*almost* Trustless Project Fundraising
Lockdrops, DeFi & DAICO’s, a new fundraising model
Since the inception of the Ethereum network, we’ve been through several different cycles of fundraising methods. Initially, we had the truly permissionless fundraising methods, such as the original DAO, Maker, Digix, and other early token sales on Ethereum. The beauty of these sales was that anyone could participate as long as they could get their hands on some ether. There was no KYC, no whitelisted addresses, no purposefully confusing language & token metrics, simply an agreement over governance and vision. Over the past three years, we’ve moved from permisisonless DAOs to Taco coins….
More recently we’ve had a series of iterations of this process becoming more and more confusing. This is due to a few key drivers: avoiding securities law, continuing to extract the ‘cheap capital’ that still exists within the crypto ecosystem, and lastly as we continue to build more financial Legos, more and more experimentation will continue to develop!
At the peak of the token sale hype cycle in Janurary 2018, Vitalik posted a piece describing an upgraded ICO process where contributors to a project would have governance over how much ETH could be unlocked at a certain time period or milestone. If this wasn’t adhered to by the team, token holders could vote to ‘Ragequit’ the project/DAO, something that we’ve started to see in the wild with Moloch DAO.
As Moloch and other DAOs begin to reintroduce these fundamental ideas behind DAOs & distributed governance, Edgeware has just conducted the largest lockup of ETH in a single contract since The DAO. The Edgeware ‘Lockdrop’ locked 1.2 million ETH ($200 million USD) for between 3–12 months. This amounts to around one percent of the total ETH supply, as opposed to >10% which was locked in The DAO. Interestingly though, there was also the ability for ETH holders to signal with their ETH, essentially signing a transaction signalling their interest in the project. This is an alternative which has zero smart contract risk, though this is reflected in the significantly smaller airdrop of tokens to those who signalled instead of locking.
At the same time, Decentralized Finance has exploded, with new financial products, services & philosophies just starting to emerge. In the past 12 months the total value locked in DeFi applications has increased almost 400% to around half a billion dollars, with the number of companies actively building in the space growing exponentially as we speak. This was evident at ETHBerlin, where there were a staggering 85 hack submissions, 23 of these building Defi applications.
So what do DeFi, Lockdrops & DAOs have in common?
Surprisingly, even when Dai has an annual return of consistently above 10% when locked on platforms such as Compound Finance, Edgeware chose to leave the locked ETH sitting in their contract without earning interest. If Edgeware had locked the same value in DAI, then exchanged this DAI into r-dai (or another interest earning dai token within DeFi) the Edgeware team would have earned $20m USD in interest — assuming $200m locked for 12 months @ 10% APR.
$20 million dollars is a good start for the development of any project. All within a low risk mechanism.
With the introduction of the Lockdrop & the current DeFi environment, we can begin to craft new and innovative fundraising methods where contributors don’t need to give up their capital; only lend it.
Low Risk is a subjective term, though we can all agree a lockdrop has less risk than simply sending your ETH to someone! Lets unpack the risk involved in this process, really it falls down to two key concerns, Smart Contract Risk & Opportunity Cost.
All smart contracts have some inherent risk - holding ETH in a multi-signature wallet has a similar amount of risk as a lockdrop contract, as long as they use similarly reviewed & audited mechanisms. There are also services like Nexus Mutual which are beginning to offer smart contract insurance. So although smart contract risk exists, these risks should only decrease as contracts become more battle tested.
The second risk is the opportunity cost of holding Dai as opposed to ETH. This means those who lock Dai are effectively shorting ETH for the given lockdrop period. Although a valid concern, these contributors would also be given governance/utility token based on their locked contribution which wouldn’t be possible to achieve without locking said DAI. The second answer here is that as the network scales, ETH is unlikely to be as volatile and as a wider audience start to interface with the DeFi world ETH is unlikely to stay as the main method of account — at least to the mainstream user/investor 🦄
The combination of these new technologies & ideas allows the Ethereum and Crypto communities to trustlessly fund projects, provide liquidity within DeFi & have less of a need to give ETH to projects only for them to sell it back to the market.
We’re super excited to see all the creativity & experimentation the space has to offer, one of the joys of the DeFi ecosystem is that we can create these new financial mechanisms using building blocks that we haven’t even finished building yet!
Axia Labs is a young & enthusiastic company focused on research & development of the tokenised world. We try to interact with every working DApp, DAO & token that adds value to the ecosystem plus build incentive mechanisms & governance structures for many of the most loved projects in the space!
