The Mastercoin’s ICO (held in July 2013) marked the beginning of a new approach for blockchain-startups to acquire funding. In 20 17 alone, a whopping $5.6 billion flooded into ICOs (Initial Coin Offerings). As if that wasn’t enough, the amount almost doubled in the first half of 2018 alone ($9.4 billion).
But there’s a big problem: for example, nearly half of all ICOs in 2017, failed to bring their ideas to life. Results like this are clearly not good for the industry’s future because the investor’s interest is key to accelerating the growth and mainstream adoption of cryptocurrencies. This issue prompted Vitalik Buterin ( co-founder of ethereum) to propose a solution, and that is when the idea of a DAICO was born.
What is a DAICO?
DAICO is an acronym for Decentralized Autonomous Initial Coin Offering. It’s a new fundraising model that integrates the features of a DAO (Decentralized Autonomous organization) with those of an ICO. The idea is to provide investors a chance to have a say in a project’s development and reduce their risk of being exploited.
The DAICO model compels developers to be accountable for their actions because investors can vote to get a refund if they’re not satisfied with the execution of the project.
How does a DAICO work?
First, the development team launches a smart contract on the ethereum platform. At this stage, the network is said to be in “contribution mode” and anyone interested in the project is allowed to deposit ether and receive proportionate amounts of the project’s tokens.
It is also at the “contribution mode” phase that specifications are made, like whether the DAICO will be a KYC (Know Your Customer) obligatory sale or a capped/uncapped sale.
When the contribution period is over, the smart contract introduces two features: a “tap” and a “refund”. The “tap” enables investors to influence (by voting) the percentage of funds that developers can withdraw for project execution. Again, the “tap” is initially set to zero but investors can vote to increase it to whatever amount they deem necessary.
The purpose of the “refund” feature, however, is to allow token holders to vote on whether or not they should “self-destruct” the DAICO, which automatically empties out the smart contract of the remaining ether and returns it to investors in proportion to the number of tokens they hold.
According to the DAICO model, investors should start off by providing the development team with small but reasonable amount of funds. As the development team consistently demonstrates their effectiveness in project implementation, the “tap” can then be raised to whatever is considered appropriate.
Also, developers in the DAICO set-up have no chance to raise the “tap” without investors’ input. They can, however, lower it. Investors on their part are not allowed to vote to reduce the “tap” and therefore obliged to put up with previous agreements.
Benefits of the DAICO model over ICOs.
The lack of regulation in the ICO space puts investors in a very challenging and risky position. Not only do they have to sort through so many ICOs to identify legitimate ones, they’re also forced to sacrifice their time to develop risk mitigation strategies.
The DAICO model, however, is more promising in terms of security because it serves as a defense mechanism for investors. The simple fact that investors have control over how the development team gets access to funds will discourage many scam projects from being launched in the first place. Why? Because the fraudsters know that collecting and disappearing with investors money won’t be business as usual.
Moreover, due to the level of accountability that rests on the shoulders of the project’s team, they’re obliged to do everything to quickly bring the project’s idea to life. Whereas, with ICOs, it’s very easy to lose interest in following the project’s roadmap after raising millions of dollars.
Another benefit to investors in the DAICO model is that they can easily vote to get a refund if they believe that the project is headed in the wrong direction.
Challenges with a DAICO.
The rate of project execution in a DAICO can be seriously hampered as a vote is always required to make every budget change. Imagine a situation where the development team needs to deal with an emergency, they have to, first of all, convince token holders before taking action. Whereas, if the team had total authority over funds, they’re free to address issues as they arise.
The DAICO also exposes the project to opportunists who may want to hinder its success by simply investing heavily in the project so that their decisions can impact the project in whatever way they desire.
So are DAICOs better than ICOs?
It’s hard to tell for the moment because the DAICO model hasn’t been tested by a reasonable number of projects. The only project that took up the idea immediately after Vitalik Buterin proposed it was the Abyss. Others are still waiting to see the results before deciding whether or not to adopt it.
In any case, many people consider the idea of democratizing ICOs as a more responsible approach to crowdfunding. Even if it has some weaknesses, we all know that perfection is an illusion and nothing exists as such. Just like any other system, it can be improved with time.