Detailed Explanation of Decentralized Token Issuance Mechanism IDO: Characteristics and Current Status of Seven Major Platforms

This article is an original piece by Chain Catcher, authored by Gu Yu.

Thanks to the optimization of DeFi infrastructure and the massive increase in DeFi users, more and more projects are choosing to raise funds through IDOs, including well-known tokens like UMA, MTA, API3, and PREP, which have brought significant wealth effects. Recently, the number of IDO projects has also been increasing dramatically.

In this context, an increasing number of IDO platforms and models have emerged. Recently, Sushiswap has also chosen to enter the market, bringing more influence and attention to the IDO space.

In this article, Chain Catcher will introduce major IDO platforms and their mechanisms, including Uniswap, Balancer, Polkastarter, Bounce, Mesa, and DODO, showcasing the potential and future of IDOs as a popular financing channel. (The market has risks, and this article does not constitute any investment advice.) 1. Development History and Current Status

Recently, IDOs have once again become a high-frequency term in the crypto market. In the past week, at least eight projects, including Razor, OptionRoom, Umbrella Network, Bot Ocean, and DAOVentures, have conducted or announced IDOs, and the token prices of related IDO platforms have also risen significantly. It can be said that IDOs have become a favored method of initial public fundraising for many blockchain projects.

Currently, there are varying definitions of IDOs in the market. For example, some explain it as the first DeFi issuance, while others define it as the first DEX issuance. Considering that many projects have issued tokens on platforms beyond the scope of DEXs, this article will adopt the definition of the first DeFi issuance for explanation.

In the past few years, the methods for the initial issuance of blockchain project tokens have undergone multiple iterations, from the early ICOs based on smart contract transfers to subsequent initial exchange offerings and compliant platforms like Coinlist, with increasing thresholds and costs, to the extent that many blockchain projects do not even have public token issuance steps.

However, with the emergence and popularity of decentralized exchanges, many project teams have begun to attempt initial public token offerings on DEX platforms. For example, Binance announced in June 2019 that Raven Protocol would conduct an IDO on its DEX platform, but due to performance issues with DEXs and market education problems at that time, IDOs did not gain popularity.

However, the IDO mechanism allows project teams to raise funds directly from the community, especially enabling early supporters of the project to gain more financial returns. As a marketing tool, it can also attract more market attention, which still draws the attention of many project teams.

Starting from June and July 2020, thanks to the optimization of DeFi infrastructure and the massive increase in DeFi users, many DeFi projects chose to conduct initial public token offerings on Uniswap, including well-known projects like UMA and bZx, as well as many speculative new projects.

Specifically, the IDO model on Uniswap is based on the AMM mechanism, where project teams need to pre-create a liquidity pool based on smart contracts and recharge tokens and reserves like ETH or DAI in a 1:1 ratio. Subsequently, users purchase tokens from this liquidity pool, and as buying funds flood in, the token price will rise according to the curve model.

At the same time, this mechanism has also given rise to the issue of "scientists front-running." Due to users who pay higher gas fees often completing transactions earlier and obtaining better prices, many "scientists" use machine algorithms and high gas fees to trade ahead, which can easily lead to significant price increases under market frenzy, and is somewhat unfair to ordinary participating users.

Therefore, around pricing mechanisms, entry thresholds, and other characteristics, a large number of solutions and projects targeting IDOs have emerged in the DeFi market, including Bounce, Polkastarter, Mesa, and the recently launched MISO by Sushiswap.

From the perspective of platform types, current IDO platforms can be roughly divided into comprehensive DEX platforms and auction-type platforms specifically serving IDOs. The former includes typical representatives like Uniswap and Balancer, which can provide a series of functions for project teams from token issuance to establishing liquidity, while the latter includes Mesa, Bounce, and Polkastarter, which specifically offer a variety of token issuance and auction strategies but cannot directly create liquidity pools for tokens.

At the same time, these platforms generally have their own characteristics in terms of price discovery mechanisms, whitelist mechanisms, and entry mechanisms, basically meeting the diverse needs of project teams for initial public token issuance.

Currently, relatively well-known IDO platforms include Uniswap, Balancer, Polkastarter, Bounce, Mesa, and DODO. Additionally, DEXs like Bonfida, KyberSwap, and Poolz also support IDOs. Next, Chain Catcher will provide a detailed introduction to some of the major IDO platforms and their mechanisms, with Uniswap not being elaborated on again as it has been previously introduced.

2. Balancer: Liquidity Bootstrapping Pools

Balancer is a DEX based on the AMM mechanism that launched a solution called Liquidity Bootstrapping Pools (LBP) last year, allowing project teams to conduct initial public token offerings on Balancer while establishing liquidity pools with deep liquidity on the platform.

It is understood that the issuance time for liquidity bootstrapping pools is generally three days, and project teams can set the initial weight of tokens in the liquidity pool, with a maximum deviation ratio of 2:98, meaning that the pool will consist of 2% reserve assets and 98% project tokens. Project teams can reward liquidity without needing a large amount of capital, and the initial price of the token is proportional to the value of the reserve assets.

The liquidity bootstrapping pool also provides project teams with the ability to quickly adjust weights, allowing them to lower the value of tokens in the pool by adjusting the proportion of reserve assets, preventing price surges due to early speculation.

Therefore, those who wish to participate in token purchases can buy tokens when the token value aligns with their expectations. In such a design mechanism, the opening price is usually intentionally set high, while more favorable prices may appear in the later stages of the event.

Overall, this mechanism can to some extent avoid users rushing in to purchase due to FOMO and suppress the situation of bots "front-running," allowing all participants to compete fairly, reducing market price volatility, and facilitating smoother token value discovery.

