Co-founder of Ethereum Vitalik Buterin has just announced a new, decentralized fundraising model that has been created specifically for the Ethereum network, called DAICO. The aim of this new proposal is to offer a more democratic and fair way of monitoring an ICO which is the current method of raising funds on the Ethereum network. The DAICO is created by combining the concept of an ICO with an organisation run by hard-coded rules, known as a DAO.
An ICO works by presenting a project to the public and allowing investors who see a value in the proposal, to directly invest in it. This means that they can bypass other methods of raising capital such as Initial Public Offerings (IPO) or venture capital. Finding new ways to bypass these more traditional methods, saw a huge increase in start-up activity and innovative new projects in 2017.
2017 has been labelled by some as the “year of the ICO” and to date there has been a staggering $3 billion raised in this way. Most early investors often saw great gains on their initial investments which helped to create the hype around it. The new DAICO created by Buterin has sought to improve on the existing ICO model whilst giving investors a new way of controlling it, and protecting themselves against the possibility of fraud.
Similarities between DAICO and ICO
A DAICO works by offering users a contribution mode which facilitates the raising of funds by the team. Investors that are interested in the project can then send Ethereum to the DAICO and receive tokens in return for their investment, much in the same way that an ICO works.
The sale of tokens has several conditions attached to it such as it being capped or uncapped, an auction, a know-your-customer sale, or an interactive coin offering. After the contribution period comes to an end, the investors have the option to trade the tokens that they have received.
In these respects, the DAICO is almost the same as an ICO, but the real differences between the two starts after the contribution period ends. At this point, a mechanism called a “tap” is triggered. Taps allow anyone holding tokens to exercise control over how much funding the project team can access. For example, if the team wishes to hire more developers, they can request to raise the tap value that they can access. The holders of the tokens vote, and the tap will either rise, or remain the same, depending on the consensus of the majority. Token holders can also vote to end the DAICO and to retrieve their investment.
Traditional ICO models do not have this feature and the project team is essentially allowed to use the funds that they receive as they wish. This leaves ICOs open to possible abuse, and even fraud which has led to several controversies over the last couple of years as well as many potential investors becoming wary of the concept.
DAICO Security
As with anything that is running on a decentralised network, a DAICO is always at risk of a malicious attack, however DAICOs have implemented certain strategies to minimize such risk.
One concern is that votes could be manipulated in either direction, however the team still retains the power to change it. In an occasion where a malicious attack manipulates the votes in a way which cancels the project, the investors would still get their money back. The project team could then create a new DAICO and the investors would simply reinvest back into the new project.
Following Buterin’s announcement, it seems that 2018 could well be the year of the DAICO. Following on the success of ICOs in 2017, and the incredible amount of innovation in the blockchain industry that resulted from it, this new and improved method of crowdfunding is expected to take off. With additional layers of security and preventative methods against fraud, it is hoped that DAICOs will attract the attention of investors that were previously wary of ICOs and that more exciting projects and innovations will become a reality.
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