Introduction
Blockchain fundraising has radically changed since the boom of the first coin offerings in 2017. Though regular ICOs have mostly fallen out of favour, the need to use efficient method of crowdsale in blockchain projects is on high demand.
The first offerings of exchange and security tokens had potential but failed due to regulatory hurdles that could not allow it to go mainstream.
Initial DEX Offerings are the Future of Fundraising?
Initial DEX offerings came into the limelight when a historic token sale was held in Uniswap on the 28th of April. This is a fundamental change to the historical approach of selling tokens, using the special properties of decentralized exchange structures to provide more available and immediate trading access points.
The team distributed 2 percent of their total token supply to Uniswap and initial price of this token was $0.26. To set this starting price in the automated market maker system they paid $535,000 worth of ETH to form the first liquidity pool.
This invariant is that a buying or selling activity is guaranteed to cause a shift in the price position along the curve. Have traders buy tokens and they push the exchange rate up to an average execution price, which is greater than the one shown before the trade.
- •A small trade of 1 ETH would give 202 DAI as a result
- •A more significant 100 ETH trade would not result in 20,200 DAI based on the price movement along the curve
- •In the case of the UMA token launch, this probably resulted in 20,170 DAI
The price has stabilized in three days at a price of about $1, which is 4 times higher than the original offering price. This initial price volatility index witnessed great heights, as the price peaked at 5 times the initial price within 25 minutes of launch and there was a time when it peaked above $2.
The rush provided chances to front-run the transactions, with technically advanced traders paying high gas fees to have their transactions processed sooner than the other trades, thus generating about $2 million worth of ETH to the protocol.
Addressing Distribution Fairness Issues
Although it was successful in raising funds, it revealed some areas of improvement in the development of more fairer distributions.
One of them is a reverse dutch auction mechanism in which the initial pool begins with tokens priced at the maximum. Gnosis protocol has developed another variant of this solution by conducting trades in batches and clearing prices in a single price, eliminating the benefits of the first mover strategy and providing a more fair access to all participants.
Although these platforms have better user interfaces and better liquidity, they are also highly expensive and expensive to enter. Yet, they have traditionally been characterized by reduced liquidity, which has led to increased order delivery times and reduced efficient price discovery.
The projects are now able to supply first-time liquidity to their tokens and allow them to trade instantly without the need of being listed.
This implies that the prices change dynamically in response to the trading activity in a mathematical formula of the bonding curve that xy = k.
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Practical Implementation Problems
Practical implementation has shown that the automated market maker-based distribution of tokens has a number of problems.
Structural Challenges
The structural incentives present in the inherent structure are that front-running will be significant and prices will only be able to rise, meaning that technically sophisticated investors have a great advantage since they can:
- •Automate their involvement
- •Conduct transactions more quickly than manual traders
- •Utilize high frequency trading plans
Future Outlook
Even simple liquidity pool mechanisms do not guarantee equitable access, but represent the major advance towards token distribution processes in the future, independent of the exact sale mechanism used. This makes them the necessary infrastructure in the bigger token economy.
Although present implementations are hard to use in terms of fairness and front-running, they provide the most accessible and immediate access to projects and investors in history.
With the technology becoming more mature, with the introduction of new solutions to mitigate the existing limits, the tendency of decentralized exchanges to become increasingly central to the process of introducing tokens to the market by projects that are seeking alternatives to the standard fundraising strategies is likely to rise.
Due to the ongoing increase in trading volumes on the decentralized exchanges, they can become the place of choice to introduce new tokens to the blockchain ecosystem.
The consequence is usually a disadvantage to the retail investors as they are unable to match the automated systems and the high frequency trading plans.
