How DeFi Networks Are Enabling Blockchain Startups To Raise Capital
To make the entire fund-raising process more tenable, several firms are now offering companies looking to launch their own ICO/IEO/IDO a full suite of advisory services ranging from Legal documentation, Marketing services and Technological aspects like tokenomics.
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Many startups today are trying to solve real-world issues using blockchain technology and the increasing adoption of cryptocurrencies globally has led to the stratospheric rise of decentralized finance (DeFi) applications that utilize smart contracts on blockchains like Ethereum to offer traditional financial instruments. Additionally, the smart contracts feature enabled the tokenized raising of funds for startup projects through Initial Coin Offerings (ICOs) which are the cryptocurrency industry’s equivalent to Initial Public Offerings (IPOs) that are popular in the more traditional equity-based stock markets across the world. Being quite a rage up to 2018, ICOs enabled any blockchain-based startup to raise funds to create a new coin, app, or service and were mostly deployed using Ethereum ERC-20 protocol standards.
However, with the emergence of bad players taking advantage of the crypto ecosystem and scams on the rise, the crypto world eventually gravitated towards Initial Exchange Offerings (IEOs) which was pioneered by Binance in 2019 and offered a more cost-effective platform for blockchain projects to list their crypto tokens and access funds. Despite the added validation done by these centralized exchanges for every IEO, the higher entry barrier caused by the liquidity and funding requirements made IEOs less popular and eventually led to a rise in decentralized exchanges like Uniswap that allow anyone to list new tokens without any restrictions through Initial DEX Offerings (IDOs). The evolution of IDOs continued and has now led to the emergence of IDO Launchpads where blockchain projects meeting the set requirements are required to open a liquidity pool to launch their IDO with their tokens immediately being listed on popular decentralized exchanges (DEXs) like Uniswap, Pancakeswap and Sushiswap.
Moreover, IEOs involve the payment of direct fees to the centralized exchanges which is not applicable for ICOs or IDOs as they are based on peer-to-peer lending principles. Instead, the liquidity offered by IDOs is much lower than that offered by centralized exchanges through IEOs since it relies on the community to vet the startup’s offerings rather than the exchanges. This is reflected in the lower liquidity pool available through IDOs (usually in the range of $5million to $10million) and may not be suitable for companies wanting to raise much higher capital to $150 million; like is possible through ICOs & IEOs. Understandably, the entire gamut of options available for a budding startup to raise funds can be quite confusing and presents a daunting task for new-age entrepreneurs who are constantly innovating with the capabilities of blockchain technology.
With most investors perceiving investments in blockchain startups to be a risky proposition, decentralized exchanges based out of Singapore are emerging as the most preferred avenue for such investments on account of the robust regulations employed by the city-state. Such exchanges are considered as ‘organized markets’ under Singapore’s Security and Futures Act (SFA) and are legally recognized by the Monetary Authority of Singapore (MAS); the central bank that also regulates P2P lending which forms the base of ICOs and IDOs. Moreover, with MAS implementing strong Anti-Money Laundering (AML) and Countering Financial Terrorism (CFT) regulations, Singapore has made significant strides in allaying investors’ concerns surrounding crypto-related investments.
To make the entire fund-raising process more tenable, several firms are now offering companies looking to launch their own ICO/IEO/IDO a full suite of advisory services ranging from Legal documentation, Marketing services and Technological aspects like tokenomics. With the strong regulatory framework implemented in Singapore, the best amongst these firms are headquartered in Singapore and are supporting blockchain startups with experienced advisors who not only help with the necessary business skills, strategic advice and investor connections needed; but also pave the way for entrepreneurs to carefully select the fundraising avenue most suitable for their blockchain project. It would only be apt to summarize that all these factors are leading to the emergence of DeFi as a preferred avenue for raising capital and encouraging entrepreneurs to leverage its transformative potential to power their growth strategies today
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