are being developed to drive success in decentralized finance (DeFi). To increase the funds of these startups, some processes such as ICO, ILO, IDO and IPO are actively used to raise capital, build a brand and attract more investors.
In this blog we will go through two of these processes, namely ICOs (Initial Coin Offers) and ILOs (Initial Liquidity Offers), and discuss their differences and details.
Let’s start by discussing ICOs first:
What are ICOs?
Initial Coin Offer is a popular fundraising mechanism for new ventures looking to establish themselves in the blockchain and crypto space. In this, the blockchain or crypto startup offers cryptocurrency tokens that refer to an authority or service. For example, in some cases the tokens would give investors the authority to make and vote on crucial decisions. The investors who see the growth potential in the startup then purchase these tokens to own a stake in the venture. In this way, the startup attracts many investors who invest directly in the company, without the involvement of intermediaries.
How do ICOs work?
To raise money with ICOs, any crypto project should follow the following steps:
Structuring the currency:
The currency for the ICO process can be structured in three ways, depending on which one best suits the goals of the project.
Static supply and static price: This refers to a predetermined number of tokens with a fixed price for each. For example, the project could raise $1,000,000 by selling 1,000,000 tokens for $1 each.
Dynamic offer and static price: These are 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 and 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 will create 1,000,000 tokens. If people invest $500,000, they will create 500,000 tokens. The supply of tokens grows with the amount of money invested.
White paper publication
To announce the process, the startup is releasing a white paper on a new website, a document with all the details such as 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 release of the white paper, the token will be placed on various types of sales such as pre-sale, private sale, and main sale. Each sale would provide the same or a different type of audience and benefits depending on the company’s marketing strategy.
Token entry
Once the sale is over, the token will be listed on various cryptocurrency exchanges, where it will enter a broad market where more users can buy, sell, trade and exchange the tokens.
Benefits of an ICO
Open access to tokens
During the ICO drives, anyone can buy the project tokens; buying and selling is therefore done anonymously, which attracts many investors.
Global token sale
In a crypto and blockchain space, ICOs are accessible worldwide and investors from different locations can buy and sell the tokens.
Minimal access barriers
There are no requirements or geographical barriers to purchasing the coin or token, making it hassle-free for investors to purchase the tokens.
The potential of a high ROI
ICOs allow investors to get into the business at an early stage, which would provide them with lucrative returns in the future if the project becomes successful.
For more information about ICOs and their associated regulations, check out our blog at ICO regulations.
Disadvantages of an ICO
Below are the disadvantages of ICO:
Due diligence challenges
There are no strict rules to monitor the terms of smart contracts, which can lead to many companies keeping hidden terms that could prove harmful or detrimental to investors in the future.
Regulatory risks
Lack of regulation or confusion over ICO rules, including taxes on profits or income, complicates the processes and prevents investors from making informed decisions.
Scams and fraud
The ability of ICOs to quickly raise capital makes them highly vulnerable to fraud and scams. Therefore, investors must verify the details of the startup before participating in the ICO process.
High volatility
Market fluctuations disrupt token prices, which can put the investor’s money at risk and make them prone to losses.
What are ILOs?
Initial Liquidity Offer (ILO) is another fundraising mechanism for new blockchain startups. It allows startups to launch their tokens by linking them to 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 money for a business, making the process reliable and smooth for a wide range of customers.
How do ILOs work?
Below is how ILOs work:
Token creation and setting up a liquidity pool
To begin the ILO process, the project creates a new token and places a certain number of tokens into a liquidity pool on a decentralized exchange (DEX). The same number of other already established tokens, such as Ethereum, have also been added. Users can now trade between the new and pre-existing tokens using this liquidity pool.
Using Automated Market Makers (Amm)
To facilitate this exchange, Automated Market Makers (AMMs) are smart contracts that automatically continue trading and adjust the prices of tokens according to supply and demand.
Launch of the ILO and immediate trade
After installation, the ICO will be launched, which is the official announcement that the token exchange will be open to investors. ILOs do not require a 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. As more users buy the tokens, the price will increase; if more users sell them, prices will crash.
Lower costs
Thanks to the inclusion of smart contracts, the gas costs for trading on the decentralized exchange (DEX) are minimal compared to conventional fundraising approaches.
Advantages of an ILO
Below are the benefits of an ILO:
Faster sales
With the implementation of AMMs, the ILO is facilitating faster sales because when the tokens are released into the liquidity pools, the investors can immediately purchase them.
Instant access and fast liquidity
Once the token is released, developers and investors can purchase it without waiting. Furthermore, since the project is running on the DeFi-based DEX exchanges, their liquidity is increasing rapidly. This makes the liquidity market more compatible and allows traders to trade with ease.
Unbiased method for token trading
The ILO mechanism is unbiased for the investors as it allows them to buy the tokens early and sell them to the public when prices rise. This gives them loyalty bonuses and unparalleled profits.
Cost-effective model
ILO is considered a cost-effective method compared to other techniques. It is also very fruitful for the users as it allows the first contributors to use the initial liquidity to increase profits and move the project forward.
Disadvantages of an ILO
These are the disadvantages of ILOs:
Temporary loss
Due to sudden fluctuations in token prices, the liquidity makers on the DEX platform may lose the value of their deposited assets, leading to a temporary loss.
Complexity
Participating in ILOs requires an understanding of how decentralized exchanges work, which makes it complicated for new investors.
Market volatility
Even with the benefits of liquidity pools, token pricing fluctuates and disrupts the supply and demand dynamics that emerge under the liquidity pool.
ICO vs ILO
Now that we know more about ICOs and ILOs, we can move on to discussing the difference between Initial Coin Offers (ICOs) and Initial Liquidity Offers (ILOs) through the table:
| Aspect | ICO | I LO |
| Fundraising method | Tokens are sold directly to investors in various sales. | Facilitates token trading by providing liquidity to decentralized exchanges. |
| Liquidity | May experience liquidity problems and delays. | Guarantees immediate and sustainable liquidity for the future. |
| Regulation | ICO rules vary in different countries and regions. | The regulations are still unclear and are being worked on. |
| Trade | Tokens may need to be offered for exchange on various platforms as part of the ICO process. | Tokens are directly tradable on DEXs. |
| Risk of fraud | Direct sales of tokens and quick fundraising attract a large number of scammers. | Liquidity provision is more transparent and less susceptible to fraud. |
| Inconstancy | High, with significant fluctuations. | Remains high, but tempered by liquidity pool support. |
Last words
ICOs and ILOs are both highly trusted and used in fundraising in the crypto landscape. However, they both suit the different needs and expectations of business owners, and come with different risks and rewards. On the one hand, ICOs are easier and more streamlined to create fun, but they come with more risks and liquidity problems 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 fundraising method that best suits your business needs, you should 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 such a company, don’t worry! Because Blocktech brew is the all-in-one company you need!
For a free consultation on ICO and ILO development related to your idea, please contact us by email at business@blocktechbrew.com and discover unusual ways to grow your business!
I am the CEO and founder of Blocktech Brew, a team of blockchain and Web 3.0 experts who help companies adopt, implement and integrate blockchain solutions to achieve business excellence. Our team has successfully delivered more than 1,000 projects to clients in more than 150 countries and is committed to designing and developing smart solutions to scale your business growth. We are focused on harnessing the power of Web 3.0 technologies to provide world-class Blockchain, NFT, Metaverse, Defi and Crypto development services to businesses to help them achieve their goals.