The 2023 Guide to Initial Stake Pool Offerings
crypto basics
Cryptocurrency and blockchain-based projects have experienced a boom of late, with technological breakthroughs always right around the corner in a rapidly expanding field.
However, such research and innovation take work, time, and resources, all of which require funds. Initial stake pool offerings are the most recent, but crypto fundraisers have a rich history.
Different blockchain projects take and have taken different fundraising routes, but the constant is that fundraising itself is a basic operational requirement. Several very successful projects have been bootstrapped, but scaling projects tends to require a significant war chest these days.
Thanks in part to good funding, blockchain has attracted some of the best and brightest minds away from Web2 firms hell-bent on achieving monopoly status and into a domain focusing on global development, empowerment, and true ownership of assets and data.
Types of Crypto Funding
Many blockchain-based projects developing technology or services choose to operate as startups, following a somewhat more traditional path regarding organizational structure. For example, some choose to set up as a DAO (decentralized autonomous organization) or market part of their product as a DAO, but the majority tend to set up a firm in the background.
These firms have employees and require resources to operate, and the developers putting together a working dApp or building out the next evolution of consensus still need to pay the bills. Many blockchain firms choose the venture capital route, selling either equity in the firm or a share of their token distribution to VCs. That provides them with the capital to get the ball rolling.
Some firms choose to eschew the VC route entirely and fundraise in a more decentralized, public manner. For obvious reasons, the VC-backed projects also go to the public eventually. Several different public fundraising methods have been used to date, such as:
- Initial Coin Offering (ICO)
- Initial Exchange Offering (IEO)
- Initial DEX Offering (IDO)
- Security Token Offering (STO)
- Token Generation Event (TGE)
#1. Initial Coin Offering (ICO)
This is the original crypto funding model and is meant to sound very similar to the IPO (Initial Public Offering) model used by traditional asset classes. However, this has come around to bite because regulators, including the U.S. Securities and Exchange Commission, have been taking a keen look at whether ICOs over the years were, in fact, offering securities.
#2. Initial Exchange Offering (IEO)
This model is used in partnership with a centralized, regulated cryptocurrency exchange to sell tokens or coins directly to exchange customers. Several exchanges have dedicated services for this, such as the Binance Launchpool and Kraken Launchpad.
#3. Initial DEX Offering (IDO)
Similar to an IEO, the project chooses to sell tokens on a decentralized exchange platform like Uniswap, PancakeSwap, or Sushi instead of a centralized one. This makes it possible to participate anonymously but limits the field to more advanced crypto users.
#4. Security Token Offering (STO)
This is similar to both ICOs and IPOs because it entails the sale of a tokenized digital security on an exchange. STOs are still subject to some uncertainty, given the way they have been handled by some bad actors.
#5. Token Generation Event (TGE)
Similar to most of the other initial offerings, this is the sale of a token that makes up only a small part of the project’s overall product and utility so as not to be classified as a security.
What is Initial Stake Pool Offering (ISPO) in Crypto?
The initial stake pool offering model emerges from one big weakness common to all of the previously mentioned fundraising methods—token custody.
Custody has become a bit of a dirty word in crypto, and for good reason, given the collapse of a number of crypto custodians in 2022. All of the guarantees offered by these same firms seem to have vanished into thin air, and customers always find out far too late that they’re last in line for any reparation. Worse yet, bankruptcy experts cost a pretty penny and are always paid on time.
In most of the traditional crypto fundraising methods, such as ICOs, interested parties have to send their funds out or lock them away. They lose full control of their coins or tokens since they aren’t in their own wallet any longer.
This was the motivation behind the initial stake pool offering model, which was created in April 2021 by the team behind a decentralized finance (DeFi) protocol on the Cardano blockchain called SundaeSwap.
However, the SundaeSwap team wasn’t actually the first to deploy this method in practice. They postponed the launch of their initial stake pool offering twice, and a non-custodial banking protocol called MELD beat them to it in December of that year.
How Does ISPO Work?
