By: Laura Marissa Cullell
Senior Blockchain Consultant
Initial Coin Offerings were the buzzword du jour for 2017. There were everywhere, and changed the landscape on investor fundraising. As quick as they were able to raise millions so quickly, several issues also became rampant. From pump and dumps to ponzi schemes and just plain fraud, ICOs quickly fell out of favour and gained negative stigma. DAICOs seek to remedy the bad rep of ICOs and make them better.
Last week, we discussed the pitfalls of raising millions for an ICO. This week we’re deep diving into DAICOs (pronounced as Dye-Cee-Ohs by BlockX Labs Employees) and attempt to determine if DAICOs are viable or just a transitory method of mitigating ICO problems until something better arrives.
What is a DAICO?
Firstly, DAICOs are a new decentralized autonomous model of fundraising for the Ethereum Network, proposed by Vitalik Buterin himself. DAICOs propose an attempt to decrease fraud which has become rampant in the ICO space, ponzi and pump and dump schemes, while trying to re-establish trust in the crypto markets.
In his post titled Explanation of DAICOs Vitalik Buterin described a new crowdfunding protocol for blockchain-based enterprises that would combine the features of the Decentralized Autonomous Organization (DAO) and the ICO. According to Buterin, this new model vastly improves upon the shortcomings of the ICO model while at the same time not being too complex.
Buterin uses the following diagram to better explain DAICOs, which mere benefits of DAOs in a way that minimizes complexity and risk.
As Vitalik Buterin writes:
“A DAICO contract is published by a single development team that wishes to raise funds for a 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. This could be a capped sale, an uncapped sale, a dutch auction, an interactive coin offering, a KYC’d sale with dynamic per-person caps, or whatever other mechanism the team chooses. Once the contribution period ends, the ability to contribute ETH stops, and the initial token balances are set; from there on the tokens can become tradeable.”
FundYourselfNow’s blog on DAICOs states that the DAICO contract would serve two major roles which are:
- Governing the crowdfunding process
- Controlling the utilization of funds raised during the crowdfunding process.
They believe that this second function that DAICO contract surpasses most ICO smart contracts. They believe that DAICO contracts continue to be operational after the crowdfunding, whereas ICO contracts are only written to govern the crowdfunding process alone. These two main functions of the DAICO contract are based on the two parts of the contract which are as follows:
- Funding Mode — This is the mode where all capital is raised. It can also be seen as the ICO portion of the DAICO. Different kinds of funding can be established based on the needs of the project.
- Tap Mode: This mode is activated upon completion of the funding round. Collectively, everyone who invested can decide how much or how little is released. Invested parties can vote to release the tap or stop it altogether through a voting process. They can also vote to increase or decrease the tap.
According to Chrisjan Pauw of CoinTelegraph:
“There is one variable that comes into effect after the contribution period has ended called the tap variable. This tap in the contract can be programmed to predetermine the amount (per second) that developers can withdraw from the token sale funds. Initially, the limit will be set to zero, but contributors can then vote on a resolution to increase the tap.”
This voting mechanism is key to ensuring that the project is still receiving funds and that some investor interests are protected.
Benefits of DAICOs
DAICOs provide a different spin which essentially mitigates the flaws found commonly in ICOs. To put it simply the main benefits of an DAICO are:
- Fraud is minimized
- Brings trust back into ICOs through improved security measures
- Investors have more power
According to Jesus Rodriguez of Cryptocurrency Hub:
“The DAICO contract implicitly brings some benefits preventing the withdrawal of funds from the company without the blessing of the token holders while also clearly preventing some malicious scenarios that are common in ICOs. Keeping the tap at a reasonable level should guarantee that the funds raised should be used properly. While a malicious actor can try to increase the level of the tap for his benefits, the DAICO models believes that the wisdom of the shareholder community should prevail in the long term keeping the tap at adequate levels”
DAICOs provide a potential solution to the issues that plague current cryptocurrency crowdfunding.
Food for thought I: The Fundraising Phase
Some fundamental questions we have during the fundraising phase:
- What is the proposal for Fundraising?
- How frequently do you have to raise?
- What happens when the funds are depleted? Are there any contingencies established?
- If the money is depleted, is the business successful or nah?
Current world examples would help provide a sense of how frequently fundraising is required. IPOs, for example, lean towards quarterly results, and produce a revenue check and executive summary. At the end of each quarter, drafting a proposal that outlines what will be accomplished in the next quarter is highly recommended. This way, projects can receive enough money to sustain the project upfront, and ongoing reports can ensure that KPIs are constantly being met, keeping the project on track.
Food for thought II: The Voting Phase
Some considerations to reflect upon regarding the Voting phase:
- How long is the voting open for ?
- How do investors get notified of voting?
- What is the minimum amount participation requirements and what happens if these thresholds are not met?
- What kind of user interface will developed to help voters understand the processes?
First and foremost, educated voters are key to creating a successful DAICO. The organizations and developers themselves have the responsibility to keep them engaged and up-to-date on everything related to the project. The actual voting mechanism itself should be simple enough and must requires a friend user interface to make it accessible to voters and contributors. This interface should also inform users of the length of voting periods, and the minimum requirements needed to make informed decisions.
Flaws of DAICOs
1. Too much Investor Power
There are many opposing views on this point. On the one hand, granting more investor power minimise the risk of scam ICOs. On the other, granting too much power to investors may cause issues with project delivery and may restrict innovation based on opposing interests.
2. Numbers and processes
Every DAICO could have different voting or fund releasing methodologies. Investors need to understand each and every process to take full advantage of the DAICO. This may be overwhelming for some investors and may prevent them
3. DAICOs require constant Investor Engagement
The voting system requires a high element of engagement from investors. Mechanisms should be put in place to keep them constantly engaged throughout the project.
4. Hard to plan tapping mechanisms
There can be some difficulties judging how much money is required for a project. That’s why forecasting cost of operation for casting the contingencies is fundamental. Careful and thoughtful projections will prepare you for the unexpected, but also help with investor management.
5. Mass Panic can cause a DAICO to die
False information or the dreaded “fake news” may put a DAICO at risk of being put into killmode. Providing timely updates and ensuring the community is engaged adds credibility and prevents panic from arising.
Although there are many flaws with DAICOs, they are still a viable model and are a welcome alternative to ICOs. To manage these flaws a necessary balancing act is required. DAICOs can succeed if these are monitored closely and everything remains balanced.
So…DAICOs or Nah?
DAICOs all the way! Proper mechanisms are required to manage the power accordingly. Voting mechanisms and investor management have to be fine tuned and properly controlled. Any imbalances in power will ase Since there are limited protections against fraud, DAICOs are one way of mitigating damages to investors, and ensuring that projects come into fruition.
Do you have any alternatives to DAICOs that improve the current ICO problem? Let us know in the comments below or contact resident Blockchain Consultant Laura Marissa Cullell at email@example.com.