ISPO 101: A beginner’s guide on initial stake pool offerings
An initial stake pool offering (ISPO) is one of many ways for a crypto project to raise funds. It is a relatively new approach to crypto fundraising and was first introduced on the Cardano blockchain.
Being a proof-of-stake (PoS) blockchain, Cardano permits investors to stake cryptos in support of the network's decentralization and receive rewards in return. In this case, an investor can easily delegate their ADA (the native token of the Cardano blockchain) to their preferred pool operator, even when they lack the resources or the time to run their own stake pools.
The crypto industry has been continually developing since the launch of Bitcoin (BTC), and innovators are constantly looking for ways to better the experience for investors, attract more winnings to the developers and help their communities. Technology is at the center of these innovations, with funding being the biggest concern for innovators and enthusiasts.
This facet of cryptocurrency investing has seen significant changes over time and has gone through different paths. The ISPO is the result of many different fundraising models that have come before it. In the next section, we cover the primary funding methods that led to the ISPO, which developers, communities and investors still enjoy using to this day.
Types of crypto funding
Cryptocurrency funding has undergone constant development with innovators creating novel, more convenient and easier ways to improve the experience for every stakeholder. Since then, some of the funding systems that have already been in use include the following:
Initial DEX offering (IDO): The IDO method works by offering tokens in exchange for liquid cash, and provides an excellent way to get direct funds from investors. IDOs are common in various projects including sports fan tokens.
Security token offering (STO): The STO funding model entails listing tokenized digital securities for sale on security token exchanges. The model borrows somewhat from the two systems, making it a fine cross between the traditional initial public offerings (IPOs) and crypto initial coin offerings (ICOs).
Initial exchange offering (IEO): The IEO is a crypto funding model that offers investors with registered accounts coins on an exchange market.
Initial coin offering (ICO): As the original crypto funding model, the ICO enables new projects to reach investors through white papers. The investor benefits when the project's coins increase in value over time and reach more individuals.
One massive disadvantage shared by all these methods listed above has been the fact that they all require custodying an investor’s capital. Thus, the latest iteration in crypto funding, the ISPO, presents clear advantages since investors can participate while keeping their funds secured in their own wallets.
What is an initial stake pool offering?
The initial stake pool offering is a new model of project development fundraising that takes place via a Cardano staking pool. In the ISPO model, developers set a variable margin, collect the rewards and pay their delegators with their utility tokens.
Users might be wondering how a staking pool works. In essence, project teams start staking pools in which ADA holders stake their tokens. Afterward, the project team pays the ADA delegators through tokens from the project. At the same time, the pool operators take all or a percentage of the ADA rewards to fund their projects.
The SundaeSwap team designed the ISPO model in April 2021. However, they did not use the novel method, since the team consecutively postponed the launch of their staking pool twice. On July 1, 2021, MELD, the first decentralized finance (DeFi) non-custodial banking protocol of its kind, took advantage of the new design and set a course to use the model to source funds for their project campaign, launched on December 8, 2021.
MinSwap recently developed an updated version of this model, calling it the fair stake pool offering (FISO). The MinSwap model uses algorithms to dispense tokens among the delegators in a fair manner.
The FISO fundraising method has become commonplace across different blockchain ecosystems due to its advantages for project teams, delegators and communities. Currently, seven DeFi projects on the Cardano blockchain are using the ISPO model to dispense their tokens to different ADA delegators.
Is an ISPO different from an ICO?
The ICO rose to fame in 2017 and reached new heights in 2018 when the industry ranked it against venture capital funding. Unlike in an ICO, where investors spend their stake on the project's tokens, ISPO investors maintain control over their funds, even after delegating.
In other words, ICO investors are required to spend their funds, usually in BTC or Ether (ETH), to purchase tokens from the project developers. On the other hand, ISPO counterparts receive tokens by investing their stake on the project's supported blockchain.
As a result, ISPO investors maintain control over their funds and can opt out of the staking pool or redelegate their stake at their convenience.
How does a staking pool work?
Staking pools use the Proof-of-Stake mechanism. To secure the network, they depend on network validators rather than the computational power invested into the network to verify transactions and produce new blocks.
Validators — operators of the staking pools where investors stake their funds — determine how each block ends and which pool wins after each epoch. On Cardano, an epoch is defined as a reward period of five days.
According to the Ouroboros protocol, the higher the number of stakes in a pool, the greater their chances of leading in any block. When a new block begins, the protocol grants the validator rewards that are divided among the stakes in the pool, depending on the amount staked by each delegator.
A pool with higher stakes has a greater chance of becoming the validator node in a block and part of the network’s consensus. Thus, when a validator receives an ADA reward, it’s divided among the pool delegators.
What’s the role of ADA in staking pools?
ADA on the Cardano network acts as stakes with each stake size directly proportional to the amount of ADA stored in a user’s wallet. An investor's ability to delegate their stake to a pool depends on the native functioning of the Cardano blockchain.
Public or private stake pools are available. A public stake pool is a node on the Cardano network with a public address to which other users can delegate and earn rewards. The only people who benefit from private stake pools are the people who own them.