An initial stake pool offering starts with a project whose developers are both interested in and willing to employ this model for fundraising. It’s also currently unique to the Cardano ecosystem, so developers must set up staking pools where ADA holders can stake their tokens.
Cardano is a proof-of-stake blockchain secured by the willingness of token holders to lock up their tokens with the protocol. These tokens are delegated to staking pools, which serve as validator nodes on the blockchain. This means that they receive block rewards.
What ISPO truly means, therefore, is that the project looking to fundraise can be backed by ADA holders, and the more backers it has, the more ADA it can earn via its staking pool. This serves as project funding.
The project team will also set margins and pay back stakeholders using the project’s utility token. Stakeholders are giving up a chance to earn ADA from staking, which is the price they have to pay—a lesser price, one imagines, than having to actually buy new tokens in an ICO or TGE.
The genius of the ISPO model lies in the fact that it applies more of an opportunity cost than anything else to token holders and allows the use of tokens that they already hold rather than requiring a fresh investment.
There’s also the fact that there isn’t a lock-in period with an initial stake pool offering, and Cardano itself features the ability to change staking pools rapidly. It also means that holders retain full control of their staked ADA and don’t need to deposit it into third-party custody.
What is Staking Pool & How Does it Work?
To truly understand what ISPO means in and for crypto, it’s important to dig into the staking pools’ mechanics.
Not to be confused with liquidity pools, staking pools or stake pools are set up by node operators on the Cardano blockchain who run hardware, allowing them to perform the role of Validators. These pools are configurable and exist to attract other ADA holders to stake their coins.
It stands to reason that a stake pool with minimal fees and a good track record will attract more ADA stakers. As the pool’s total stake grows, the chance for it to be picked to be a block producer likewise increases. This earns the pool ADA in the form of rewards, which are then distributed back among the stakers every 5-day epoch.
Cardano’s (ADA) role in Staking Pool
Cardano is a proof-of-stake blockchain, whose stake pool-based design for consensus and delegation makes the ISPO model possible. It’s a natural evolution in the design, and the configurability of the staking pools has not just allowed the ISPO model to prosper but also spurred iterations of it.
While other blockchains have successfully implemented the ISPO model and similar systems, it isn’t possible on all chains without much work. Ethereum’s design, for instance, isn’t as suited to ISPOs as Cardano’s.
Benefits of ISPO
ISPOs are growing rapidly in popularity despite being a relatively simple innovation from a technological standpoint. This is because the initial stake pool offering model brings a variety of benefits to crypto fundraising:
- Non-custodial. As mentioned, the ISPO model doesn’t require interested parties to send funds away or lock them up. All tokens used for participation in the ISPO remain in the staker’s wallet and are fully in their control.
- Secures the network. In other fundraising models where funds have to be locked up in escrow or simply transacted, they can’t concurrently be staked. The whole point of ISPO is that the network coins are being staked and therefore are playing a part in network security while participating in the ISPO.
- No new purchases. Participants have to dedicate capital to buying new tokens in most other fundraisers. With an ISPO, they don’t have to since they can just stake network coins they already possess.
Is Initial Coin Offering Different From Initial Stake Pool Offering?
2017 is often regarded as the year of the ICO, even though the first one was held back in 2013 for a project then known as Mastercoin. Ethereum had its own ICO in 2014, but in 2017, the number of ICOs and the amount of money they raised were staggering.
The Brave browser had an ICO using its BAT utility token that raised $35 million in half a minute, and messaging app developer Kik pulled in almost $100. Filecoin blew them both out of the water in January 2018, raising $257 million in total.
ICOs, however, require investors to first raise capital and then spend that capital to purchase new tokens. The capital they spend, often in the form of cryptocurrency, must be sent to project developers or escrow to obtain these new, often speculative tokens.
These ICO characteristics are in stark contrast to initial stake pool offerings, which neither require any new expenditure nor require interested parties to give up control of their funds or send them anywhere for any duration of time.
As such, an initial coin offering is poles apart from an initial stake offering in several important areas.
