This article aims to provide an overview of launchpads and its role in the cryptocurrency investment landscape as well as how they work. If you are unfamiliar with DeFi, consider reading our introductory article on DeFi here first. You might also want to read our articles on blockchain and crypto before reading this article.
What Are Launchpads?
The global tech scene is no stranger to the myriad of financial infrastructure that provides the runway for new projects to take off.
- Angel Investing: Involves individuals with deep business knowledge (and deep pockets) offering early capital to projects still in their infancy
- Venture Capitals (VCs): Institutions that identify high-potential businesses in their growth phase and provide pivotal funding in exchange for a slice of the action
- Equity Crowdfunding Platforms: Serve as an avenue for small and medium enterprises to sell ownership shares to investors of different sizes
In crypto, launchpads, also known as incubators, are an improved iteration of the early-stage fund-raising process. These platforms curate new and innovative crypto projects and users can acquire a stake in these projects before their public token launch. Launchpads are mainly hosted by an exchange or specialized crypto launchpad projects. Given their benefits to both investors and founders, it is no wonder they have seen an explosion in popularity during the bull run of 2021.
The History and Evolution of Crypto Crowdfunding
Community has always played an indispensable role in the growth of projects in the space. Early adopters preached the gospel of crypto to spread awareness about its potential and raise funds for the projects they support.
The ICO Craze
In 2017, many new projects started conducting token sales directly on their website in a process known as an Initial Coin Offering (ICO). This involved the distribution of tokens to investors at a predetermined price with the condition that investors had to hold the tokens until they are publicly listed. Similar to the gold rush, this lured many investors seeking to make astronomical returns into the space. With the lack of regulation, the hype eventually crumbled when most of the projects turned out to be scams and investors saw large sums of money go down the drain, such as with BitConnect.
The fundamental concept of ICO was not the issue. Rather, amidst market euphoria, new investors lacked the know-how to properly appraise new projects through due diligence and “doing their own research”.
Creation of Launchpads
Visionaries in the space sought to create a sustainable and trustworthy means of facilitating the crowdfunding process. Binance, a centralized exchange (CEX) at that time, hosted the first Initial Exchange Offering (IEO) in January 2019, launching the Binance Launchpad.
In 2019, Decentralized exchanges (DEXs) such as Uniswap and PancakeSwap emerged and rose in popularity in the space. The decentralized nature of DEXs attracted many crypto projects to conduct their token sales on DEX launchpads, giving rise to the concept of the Initial DEX Offering (IDO). IDO launchpads then began offering bespoke services for new projects, making them an attractive platform to raise funds.
Shortly after, other variations of the initial offerings surfaced. For instance, the Initial Game Offering (IGO) was introduced, allowing early investors to secure in-game assets and tokens before they were made available publicly.
How Do Crypto Launchpads Work?
Crypto launchpads bridge new projects and early investors by helping projects amass crowdfunding and market exposure while granting investors early access to tokens at bargain prices. The aim of a launchpad is to build and nurture projects’ communities, as well as to attract genuine, high-potential projects to the platform. Many big projects in the space have their origins in launchpads, such as Polygon (MATIC), Axie Infinity (AXS), Orion Protocol (ORION), and My Neighbor Alice (ALICE).
Additionally, crypto launchpads provide vital infrastructures that form a secure and transparent environment for investment activities. Projects undergo rigorous vetting before earning a place on the launchpad, reducing users’ exposure to scams. This maximizes investors’ safety and saves them time and effort in their due diligence process.
Most launchpads require users to own their native token to participate in crowdfunding, but different launchpads operate differently. For example, IEO launchpads may have more stringent vetting standards than IDO launchpads. IDO launchpads may not require know-your-customer (KYC) verification from investors, and some also employ a whitelisting process to filter participants of the IDO.
The Downside of Crypto Launchpads
High Barriers to Entry
The strict vetting process leads to high barriers to entry. While this is critical in creating a safer crowdfunding ecosystem for investors, there is a chance that projects with high potential might be turned away. On the other hand, some launchpads require a large token lock-up, which might turn away small investors. For example, DAO Maker requires investors to stake a minimum of 2,000 DAO into a liquidity pool before participating in an IDO.
For certain IDOs, big investors may take up a huge portion of the token allocation through purchasing or prior agreements with the project. This defeats the aim of crowdfunding and presents the risk of a pump-and-dump where large holders of a token sell their assets on a CEX or DEX immediately after the public launch.
Increasingly, governments are laying stricter crypto-related regulations. This might limit access to IEO launchpads on CEXs for both users and projects. For example, KuCoin and Binance are not licensed to operate in the USA.
Should You Use Crypto Launchpads?
Crypto launchpads present exciting opportunities for investors and early projects in the space. They allow projects to gather capital both efficiently and effectively. For instance, BitTorrent managed to raise US$7.2M in 15 minutes, while Fetch.AI raised US$6M in a record 6 seconds.
Although projects on launchpads often go through strict vetting processes, there is always risk involved, and it is important to always do your own research when it comes to crypto, be it on the projects or the launchpads they are hosted on.
This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up to date or accurate.
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