What is Initial Stake Pool Offering (ISPO)?

In recent years, crypto fundraising methods have seen a significant transition, introducing more convenient and accessible mechanisms for both developers and investors. The Initial Stake Pool Offering (ISPO) is a promising new fundraising strategy that offers more benefits than existing methods such as IDOs, ICOs, and others.

Though note that ISPO is exclusive to the Cardano ecosystem. It enables project developers to create staking pools in which holders of ADA can stake their tokens. Developers can define varying margins for each staking pool, collect rewards, and pay stakeholders with their project's utility tokens. The higher the stake in a pool is, the more likely it is to be chosen as a validator node for the following block.

Though ISPO has one major difference from other similar models, which require investors to buy, sell, or trade one token in order to purchase and stake project-specific tokens. The difference is that with the ISPO model users can utilize the ADA tokens they already own. Besides, users stake ADA tokens in the staking pool of the project in order to earn the project’s native tokens as a reward, instead of staking these tokens in the Proof-of-Stake (PoS) ecosystem of Cardano.

An ISPO is more secure for investors than other funding choices. It's less risky because users are just giving up their ADA rewards in exchange for project-specific rewards. Though the staked ADA is theirs, and it remains in their non-custodial wallets.

In addition, in an ISPO, there is no lock-in period. Users not only have complete control over their assets, but they also have the freedom to use their ADA any way they want. This includes selling, trading, unstaking, using ADA to buy NFTs, and everything else you can do with these tokens.

How Does an ISPO Work?

Generally, PoS consensus mechanism is used in the stake pools of Cardano. Therefore, transactions and the production of new blocks are verified by network validators. These validators are stake pools or nodes that provide delegators (users) with the ability to stake their funds.

The networks, with the assistance of the Ouroboros protocol, choose staking pools that have the biggest amount of stakes to distribute rewards to validators. Validator rewards in the form of ADA are shared among the delegators of the successful staking pool based on the amount of ADA staked by each user after each epoch (which lasts five days in Cardano).

With the ISPO model, delegators stake their ADA in staking pools created by project developers. The staking pool with the largest stakes becomes a validator node in a block, eventually contributing to the Cardano network's consensus.

Though users who stake their ADA tokens in these pools do not receive ADA rewards. They are compensated in the project's native token instead of ADA. The rewards, which would normally be distributed among the delegators, are delivered to the operator of the validator node.