What is a DAICO? - A Beginner's Guide
Initial coin offerings (ICOs) have emerged as a highly popular new way to fund blockchain startup projects. However, as we have witnessed in the past twelve months, the ICO market is ripe with fraud, mediocre projects, and hacks.
To improve the current model of the ICO, Vitalik Buterin, founder of the Ethereum platform, has suggested a new fundraising model that improves on the concept of the ICO, called DAICO.
What is a DAICO?
A DAICO is a new fundraising method that seeks to incorporate the best features of a DAO with those of an ICO in order to create a structure that provides a higher level of effectiveness to the token sale fundraising model.
DAO is an acronym for Decentralized Autonomous Organisation. It was created as a way through which a new business model would be introduced to the global market. A business built in this way has its rules encoded into a smart contract. In this way, the business is governed in a decentralized manner. In addition, this model provides investors with a higher level of control as they are able to control the actions of the project through a voting mechanism.
In contrast, when an investor decides to put money into an ICO, they usually do not have any control over how the money is used or the direction the project will take. As a result, investing in ICOs is a highly speculative action with a large amount of risk. The combination of DAOs and ICOs seek to balance out these shortcomings.
A DAICO is a model whereby investors have control over the funds collected once the fundraising is over. The investors could influence how developers have access to the funds and at what frequency. In addition, investors can also vote to do away with the project and have the investor funds returned.
How Does a DAICO Work?
As defined by Ethereum co-founder Vitalik Buterin in his January 2018 introduction of the concept, he explained that a DAICO would start off with a smart contract as the foundation upon which the fundraising, and all relevant rules, would be built upon.
In order to create a DAICO, the development team of a project would need to publish a smart contract on the Ethereum network. Initially, the smart contract would be programmed to allow people to contribute funds in exchange for tokens native to the project. “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.
As is the case with ICOs currently, the contribution mode can be programmed to include any specifications such as a fund raising limit after which investors funds would be rejected or a time lock feature. “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.” The final similarity to the structure of regular ICOs is that it will be possible to trade the tokens on listed exchanges once the fundraising period is closed.
Once the DAICO closes, the smart contract introduces a new concept called a tap. The tap is a tool through which investors are able to control the amount of money that developers can access. When programmed, the tap states and enforces how much ETH per second the developers can withdraw from the DAICO. The tap is initially set to zero. However, contributors can vote to increase to whatever amounts they are comfortable with.
In addition to raising the tap amounts, investors are also able to use the voting mechanism to dissolve the DAICO contract if they are dissatisfied with the progress of the project. Buterin refers to this as the self-destruct mode where contributors are able to get their money back.
He 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 is important to note that developers are able to lower the tap but are unable to raise it without the input of their investors. Moreover, the investors cannot lower the tap through a vote and must abide by any prior decisions with regard to the tap amount.
How is a DAICO Better Than an ICO?
To begin with, the DAICO model provides investors with a higher level of security. The cryptomarket is still the “wild wild west” due to its lack of regulations, which leaves investors open to the risk of heavy financial losses. As is evidenced by the latest ICO scam that just made off with over 2 million of investors money, there is definitely a need for a mechanism that regulates how developers can access funds raised.
Due to the fact that investors will be able to control how project developers interact with the funds, this will improve the current state of the ICO space. Moreover, this will act as a deterrent to cyber-criminals looking to take advantage of the lack of regulations within the ICO market in order to steal from their unsuspecting investors.
Furthermore, the investors have the power to dissolve the DAICO, only within the initial phases of the project if they are not happy with the progress. This creates a scenario where the project developers need to continually hit the targets in order to stay operational. This is a feature that is not available in the ICOs of today.
Due to the use of the voting mechanism, it is theoretically possible to take control of a DAICO using a 51% attack. However, this can be mitigated in a number of ways. If an attack raises the tap amount, the developer can lower the value to reduce chances of misuse. Moreover, the investors can help prevent misuse through the tap but if they become satisfied with the state of things, they are able to vote to destroy the contract.
Lastly, if a 51% attack leads to the destruction of a DAICO, developers are able to create another one easily. 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.”
It remains to be seen whether DAICOs will become the standard in the digital fundraising sector. If they do, they will theoretically be able to introduce a level of accountability that is currently not available within the ICO sector. Moreover, this will help to ensure that only worthy projects will be able to successfully raise funding using this model, which will help innovation in the blockchain sector as well as flush out scams and mediocre projects.