What is a DAICO: An introduction
Are you an ICO investor? You may have noticed with concern that scam ICOs have made off with investors’ hard-earned money. You are probably wondering how the crypto ecosystem will achieve a greater degree of accountability and prevent scams. A new model called DAICO could be the answer. I will explain here what is a DAICO.
An overview of key ICO risks:
I will first look at some key ICO risks. ICOs are conducted using a smart contract that governs the funding by investors and token distribution to them. An ICO typically has a ‘soft cap’, i.e. the minimum amount that the project team must raise from the event, to continue with the development.
If an ICO project can’t raise the ‘soft cap’, the ICO is a failure and the project team returns the funds to investors. However, if it raises the soft cap, then they control the fund and spend it the way they want.
The smart contract completes its’ functions as soon as the funds are raised. It provides no ability for investors to control the subsequent events. An unscrupulous project team can run away with the funds, which has indeed happened.
Smart contract execution results are irrevocable, leaving investors helpless. Read more about how they work in “Beginner’s Guide to What is a smart contract?“.
Since ICOs are unregulated, investors have no legal recourse either. Read more about the unregulated nature of ICOs in “What is an ICO: An introduction to Initial Coin Offering“.
What is a DAICO: the concepts
Vitalik Buterin, the founder of Ethereum had first come up with the concept of DAICO in January 2018. He proposed combining features of ‘Decentralized Autonomous Organization‘ (DAO) and ‘Initial Coin Offering’ (ICO) to improve accountability in the ICO model of fundraising. Read his point of view in “Explanation of DAICOs“.
The DAICO concept retains the fund-raising component of ICO, i.e. the smart contract will enable the ICO project team to raise funds from investors. However, it also introduces a key concept of DAO, i.e. the investors will hold tokens and can vote to decide the future of the project.
A DAICO smart contract will have two parts, as follows:
- The first part will allow investors to send their Ethers to the project team. They get tokens in return, and when the crowdsale ends, this part of the contract prohibits any more investment.
- The second part provides a mechanism where the funds are released to the project team in phases. A democratic system where investors vote will determine the quantum of funds for release.
DAICO smart contract – the 1st part is like ICO smart contract:
The 1st part of a DAICO smart contract will be quite similar to an ICO smart contract. Investors send their funds to the project team and receive tokens proportionate to their funding. It’s also called the ‘Contribution mode’. The main difference from ICOs is that the funds are locked away from the ICO project team at this stage, they can’t access it.
DAICO smart contract – the 2nd part is like DAO model:
In the DAO model, token-holders vote for or against a project development proposal. The project team can only implement proposals that get sufficient votes in their favor. DAICO implements this concept in the 2nd part of the smart contract.
The contract will have a variable called ‘Tap’. It’s set to zero initially, hence the project team can’t access the funds. This part of the contract is called the ‘Tap mode’, and it’s activated as soon as the ‘Contribution mode’, i.e. the 1st part, ends.
The project team needs to submit resolutions that contain project development phases, whereas investors need to decide whether to raise the ‘Tap’ value. If they decide to raise, the project team receives the funds for that phase of the project, otherwise, they don’t.
This part of the contract also has a ‘Withdraw mode’. Consider a hypothetical scenario where either investors or the project team are unhappy with how the project has progressed. They can vote to self-destruct the contract, which refunds remaining Ethers to investors. The refund is proportionate to their investment.
The advantages of a DAICO:
There are two main advantages of a DAICO, as follows:
- The project team can only use funds to the extent investors approve, unlike the risk of them running away with the funds after an ICO. This issue with ICOs is so serious that we ask ICO investors to carefully check the credentials of the ICO project team to spot if it’s a scam. Read more about our recommendation in “Beginner’s Guide: How to spot ICO scams“. A DAICO eliminates scam projects by restricting the flow of funds.
- Supposing a group of hackers stage a 51% attack, unlike an ICO website where all funds are available for spending, hackers will meet a restricted ‘Tap’ in a DAICO. This reduces the magnitude of loss significantly even if they are successful in staging an attack. Read more about 51% attack in “PoW Vs. PoS: A Comparison Between Two Blockchain Consensus Algorithms“.
The disadvantages of a DAICO:
While the DAICO model has advantages, the crypto community needs to address the following disadvantages:
- This model will subject every project development phase or proposal to a democratic voting process. The advantages of start-ups compared to big enterprises is their agility, but a potentially slow DAO voting process will slow down the project development, and negate this advantage.
- Investors often enter the crypto market for quick profit whereas the DAICO model requires their long-term involvement with the project. A section of investors uninterested in the long-term future of the project may not vote, thereby reducing the very advantage of a DAO.
- Many crypto investors are new to the technology, and may not understand some project proposals well. If many such investors vote down good proposals, then the project won’t realize its’ potential.
- If a majority of investors become unhappy with the project due to lack of appreciation of the token in spite of the long-term potential of the project, they may vote for withdrawal. A promising project might close down due to negative investor sentiments.
- There isn’t enough clarity on what happens when investors sell their tokens in crypto exchanges. Should traders buying tokens get the same voting right? Then the speculation associated with the crypto market can hamper the project. On the other hand, if traders don’t get the voting right, then the remaining initial investors will control the entire voting leaving out traders who bought tokens later.
The DAICO model is very new. ‘The Abyss Platform‘, i.e. a blockchain-based digital distribution platform is the first start-up to adopt this model for their token sale. We need to watch how effective the DAICO model is in the long-run. In the meantime, if you want to compare it with ICOs, you can read “ICO Vs DAICO: What Is The Difference Between The Two?“.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research!