Explanation of the DAICO concept and the history of its creation, description of its working process as well as comparison between DAICO and ICO revealing its benefits and issues.
Today we are going to present the project proposed by Vitalik Buterin, a DAICO, which is an improvement on an ICO. It takes the best features of DAOs to give investors more control over how their money is used by a startup.
How does a DAICO work?
Much like an ICO, a DAICO starts off with a fundraising campaign. A DAICO-based startup chooses a mechanism whereby to distribute tokens, be it a capped sale, an uncapped sale, a Dutch auction, an interactive coin offering, a KYC’d sale, etc. The startup launches an appropriate smart contract in contribution mode. Investors then send their money to the contract in exchange for utility tokens. The contract distributes tokens until a) the specified date coded into the contract, or b) the cap is reached. In either case, the contract can no longer accept money and issue new tokens.
Now the contract goes into tap mode. Tap mode allows contributors to control the rate at which funds can be withdrawn from the contract. Initially, the tap is set at 0, meaning the developers cannot take money out of the contract. The token holders can then vote to raise the tap to allow the project to start using contributed money. If the investors are satisfied with the initial progress, they can open the tap more, so as to reward the developers. If, however, the team does not meet expected intermediate objectives, the token holders can vote to destroy the contract, which returns remaining funds back to the investors.
How are DAICOs better?
The DAICO model eliminates the risk of scams where developers run away with investor money as soon as fundraising ends. Another advantage of a DAICO over an ICO is that the former encourages improvement and motivates developers, whereas ICO-based startups have complete unrestricted access to the money, which negatively impacts their motivation. DAICOs also reduce the damage dealt by 51% attacks, such that attackers cannot siphon more money than the tap allows.
What are the challenges?
Among the challenges DAICOs face is the fact that developers can buy tokens themselves and then vote on raising the tap. The DAICO model implies that a great deal of responsibility lies in the hands of investors, which poses a potential threat to the security of the project. Investors may turn out negligent about the project putting all their trust into the DAICO concept. Thus, non-participating token holders increase the chances of a successful 51% attack.
What is the history?
It has been a little over two years since the DAO attack. The DAO, Decentralized Autonomous Organization built on the Ethereum network, was a promising project that aimed to bring governance to the level where decisions are voted on by stakeholders and made effective by an unbiased machine, which cannot be corrupted or otherwise swayed. Unfortunately, a large portion of the money raised for this project was stolen. The team behind Ethereum decided to revert back the fraudulent transactions to restore the damage. This effectively split the network into two: Ethereum and Ethereum Classic with the latter refusing to go back and deciding to stick with the ethereum blockchain as it was. People have learned from the mistakes and come up with the concept of DAICO. The first DAICO ever was held by The Abyss, a reward-based ecosystem for gamers and developers. During the sale (April 18 to May 16, 2018), the project raised $15 million at $0.08 per token.