Types of ISPO
Following the design of the ISPO by SundaeSwap and the successful MELD ISPO, the model has become popular. Several blockchains have adopted the model or variations of it, and an iteration called FISO (Fair Stake Pool Offering) was developed by a protocol called MinSwap.
MinSwap is among multiple other protocols to carry out successful ISPOs on Cardano in MELD’s footsteps. SundaeSwap also used the FISO model, as did Mala DEX, MIRQUR, and Ray Network.
Solana, often viewed as a competitor to Cardano, has also seen successful initial stake pool offerings in the cases of Saber and Sunny Aggregator. On Terra, before its collapse, investors could stake LUNA and receive the ill-fated Anchor Protocol’s ANC tokens.
Certain other blockchains feature similar characteristics too, with TRX holders on TRON able to stake their coins to receive token airdrops. Polkadot and its canary network Kusama also allow native coin holders to stake DOT or KSM but receive project tokens.
What is MELD ISPO?
MELD has already been mentioned, but it has to be recognized for being the first successful implementation of the ISPO model in December 2021.
Using Cardano wallets like Daedalus or Yoroi, participants could delegate their ADA to the MELD staking pool, which received all or some of the ADA generated as block rewards. Stakers received MELD tokens during the project launch, depending on how long they staked to the MELD pool and how much they earned.
The project ran two staking pools. One was called 100% MELD, meaning that stakers took their staking rewards purely in MELD while all ADA generated went to the protocol as funding. The other pool was called “50% MELD 50% ADA” and split the rewards down the middle for more risk-averse participants.
MELD isn’t just the first protocol to conduct an ISPO; it’s also the first decentralized protocol to issue fiat loans. It’s open-source and non-custodial and it lets users borrow EUR or USD while earning rewards on their crypto.
How to Participate in ISPO
The first step toward participating in an ISPO on Cardano is identifying which initial stake pool offerings are ongoing and what the staking pools are called. You’ll also need some ADA coins and a Cardano wallet, such as Daedalus or Yoroi.
Yoroi is a web-based “lite” wallet that might appeal to those familiar with Metamask. Daedalus is a full-node wallet, meaning it is also far more powerful and can do more, but it also needs to store an entire copy of the blockchain on your device and can take a while to sync up.
Once you have some ADA and your own wallet, you can stake your ADA to the project’s stake pool. Like MELD, it’s likely that the project team will set up one or more staking pools with clear distinctions as to how rewards are split, between project tokens and ADA.
Every 5-day epoch, you can expect to earn reward tokens. At the end of the ISPO period, you simply unstake from the pool, which will airdrop your earned tokens to your wallet without needing further action.
The Future of ISPO
The ISPO fundraising model is one of the most compelling to have arisen in the blockchain industry in the past few years. It’s gaining traction, and we’re seeing more and more projects opt for an ISPO because of the benefits that it gives all stakeholders.
It encompasses the permissionless nature of IDOs and the wide reach of ICOs and helps secure the network without requiring anyone to invest large amounts of capital. Its non-custodial nature helps to insulate the initial stake pool offering model from “pump and dumps” as well, with the worst thing that can happen being stakers’ inability to earn any rewards for the time they stake to the ISPO pools.
Given the increased scrutiny over ICOs by regulators, who may be sour that lucrative IPOs are being taken away from the clutches of Wall Street, the ISPO model breaks the mold entirely and looks set for the long haul.
Key Takeaways
Blockchain has been a never-ending source of both disruption and innovation ever since the launch of Bitcoin, shaking up the status quo in areas such as finance, gaming, supply chain, and more. Fundraising has also evolved through crypto, with startups eschewing the traditional IPO model in favor of far more transparent ICOs.
However, the initial stake pool offering model looks very much like the next generation of fundraising, given how it eliminates risk across the board while retaining transparency and remaining equitable. The benefits of ISPO to all involved are clear, and as blockchain technology receives greater adoption, more and more firms could choose to fundraise this way.