What is a DAICO and what are the Benefits?
What is a DAICO?
DAICO is an improved capital raising version of the Initial Coin Offering model. It incorporates some aspects of Decentralized Autonomous Organizations (DAO). What are DAOs? They are digital companies with by-laws set within the Blockchain. They are managed transparently, their finances can be audited by the public, with impossible corruption and zero downtime. DAOs can enable a wide range of possible business models.
The idea about DAICO was suggested in January 2018 by Vitalik Buterin, Ethereum’s co-founder. The goal is to make ICO’s more secure by involving investors in the initial development process of the project. A DAICO does this by minimizing the risk without making it more complex. DAICOs will enable token holders and investors to vote for refund on the invested funds if they are not happy with the developers and the progress they are making.
The projects that adopt this concept will build more trust with their user base. It will force cryptocurrency projects and developers to be more accountable to their investors. Also it will relieve some of the stress that ICO investors endure due to the lack of regulations and will guarantee at least their money back if things fail.
How does a DAICO operate?
There are many key elements that make the DAICO. The DAICO contract is published by a single developement team. The smart contract starts in “contribution mode” with the feature in which investors can send funds to the project in exchange for network specific coins. This sale can be capped, uncapped or any other mechanism. When the fundraising period ends, the smart contract will prohibit anyone from investing any more. The DAICO smart contract distributes the token balances and after that the token becomes tradable.
A key feature comes into effect after the crowdsale has ended called a “tap variable”. This tap can be programmed to predetermine the amount that developers can withdraw from the Coin Offering funds in wei per second. The limit is initially set to zero and can be voted by investors on a consensus to increase the tap. This is the key feature that makes the Initial Coin Offering decentralized and autonomous, thus called a DAICO.
What are the differences between an ICO and a DAICO?
The main features taken from Decentralized Autonomous Organizations are three. The first one is the opportunity to refund the contributed money. It is a huge confidence and trust building tool. The greatest of the three key features is the decentralized aspect of it. Investors vote for a refund of the remaining finances if the project is failing or just lazy. It brings regulations without the centralized aspect and gives power to the crowd.
The second feature is that being decentralized, decisions on funds are decided by a voting system, thus are democratized. There isn’t a centralized team that takes all the decisions and the third is that the funding is not released all at once. It is released over time to prevent scams and to give investors options.
When an Initial Coin Offering ends the team behind the project has total access to the raised capital. This access of funds makes great difference because developers calculate beforehand how much capital will be needed for the project plus expenses. ICOs usually set a soft cap and a hard cap. If you don’t know what they are, click here to read a quick article about them.
After they reach the soft cap, the team can immediately start working and spending on the product. If they can’t reach this initial soft cap, they refund the money to investors…usually. But after the end of the ICO it is all up to the project’s team and investors are left stressing about their money and constantly searching for any news. In DAICOs investors are part of the project’s development and have some control over the team they invested in. It gives more power in the hands of contributors.
Benefits for the crowd
For now it is hard to say because the technology will be further improved and upgraded. A digital distribution platform called Abyss plan to be the first issued DAICO in March. 2018 will be an interesting year for cryptocurrencies and Blockchain technology in general. Investors will have more ways to influence the development of the project.
It will reduce the risk of scam Initial Coin Offerings and the risk of developers running away with the funds without delivering on their promises. Some projects don’t even set a hard cap and raise tens of millions of dollars. Often we see after an ICO the money that was invested to depreciate in panic sales and because of lack of communication from the projects.
In the DAICO model, the team’s success and motivation to develop the project are tied to the raised capital. The smart contract released the funds with time and sustains the project over a period of time.
Challenges in the Future
As with all concepts, there are imperfections that will be solved with time or won’t. There are challenges in front of DAICO but it looks very promising. One of these challenges is investor participation. Some investors can put their trust in the DAICO project and refuse to partake in voting and consensus, thus reducing the majority threshold and giving more power to a select of people.
Investors need to understand why the price of the coin is falling or rising so they can make better decisions when voting for the tap limit or to panic bail. The facts can be read in different ways so education is a great solution. Reactions on the coin’s price based on emotion can ruin your investment and your judgment.
Also if projects own a large percentage of the distributed coins they basically own the majority of votes. This way they can manipulate to increase the tap to release more money to the project from the smart contract. Also they will need a small majority of the other token holders to do what they want. We will see in the future how these problems are addressed, but for now this technology looks promising and has the potential to change fundraising forever.
- Security Token Offering (STO) Guide: Everything you need to know about STOs - Feb 28, 2019
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- Top ICOs of 2018: Initial Coin Offerings that beat the Crypto Bear’s market - Feb 26, 2019
- Ethereum hard forks Constantinople and St. Petersburg scheduled by the end of the week - Feb 25, 2019
- Ethereum founder and CEO, Vitalik Buterin revealed his non-Ether holdings and revenue sources - Feb 22, 2019
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