The current two most successful options for investing in new crypto projects, IEO and IDO launchpads appeared in early 2017 as an updated version of ICOs. And parachains are a fairly new phenomenon, with the first auction taking place in November 2021.
These two types of investments are similar. In both cases, the user invests tokens of large platforms and in return receives tokens of new projects that are being launched on them. However, there are also many differences as parachains are significantly more complex, so very few understand how they work. Let's compare returns and look at the hidden downsides of these two popular crypto investment methods.
What are Launchpads?
Launchpads are platforms for launching crypto products. They vet projects, invest in them and provide them with an audience of buyers. There are IEO, IDO and IFO launchpads. The most popular format is currently IDO. Crypto project tokens are issued on an independent platform and can be traded on a decentralized exchange (DEX). It grants crypto entrepreneurs access to a large community of blockchain enthusiasts, provides them with marketing and tech support from experienced professionals, and helps them raise funds to develop their products so they may reach the next level!
In principle, it is similar to a pre-IPO, only for crypto projects. It carries potentially very high returns for investors, but also increased risks. Some IDOs and IEOs can increase your investment by 100 times (100x), but there are also projects whose tokens liquidate to almost zero in less than a week.
Generally speaking, most projects give at least 2x or 3x profit on the initial investment. This is because of the work done by the creators of launchpads, who carefully select the best projects to present to the general public, invest in them and provide them with comprehensive support. This is one of the most important functions of the launchpad — vetting projects that are launched by it.
There is also another key difference between IDO and IPO- the staking system. In most cases there is huge competition between potential buyers for a small amount of shares that will go on the pre-IPO. So, if you're an early investor you would deposit $20,000 to the account of the investment company or underwriter. For this you’ll receive an allocation of $100 worth of shares. You will then only be able to buy $100 worth of shares initially, regardless of your real demand. This is done because the investment provider doesn't know exactly how many shares he will be able to sell to his clients. So they count how much there was deposited in total and the available asset is divided — and now everyone receives it proportionally.
With IDO’s there is also a staking system. Users lock a certain amount of tokens to confirm their interest in the future sales. In the case of IDO, you are staking assets that fluctuate in price — launchpad tokens instead of dollars. Therefore, the staking time is usually greatly reduced, sometimes to just a few hours or days. It is also worth considering that you generally can't take back staked tokens before the IDO completes without paying a substantial fee.
What are Parachain Auctions?
Parachain auctions are the core implementation of the network Polkadot and its "canary in the mine" Kusama. Polkadot is a network that connects blockchains. It provides a framework within which new blockchains can be created and to which existing blockchains (parachains) can be connected. Easy transactions within the network are supported. As a result, one parachain can transfer data to another. The inherent disadvantage of Ethereum and Bitcoin chains that hinders the development of new projects is removed.
The mission of Polkadot and Kusama is to change the existing structure of the Internet to Web3, creating a completely new and decentralized network. They help connect private and public blockchains and other networks in the Web3 ecosystem. Polkadot makes possible an Internet where independent blockchains can exchange information and transactions without obligation.
The idea for Polkadot was introduced by Gavin Wood, co-founder of Ethereum, at the end of 2016. Then, in mid-2017, the Web3 Foundation was created, which manages the project in conjunction with Parity Technologies. In October 2017, a successful ICO was held for $140 million. Today, the market cap of DOT, the network's main token, is over $7 billion. Kusama, a secondary token, is worth more than $420 million.
What does the investment have to do with it, if the ICO has already taken place? Well, it's about the way Polkadot adds new blockchains ("parachains") to the ecosystem or removes inactive ones. In order for your blockchain to be connected, you need to win the auction. It is necessary for your project to be voted for — in other words for network users to put the most DOT tokens on it. New auctions take place every 3 months.
How parachain auctions work
Everything is quite complex, the project is very large-scale and there is a whole Wiki for it. You can read more about parachain auctions and how they operate here. What is important for investors to know is that projects are very eager to get a slot and connect to the Polkadot network. They are willing to pay huge for it, most often — in the form of a large number of native DOT tokens. Similarly to the IDO launchpads, if you choose the right project, you can make very good returns.
There are some differences. With an IDO you invest your launchpad tokens and lose them (they are used by the team to develop their project). In the case of parachain auctions, your DOT tokens are simply locked for the two years that the project will remain connected to the network. Then the tokens are returned so you may vote again. That means you physically can't lose anything, except if DOT tokens themselves become cheaper. If the project falls off, ceases to be supported, or doesn’t win the auction, your DOT tokens are also returned.
As we can see, staking works very differently in the parachain world than it does in IPOs and IDOs:
- IPO — you spend stable dollars, you get stocks;
- IDO — you spend volatile tokens of launchpad or exchange, you get tokens of a new project;
- Parachain auctions — you get new tokens, but you don't spend anything, you simply lock your tokens for a while.
