• November 28, 2023

A Bird With Clipped Wings: Pre-IDOs & The Illiquidity Problem

AAs many from the global blockchain cryptocurrency community would agree, the steady rise in decentralized exchanges (DEXs) is a welcome sign. After all, interacting with a decentralized network via a central exchange is a major violation of its purpose. In addition, DEXs offer some practical benefits for crypto-based projects, particularly in terms of bootstrapping liquidity.

No matter how innovative the idea behind a company is, you need resources to establish yourself and develop yourself further. Again, there is a need for reliable fundraising methods. In this regard, decentralized projects naturally require decentralized resources. In the past, this has resulted in ICOs, but we all know that it has not. Due to the development of DEXs, we now have a very promising alternative: Initial DEX Offering (IDO).

DEXs have overcome their initial liquidity crisis and now enable IDOs to make an indelible mark in the fundraising space. There have been a number of successful IDOs in the recent past. Still there is a glitch; IDOs do great, but pre-IDOs lag behind the brand. Project owners ultimately face the brunt as their fundraising drives suffer like a bird with its wings cut off and unable to take full flight.

The problem of illiquidity still haunts innovators, but is now in the pre-IDO phase of their bootstrapping efforts. The general problem is that the current liquidity market is severely unbalanced. On the one hand, pre-IDO tokens are completely illiquid. On the flip side, assets with high potential liquidity – like NFTs – mainly serve as mere collectibles that sit idle in users’ wallets.

We need to dig deeper into the problem, but we can almost feel the solution already – we are using NFTs for pre-IDO liquidity. Aside from alleviating an ongoing crisis, it will free up billions of dollars that have not been used adequately.

Diagnosing pre-IDOs

Projects face a serious dilemma in the phase before the IDO of their fundraising campaign. To ensure longevity and robustness, they have to use token vesting – to block tokens for a predefined time and release them gradually. As such, this is inevitable: firstly, it shows the team’s commitment and secondly, it limits manipulation in the price of the token.

Vesting also reassures investors that the project is not a pump-and-dump program and that the developers are committed to long-term goals. At the same time, however, vested tokens are illiquid. They cannot be traded or secured. The negative result of blocking tokens is that a significant portion of the value remains out of the reach of the market. Of course, investors are less willing to buy into pre-IDO tokens. Innovators, on the other hand, find themselves in a vicious circle of illiquidity.

The liquidity crisis that Pre-IDO tokens are facing is also due to the lack of suitable marketplaces for this phase. As a result, projects have to rely on OTC platforms, which are often seedy and put themselves and their potential investors at risk. Inconsistent trading practices, limited scope for early discovery of token prices, and limited community participation plague pre-IDOs on such platforms. Combined, these factors further limit the ability to generate liquidity prior to the intended IDO.

A story of dead liquidity

Imagine someone dying from drinking water. If this is a reality, isn’t it unfair to underuse or abuse the available water resources? The liquidity scenario is similar – while some are suffering from an illiquidity crisis, liquidity elsewhere is underutilized.

In the past year, Non-Fungible Tokens, or NFTs, have seen a phenomenal development that has gone from nothing to almost everything. As we have seen, this new type of asset offers immense potential for representing other assets in the chain. In addition, because NFTs are unique and not interchangeable, they can have tremendous value in themselves.

Given the recent developments, it is no exaggeration to say that NFTs are revolutionizing digital creations, freeing creators, and upholding intellectual property rights. Artists like Beeple sell their works for, among other things Millions of dollarswhich is very promising. At the same time, there is steady growth on the flanks of the primary use case of NFT, ie crypto-based collectibles. We know how Ethereum crashed when the popularity of CryptoKitties skyrocketed. this is only one instance. CryptoPunks are gone from $ 1 million to $ 7.5 million in the past four years in terms of market value.

Despite steady increases in value, we cannot fully leverage NFTs in terms of liquidity. As collector’s items, NFTs are usually showpieces; They may cling to the owner’s sense of worth, but they don’t get much beyond that. In addition, non-fungible assets are by definition incompatible with partial trading, which further affects their usability. In this way, a rapidly growing store of value lay unused in the depths of an abyss. You can see it, but you can’t touch it; this is very frustrating.

Channeling liquidity into pre-IDOs

There are illiquid pre-IDO tokens at one end of the tunnel. On the other hand, there are NFTs with a high potential for low liquidity. As innovators, we can remove the barriers that separate them and achieve the two goals. The technology that enables this harmony is available in individual parts. Vision is needed most.

Token wrapping is an effective way of connecting the dots in terms of value. It allows one asset to inherit or represent the value of another without compromising on decentralization or robustness. Following the same logic, assets can seamlessly leverage each other’s liquidity, which is ultimately a requirement in our current context. For clarity, consider how currencies based on the gold standard inherit the value of gold while making it liquid. It is possible to do something similar with pre-IDO tokens, but of course this will be much better given the underlying framework.

To deal with the liquidity crisis of vested pre-IDO tokens, we can represent them as NFTs. In return, we will trade such NFTs on the secondary market and thus add liquidity to the former. The benefits run both ways as NFTs also benefit from the diversification of their potential use cases. Not just collectibles or works of art, they can now represent a whole multiverse of projects and proposals. Based on this method, a comprehensive marketplace will also be able to address the concerns related to undesirable OTC platforms.

Finally, it should be noted that the above solutions can be implemented very well. In fact, innovators have already embarked on this path. Others will certainly follow in the coming days, and with improvements too. In a domain as dynamic as the blockchain cryptocurrency community, the future is always the present. It is only a matter of time before the IDO bird takes full flight and soars high on a clear blue sky.

Author bio:

Garlam won has been in the crypto ecosystem since 2017 and previously headed marketing at Harmony before starting his company – Momentum 6. He was responsible for marketing some of the best DeFi & NFT projects in the field including Harmony, Sandbox and Kava, SEASCAPE, MANTRADAO, KPAD, Splyt, etc.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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