Crypto fundraising strategies
A different way to raise money for your business: ISPOs
Learn all there is to know about this method for fundraising
ISPO stands for initial stake pool offering. This is a unique way entrepreneurs and crypto builders are using to raise funds for kickstarting their project.
In this article, you will learn everything about ISPOs, how they work, and how you can take advantage of them. Let’s get started.
The basics of staking
In proof-of-stake chains such as Cardano, security is enforced by multiple nodes in a network locking their coins in order to validate the next block and earning a reward in return. The more coins they lock, the more chances to be picked by the algorithm as a validator.
However, if a whale decides to stake, the process becomes less democratic, as regular users have fewer and fewer chances to be selected as validators.
For example, imagine that 9 people stake 500,000 coins each. The total amount of coins staked on the network would be 4.5M, and all 9 stakers would have an 11.1% chance of being selected as the next block validator by the algorithm.
Now, suppose that a 10th staker comes in, staking 4.5M coins himself. The total amount staked would be 9M, and the first 9 stakers would now only have 5.5% chance of being chosen. This happens because their share of the total staked coins has relatively decreased. On the other hand, the whale alone would have 50% of being chosen as the next validator.
This would not only exclude many users from participating in the staking process. It would also be insecure for the network, as one person controlling over 50% of the coins could take control of the chain.
What are stake pools
Stake pools come to solve both problems at once. They are groups of stakers that “pool” — hence the name — their coins together, staking as if they were one single node. The people who lock their coins in a pool are called “delegators.”
This allows them to increase their total staked coins and thus, their chances of validating the next block. As for the rewards, they are shared among all the members of the pool proportionally to their contribution.
Following the example above, the first 9 users could delegate their 500,000 coins to a pool, reaching 4.5M in total and match the whale’s stake. Now, the whale and the staking pool would both have a 50% chance of being chosen by the algorithm.
Initial stake pool offerings
Now that we know what stake pools are and how they work, let’s dive into the matter at hand: ISPOs.
Initial stake pool offerings consist of raising funds for a project through staking rewards. Essentially, a crypto project would run its own staking pool and invite delegators to stake their coins in it.
When starting the staking pool, the developer sets a percentage to fund their project. As a result, that percentage — set by developers — of all the rewards generated from the stakes are allocated to funding the project. On the other hand, delegators get rewarded by token airdrops or special benefits.
Say you want to raise $100,000 to build your crypto project. With the ISPO model, you could create a stake pool and set a 50% funding percentage. Then, half of all the rewards your pool generates will go to your project’s treasury, and the other half would be distributed among delegators like a regular pool. In addition, you could give your delegators an airdrop of your project’s token, or early access to a beta version, for example.
Advantages of ISPOs
Initial stake pool offerings have greater advantages compared to other fundraising methods, especially on the investor side.
The principal feature of this method in particular is saving your principal. Other methods, like ICOs or IDOs, involve straight out buying the project’s token. This involves great risk and can discourage many investors from participating.
ISPOs, on the other hand, require only to lock your coins in a pool and earn from it. You’re not trading or exchanging your initial capital for tokens. In the end, when the ISPO ends, you get both your principal and the tokens airdropped to you. Zero trading risks.
Another advantage is flexibility. Should you choose so, you can withdraw your coins from the pool at any time.
Transparency is also a great feature of ISPOs. Where ICOs are centralized and IDOs are shady — you never know who’s providing the liquidity, all stake pool data is recorded on-chain and available for everyone to see. This includes total stake pool balance, total rewards distributed, total number of delegators, and so on.
On the developer side, ISPOs drive long-term investors, as rewards and airdrops are gradually distributed over longer periods. Supporting them with proper communications channels, project builders can turn delegators into a loyal, engaged community.
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