The Cardano protocol decides who adds the following block to the blockchain and receives a monetary reward depending on the stake that investors delegate to a given pool.
While the staking amount is capped at a certain amount, a pool with the highest stakes is likely to generate the subsequent block, and the rewards a pool attracts are distributed between the stake pool operator and its delegators.
Examples of ISPOs
ISPOs are growing rapidly in popularity and becoming investors’ preferred crypto funding model due to its many benefits like rewarding both the network and the project developers while still keeping investor funds safe and unlocked.
MinSwap, for example, is a decentralized exchange (DEX) on the Cardano blockchain that focuses on offering users a minimal fee for swapping cryptocurrencies.
MinSwap uses the Babel fee mechanism to guarantee that every investor executes every trade successfully, regardless of their funds. Furthermore, Minswap allows every user to fund the transaction fee using the token they own, thus not necessarily requiring ADA to pay the fee.
In their ISPO project, which lasted 20 epochs, MinSwap offered its native token MIN, using the FISO model which featured 10 staking pools.
Other PoS blockchains that have adopted the model include the following:
Tron: TRON (TRX) investors can stake their TRX to receive token airdrops
Polkadot: Polkadot allows investors to stake the native token DOT or Kusama (KSM) and receive native tokens from the projects.
Terra: Investors can stake Luna and receive Anchor Protocol’sl ANC, Mirror Protocol’s MIR and other tokens.
Solana: Saber and Sunny Aggregator users can stake Solana’s SOL to receive the native tokens SBR or SUNNY, respectively.
Cardano: Mala DEX, Ray Network, MELD, MinSwap, MIRQUR and SundaeSwap are all using the FISO model.
What is MELD ISPO?
The MELD ISPO is an open-source non-custodial liquidity protocol that allows users to borrow currency in euro or U.S. dollars while using crypto in their wallets to earn rewards for their deposits.
The MELD platform has secured its place in history as the first-ever decentralized protocol to issue fiat loans. MELD allows users to transact between crypto and fiat currencies while maintaining the security of their digital assets.
To participate in the MELD ISPO, investors need to delegate their ADA to the MELD staking pool, and 100% of the ADA rewards go toward supporting the MELD project. The investors, on the other hand, receive MELD tokens during the launch.
What is the MELD staking pool?
The MELD staking pool is a new and distinctive community-oriented fundraising pool that aims to prioritize the safety of all the parties involved.
Here is how to participate in the MELD ISPO: Investors need to delegate their ADA in Daedalus or Yoroi to the MELD staking pool. Delegators receive MELD tokens depending on the ADA staking period and the number of rewards from staking.
How to participate in an ISPO?
Investors can start and run a staking pool and invite delegators to stake or delegate their ADA in a staking pool run by another party. Staking pools earn ADA through ADA rewards. When starting the staking pool, the developer sets a percentage to fund their project (typically 100%).
Thus, 100% (or another percentage set by developers) of all the ADA rewards are generated from the stakes funding the project. On the other side, the investors delegating their ADA to the pool earn tokens airdropped to their wallets after every epoch.
Suppose the staking pool settles on a percentage lower than 100%. In such a case, the Ouroboros protocol issues the rewards to investors, and those who staked using ADA receive only ADA as compensation.
Delegating in the MELD ISPO
Participating in the MELD ISPO introduces a novel experience for the cryptocurrency ecosystem.
The MELD ISPO delegation protocol is revolutionary. The best part about staking via the MELD ISPO is that all the participants are guaranteed that their staked ADA has been secured since they maintain complete control of the entire process but still receive the much-coveted MELD tokens.
Can you leave the ISPO early?
ISPO users have the freedom to unstake their ADA at any time during the period. It’s worth remembering that investors retain complete control over their ADA. The MELD staking pools calculate the token rewards after every epoch. However, investors are free to unstake or redelegate their ADA at any time.
The difference between MELD (100% MELD) and MELD (50% MELD 50% ADA)
The MELD ISPO staking pools operate in two ways: MELD (100% MELD) and MELD (50% MELD 50% ADA). The choice of the pool to stake with depends entirely on the investor. However, the rewards rely on the pool they delegate their ADA to.
In the 100% MELD protocol, the ISPO grants 100% of the rewards in MELD, while in the other split arrangement, the ISPO offers 50% of rewards in ADA and 50% in MELD. The quantity of rewards received by an investor depends on the amount of ADA staked in each block. The table below summarizes the MELD protocol.
Are ISPOs the future of crypto funding?
ISPOs have been growing in popularity over the past few months and the trend is most likely to continue due to the various benefits. For instance, the system doesn’t discriminate against investors based on the size of their wallets. Instead, every investor receives rewards and tokens depending on the size of their stake.
As a result, the ISPO model welcomes everyone willing to invest, making it the go-to model for the masses. Moreover, the ISPO funding model allows investors maximum control over their ADA, secures their stake and gives them the freedom to opt out at will.
Again, more crypto projects are choosing the ISPO model as their preferred fundraising approach, ensuring that the method will continue to gain traction in the future.