So far, at least five projects, including APY.Finance (APY), Perpetual Protocol (PREP), and Furucombo (COMBO), have conducted IDOs through Balancer's liquidity bootstrapping pool mechanism.

3. Mesa: Batch Auction Mechanism Based on Circular Trading

Mesa is a DEX project built on the Gnosis protocol, maintained, owned, and hosted by DXdao, supporting simple market-making strategies for stablecoins. Since July 2020, the platform has conducted at least nine IDOs, including several well-known projects like mStable (MTA), dHEDGE (DHT), and API3.

Project teams can set the number of auction items and the upper and lower price limits on the platform, while users participate through a limit order submission mechanism. Compared to other IDO platforms, Mesa's main features are circular trading and batch auctions, and users need to pre-fund the official wallet address to gather and maximize liquidity and prevent early front-running.

Specifically, circular trading means that Mesa allows users to participate in auctions using multiple assets, rather than being limited to specific trading pairs, achieving shared liquidity among all trading pairs and consolidating all orders into a single order book for order settlement, thus gathering and maximizing liquidity.

Batch auctions mean that Mesa users' auction orders are not settled individually but are instead settled in batches every five minutes. At the start of the five-minute batch auction, all user auction orders will be listed, and 30 orders will be selected based on price and amount, initiating a public competition for the optimal settlement scheme through an off-chain solver, determining a single settlement price through a specific calculation formula. When the next five-minute auction begins, all auction orders are settled in batches and settled on-chain.

Mesa charges a 0.1% fee on each completed order, and this fee will also be used to pay users' gas fees. To ensure that the platform does not incur losses, Mesa recommends a minimum subscription amount of 1600 USDC, and orders below this amount will not be settled.

This mechanism means that all participants in a single batch purchase tokens at the same price, avoiding situations where some users pay high gas fees to "front-run" the auction, providing users with relatively fair and equal participation opportunities.

4. Polkastarter: Fixed Swap Pools

Polkastarter is a cross-chain token swap and auction protocol that launched its beta version on Ethereum last December and is expected to migrate to Polkadot in the first quarter of this year. It is also one of the most frequently used platforms for IDOs recently.

On September 20 last year, the project announced it had raised $875,000 in seed and private rounds, with investors including NGC Ventures, Moonrock Capital, and Signum Capital.

Compared to other IDO platforms, Polkastarter has two main features: first, it introduces fixed swap pools, allowing project teams to set fixed prices for token auctions; second, project teams can set whitelists for token auctions, allowing only specific addresses to participate. Users typically need to complete a series of tasks specified by the project team or enter a lottery to qualify for the whitelist.

Currently, at least 15 projects have conducted IDOs on this platform, but almost all of them are not very well-known, and the number of participants usually ranges from 100 to 300, with individual user IDO quotas being relatively low, typically between 0.2 and 0.5 ETH.

5. Bounce: Community Authorized Auctions

Bounce is a decentralized auction protocol for token swaps that launched in July last year, with its founder also being Chandler Song, the founder of Ankr. Investors include ParaFi Capital and Blockchain Capital, as well as industry figures like Synthetix founder Kain Warwick and Aave founder Stani Kulechov.

Currently, Bounce has two main products: a decentralized auction platform and the recently launched community authorized auction platform. The former is not much different from other IDO platforms, where any project team can set the number of tokens, maximum ETH received, duration, and auction strategy, supporting fixed swaps, Dutch auctions, and sealed auctions, with excess funds being bounced back to users.

The Bounce community authorized auction platform allows the BOT holder community to decide which projects can be activated and conduct token sales, with the platform assisting qualified projects in creating auctions. Additionally, individuals wishing to participate in certified auctions must pass KYC and whitelist requirements based on each project's criteria.

6. DODO: Crowdpooling

DODO is a DEX product established in August 2020, based on a PMM algorithm with a nonlinear price curve, proposing an IDO model called crowdpooling, which has conducted at least three IDOs so far.

Crowdpooling specifically involves the project team providing a certain amount of tokens, specifying the token price and issuance amount. Within a specified time, anyone can recharge to subscribe. If users subscribe beyond the token issuance amount, tokens will be allocated based on the amount of funds users recharge. After the crowdpooling period ends, a public liquidity pool is automatically established, and the crowdpooling price serves as the opening price for immediate spot trading.

At the same time, DODO has set up a "liquidity protection" mechanism, where the buy side of the spot market is composed of funds recharged by users, and the sell side consists of the remaining tokens after the crowdpooling period. All initial liquidity belongs to the initiator of the crowdpooling, but during the liquidity protection period, the initiator cannot withdraw liquidity.

7. Sushiswap: A Comprehensive Solution

On February 2, Sushiswap announced the launch of its IDO product MISO, aimed at simplifying the process of creating tokens and launching new projects on the SushiSwap exchange, including creating tokens, establishing liquidity pools, creating token sale strategies, and initiating liquidity mining, to attract more new projects to establish liquidity on the platform.

Compared to DEXs like Uniswap and Balancer, the main features of Sushiswap's MISO lie in its richer and more systematic solutions, while also supporting project teams to adopt various sale strategies, including fixed-price crowdfunding, batch auctions, and Dutch auctions.

Overall, the IDO market has now become one of the focal points of DEX platforms, and various IDO platforms have their own characteristics and advantages in terms of operational convenience and price discovery mechanisms. However, due to the current market sentiment being high and quality projects generally not lacking funding, IDOs may find it difficult to become the primary choice for most quality projects, with long-tail market projects likely being their main targets, and the associated risks should not be overlooked.