By far the most popular way to date to fund new blockchain projects has been the initial coin offering (ICO). It’s so popular that in 2017 nearly $4 billion was raised through ICOs, but so far in the first half of 2018 (through June 30, 2018) over $12 billion has been raised through ICOs. The problem with the ICO process is that it is fraught with hackers, frauds and mediocre projects.
A new model for ICOs has been proposed this past January by Vitalik Buterin, the founder of the Ethereum network and blockchain, and this model is being called the DAICO. It has been suggested as an improvement over the ICO model that keeps investor funds in the control of the investors.
What is a DAICO?
A DAICO is the new fundraising method for blockchains that was proposed by Vitalik Buterin and is meant to incorporate an ICO with the best features of the Decentralized Autonomous Organization (DAO). The intent is to create a structure that will give a higher level of effectiveness, safety and success to the token sale fundraising model.
The DAO was created as a way to provide an organizational model for blockchain based business that have global reach. The DAO has its rules built into smart contracts on the blockchain, making it decentralized and not vulnerable to human manipulation. One of the great benefits of the DAO is that it gives investors a greater degree of control over any business they invest in due to the built-in voting mechanism.
ICOs directly contrast with the DAO model because once investors decide to put their capital into an ICO they no longer have any control over that capital. This makes ICO investing highly speculative and risky. The DAICO seeks to balance out the shortcomings of the ICO by putting some power back in the hands of investors.
In the DAICO model investors retain control over the invested funds even after the fundraising has ended. Through a voting mechanism the investors can influence how much of the funds developers have access to and at what frequency. And if the project is failing the investors can even vote to end the project funding completely and have the investor funds returned.
How Does a DAICO Work?
As you can read in this link to the explanation of the DAICO as proposed by Vitalik Buterin in January 2018, the DAICO begins as a smart contract that provides the foundation for all fundraising, fund distribution and all other relevant rules are defined.
To create the DAICO a development teams starts by publishing a smart contract on the Ethereum network. The initial programming of the smart contract will allow investors to contribute funds to the project in exchange for the projects native tokens.
“The DAICO contract starts off in “contribution mode”, specifying a mechanism by which anyone can contribute ETH to the contract, and get tokens in exchange,” Buterin explained.
Similar to the way that ICOs are already structured, the contribution mode in the smart contract can be programmed to include any features such as a soft cap and hard cap limits, or time lock limits. Buterin clarified as follows, “This could be a capped sale, an uncapped sale, a Dutch auction, an interactive coin offering, a KYC’d (Know Your Customer) sale with dynamic per-person caps, or whatever other mechanism the team chooses.” Finally, if the token sale is successful it will be possible to list the tokens on established exchanges to buy and sell them in the aftermarkets.
Once the DAICO is finished the smart contract enables another new feature that is called a “Tap”. This is a tool that allows the investors in the project to control how much of the raised capital the developers can access. The DAICO can be programmed so that the tap enforces how much ETH per second the developers are capable of withdrawing from the DAICO. The initial value of the tap is zero, but investors are able to vote and increase the tap amount to whatever they feel comfortable with.
The investors are also able to raise the tap amounts over time, and the smart contract can also be programmed to limit how often the tap amount can be changed. Besides raising tap amounts, investors can take advantage of the voting mechanism of the DAICO to completely dissolve the funding and return it to investors if they are dissatisfied with the project progress or direction. In the original Buterin paper this is referred to as the self-destruct mode.
Buterin adds: “The intention is that the voters start off by giving the development team a reasonable and not-too-high monthly budget, and raise it over time as the team demonstrates its ability to competently execute with its existing budget. If the voters are very unhappy with the development team’s progress, they can always vote to shut the DAICO down entirely and get their money back.”
It should also be noted that the development team doesn’t have to use all the allocated funds, and can lower the tap if they wish, but they are prohibited from ever raising the tap amount with the vote of the investors in the project. In addition, investors are not able to vote to lower the tap amount and must accept any prior decisions made regarding the tap amount. This was put in place to keep investors cautious about raising the tap amount too much.
What Makes the DAICO Superior
The first feature that makes a DAICO superior is that it provides investors with a greater degree of security. We all know how the cryptocurrency markets are still very much a “wild west” when it comes to investing, due to the lack of regulations and oversight. This can leave investors open to significant risk of total loss of their investments, with no recourse. Just like the Giza ICO from March 2018 that attracted more than 1,000 investors before being revealed as a scam after the ICO raised more than $2 million by using a fake LinkedIn profile and copied pictures from another user’s Instagram to create a false persona. Whoever created the ICO later went on their merry way with all the money. Obviously a mechanism that limits developer access to funds is a good thing for investors.
Giving control of project funds back to investors will be a great improvement in security for the ICO space, and could soon lead to much larger token sales as investors become more willing to contribute to projects where they retain control over the funds. This will also deter the type of criminals who pulled off the Giza scam, since they would no longer be able to have full access to the funds raised in a token sale.
Giving investors the ability to dissolve the funding if they decide that progress is insufficient will incentivize developers to continue working at a pace that meets project milestones. Otherwise they will lose their funding and the ability to continue with the project. This feature is completely absent from today’s ICOs.
Because the DAICO uses a voting mechanism it is theoretically possible for an individual or group to take control of a DAICO using a 51% attack. This can be protected from in several ways however. If an attack were uses to increase the tap amount the developers could lower the tap value to decrease any chance of abuse. And while the attacker could destroy the DAICO and return the funds to investors, it would be easy enough for the developers to create a new DAICO. Buterin explains how a DAICO is able to prevent the most common fraudulent vectors witnessed in ICOs today stating: “Notice how two of the potentially most harmful kind of 51% attack: (i) sending funds to some other third party chosen by the attacker, and (ii) lowering the tap to keep funds stuck in the contract forever are both simply disallowed by the mechanism.”
The Future of DAICOs
The use of DAICOs is not widespread yet, but there is one project I’m aware of that has successfully launched a DAICO and has been using the mechanism for several months with good effect. That project is The Abyss Platform. In addition to the successful DAICO, the project has already held two tap votes, raising the tap once and leaving it unchanged once. It’s too early to see if this model will continue to work, but so far it seems to be doing a very good job for the Abyss developers and investors.
With only one actual use case it’s far too early to tell if the DAICO model will eventually become the standard for token sales. I do believe it is significantly better than the current ICO model, removing some chances of fraud, and giving control and security back to investors. Some developers might not like giving control back to investors, which would keep the adoption of DAICOs lower, but I could see the projects using DAICOs as raising far larger amounts due to the increased investor security.
Adopting the DAICO model as a standard for token sales could help ensure that only the worthy projects are able to successfully raise funding, and this would be a benefit to innovation for blockchain projects.