How parachain auctions work
If IDOs are comparable with stocks, then parachain auctions are similar to bonds. You lock your assets for a period of time, but in return receive interest in the form of periodically issued projects' tokens.
Similarly to Polkadot, just twice as fast, things are moving along with the Kusama parachains. The leasing period for them is half as long (1 year), so auctions are held more often. Your tokens (KSM) are returned back to your wallet after a year passes. This is a "test network" for the Polkadot team, moving at twice the speed, and so far it's performing very well.
Battle between giants
IDOs take place almost every day. There are now more than 500 launchpads. On the other hand, the schedule of parachain auctions is available, but they are quite rare, only occuring once every three months (in the case of Polkadot). If you want to invest in something right now, and be done with it a few weeks later, this is just not an option. Parachains are exclusively long-term investments. Therefore, they attract mostly much wealthier and more affluent users. Participants in IDO and especially IEO launchpads most often spend several hundreds of dollars, but participants in parachain auctions sometimes invest tens of millions. Although it must be noted there is practically no restriction on the minimum amount here, you can start from 5 DOT.
Parachain auctions are already collecting huge sums. Acala won the first Polkadot auction with over 32.5 million DOT in votes, worth roughly $1.28 billion at the time, from 24,934 contributors. The second parachain auction winner was Moonbeam, an Ethereum-compatible smart contract platform, with over 35 million DOT, worth $1.4 billion. Slot auctions are a battle between giants, with huge communities backing each winner.
At the same time, there is no vetting on the part of the founders. The creators of Kusama and Polkadot, Parity Technologies, maintain their blockchain networks completely open source and vowed to never influence the processes taking place within them. They don't look at what projects are being put up for public auction. Unlike launchpads, they don't check the validity of the promises given by the developers.
Therefore, for parachains, it’s as if we are living in 2017, the time of ICOs. Everyone wants to become the new Ethereum or Bitcoin. The rewards are often not proportionate to the scale of the project, users who vote with their DOT tokens are promised mountains of gold. Sometimes this is downright unrealistic. To raise $200 million in the DOT auction, they will promise $400 million. Such promises simply cannot be kept, or the product will be dead on arrival. Fortunately, there are few projects who engage in such behavior, and the community so far is doing a good job vetting them, but in the future this could become a potential pitfall for new investors.
Any project can become a parachain, even the smallest and most meaningless, if they get people to vote for them with their KSM or DOT. The likelihood that they will collapse without fulfilling all of their promises is not zero. There is no inherent safety net of IDO or IEO launchpad vetting teams. Therefore, parachain auctions are not ideal for casual investors.
In the end you don't lose anything, all DOT/KSM tokens come back. It happens especially fast if the project doesn’t win an auction. But time is wasted and lost. Therefore, a Polkadot or Kusama launchpad would be useful here. It could take over the screening of potential projects and, with its influence, give a chance to small but realistic developments with great potential.
A look at the numbers. Launchpad sales compared to the Polka auctions
1. How much can you earn on IDOs
This is a pretty simple question to answer. Approximate numbers can be viewed on Cryptorank. These are the most active IDO launchpads. We can see in the fourth column what ROI they now give on average and what was their best ever ROI (ATH ROI).
Summing up the ROI and dividing by 69 (the number of active launchpads, nice), we get an average ROI of 1.216x. That is, the profit is 21.6%. Consider that I'm writing this in the market's downturn, right after the massive failure of Luna that negatively impacted all crypto markets. At the same time, IDO launchpads on average remain profitable for investors. The best launchpads have much higher ROI: up to 2.7x, 3.5x. If you could predict all the market trends and hit the peaks, ATH ROI for some launched projects is more than 150x. But, of course, for such a considerable increase in your capital, you need a lot of luck.
2. How much can you earn on parachain auctions
This is a much more difficult question. A simple calculation of ROI depending on the increase in price of the project's tokens does not work, because each of the auction winners distributes their tokens differently. They have various unlock rules and sometimes offer additional bonus rewards.
The safest way is to check this parachain auctions page, maintained for free by the community. It shows how many tokens the projects offered as a reward, and how much these tokens are worth now. All of the rewards there are listed in dollars, but we are not interested in that. What is more important to us is the percentage of return they could give on our 1 invested DOT or KSM - that is how we calculate ROI.
So, if you do the math, out of the five submitted projects that won Polkadot auctions, the average reward is 36%, compared to the DOT price. Moreover, this percentage does not change with market fluctuations.
This is about one and a half times more than what you could get by investing through IDO launchpads.
