Russian-Canadian programmer, Vitalik Buterin, recently outlined a new decentralized fundraising model for the Ethereum network called a DAICO.
His proposal aims to create a more democratic way of controlling an Initial Coin Offering (ICO), the current model for fundraising on the Ethereum network. He accomplishes this by combining the old ICO concept with a Decentralized Autonomous Organization (DAO), an organization that is run by hardcoded rules.
ICOs allow a team of developers to find investors who see a need for their proposed idea and invest in it directly. This allows them to bypass traditional fundraising methods like Initial Public Offerings (IPO) and venture capital.
The bypassing of traditional methods saw a boon in start-up activity and innovation in 2017.
Early investors often saw great gains on their initial investment, which added fuel to what’s been labelled the ‘ICO craze’. To-date there has been over $3 billion raised by ICOs.
Buterin’s new DAICO improves on the existing ICO model and gives investors a new level of control and protection against fraud.
DAICO starts out very similar to an ICO
The DAICO begins in a contribution mode which allows the team to raise funds. Investors can send Ethereum to the DAICO and they will receive tokens in exchange for their investment.
The token sale can have several conditions such as a capped sale, an uncapped sale, an auction, an interactive coin offering or a know-your-customer sale.
Once the contribution period ends, the tokens become tradable. So far, this model is very similar to the existing ICO model. What happens next sets DAICOs apart.
Democratizing the ICO
The difference between a DAICO and an ICO begins after the contribution period when a mechanism, called a ‘tap’, kicks in. Taps allow token holders to control how much funding the team has access to.
The existing ICO model does not have this mechanism and allows a team to use the funds as they please. The state of the tap is set when the DAICO is made by the team. It has two conditions: the number of funds issued from the tap and the issue-frequency of the funds.
If the team needs more funds to hire more developers, for instance, they can request a raise in the tap value. Token holders vote on the outcome and the tap may or may not rise depending on the consensus of the votes. The idea behind this is that the community who invested in the DAICO has control over their investment and will know that their money is being spent wisely.
Token holders can also vote to cancel a DAICO, and get the remainder of their investment back.
The intention of the tap is to give the development team a reasonable budget to complete their goals. If the team meets their goals, the amount of the tap can be raised to allow the team to grow. If the team is being irresponsible or is an outright fraud, the investors can cancel the DAICO and minimize their losses.
Security of a DAICO
Any vote on a decentralized network is subject to malicious attacks. However, DAICOs minimize risks in several ways.
If vote manipulation raises the tap value, the team has the ability to lower it. If malicious actors manipulate the votes somehow to cancel the project, investors get their money back. The team could create a new DAICO and investors could simply resend their original investment back to the team.
2017 saw a huge amount of money raised through ICOs. The momentous year also led to an impressive amount of innovation in the blockchain industry.
2018 might be the year of the DAICO. The added layers of security may bring in investors previously wary of ICOs. Similarly, the stop mechanisms of DAICOs should weed out less-honest fundraisers, clearing the path for higher quality opportunities. All of this means more innovation and exciting times to come for the blockchain industry.