In addition, new projects seek to attract votes by any means. They offer additional incentives . You can get early investor bonuses, referral bonuses, various NFTs, even bonuses if the project fails at the auction. Therefore, the real profit here may be higher.
Kusama projects are similar. Excluding Moonriver, which offers an insane 548% ROI, and has many people concerned for its stability, we calculated the average ROI of the rest of the projects to be 35.2%.
3. The hidden factor to consider
The above is ideal for investors, but there is another important factor here. That is the issue of turnover rate.
From investing in IDO to receiving the first profit, it takes an average of 2-6 months — the project implementation period. At the same time, the parachain auction on Polkadot always lasts exactly one week. That is, in theory, you could buy DOT, vote with it, and receive tokens of the project you are interested in within a week.
You will receive only a part of the tokens (usually 20-30%). The rest will be distributed over two years, while the project continues to operate on the DOT/KSM network. You will receive a full profit only after two years, when you will be given the last tokens of the project, and your DOTs will be released so you can sell them (or use them for bidding in a new auction).
With IDO, this vesting period (also called token lockup period) also exists, but usually lasts only a year. Sometimes you can even receive all of your tokens immediately after the launch of the project. Meanwhile, the tokens of parachains are usually minted as long as they are connected to DOT/KSM networks. Therefore, you will receive a full profit after two years.
During this time, you could withdraw your returns from successful IDOs and invest in a new launchpad project up to 2-3 times. This is essentially compound interest. Assuming you would get an average ROI of 21.6% every time, your gains after two years would be 47.8-79.8%. Which is undoubtedly higher than the profitability of parachain auctions.
So, due to fast investment turnover, an investor in IDO launchpads will on average receive significantly more than an investor in parachain auctions, at least in a few years time. But, of course, they can get burned on one of the launching projects, while the parachain investor is guaranteed to keep all their DOT or KSM. Which, as history shows, can themselves rise in price.
The main difference
In a word — scale.
You can't invest tens of millions of dollars in an IDO launch. They are simply not needed for projects of that scale. IDO launches collect $100k to $5 million each, while parachains collect hundreds of millions. DOT and KSM worlds are full of crypto billionaires, some of them being the first adopters of Bitcoin and Ethereum. Because among them there is a belief that parachains will be the third era of crypto, fully interconnected.
There is some very serious money involved here. It's all for the long run. You must be able to wait two years, for which the project you have invested in will be connected to the network. Instead of the several months it takes to launch with IDO.
The profit in the end is also different and is more moderate. There is no 150x with parachains, but in turn there also cannot be direct losses.
In general, parachain auctions are currently targeted more towards institutional investors. For people with plenty of money and time. So far, small investors with a few thousand dollars are not very comfortable in this environment. It is better to invest in 5-10 different IDO projects than to wait for one big auction, in which you may not even choose correctly.
This could all change next year. There are already projects in development that will combine these two areas of crypto investments. There will be a Launchpad for Polkadot projects. It will provide vetting and will offer help to smaller projects (dApps working on parachains) and investors. The ecosystem could become much richer, there will be more releases, and it will be possible to get compound profit from project launches.
Potential future for parachains
So far, Polkadot and Kusama networks have a big flaw, which doesn't allow small and medium projects to flourish. These systems provide products with only one single tool to attract users: the parachain auction. This is the only way new blockchain projects can attract interest and make themselves visible. The developers deliberately withdrew themselves from anything else. Therefore, projects have to promise more goodies to their investors than everybody else. This is their only way to stand out and get a slot. This is not very efficient or desirable for the ecosystem. Good, safe and sustainable products are being overshadowed by projects with the largest promises.
Therefore, a Polkadot launchpad, tailored for the DOT system, will be very relevant here. It could give projects the opportunity to gain an audience other than huge auctions once every three months. It would allow users to find those products that are real, that give sensible rewards and most likely won't go to zero. The existence of such a launchpad will be relevant especially for small and medium projects and decentralized apps that cannot (and do not want to) raise billions.
It turns out that you can take the best of both systems. On one hand, get security, vetting, and promotion from the launchpad side, and on the other hand, get a massive, successful, and interconnected Polkadot ecosystem.
Without any type of launchpad existing for Kusama and Polkadot, you need to consider all the projects on your own. Which can be difficult for a private user. Even if you calculated everything correctly and voted for the most realistic and sensible product, it is not guaranteed that the community will agree with you. A parachain auction may be won by another project, and the slot will be given to it. As a result, your DOT/KSM will remain uninvested.
Therefore, without a launchpad for the Polkadot network, despite the formal absence of risks, it does not work at full capacity and does not bring such cumulative profits in the same way as crypto launchpads. The short-term casual investor is better off trying their luck with an IDO or IEO at least for now.
