A Guide on DAICOs and Why We Need Them
Vitalik’s solution to all the people taking your money to buy lambos instead of doing real work with ICOs
Everyone has heard the horror story of the original DAO that ended up forcing a hard fork to occur and create a schism in the Ethereum ecosystem.
Many people have had fraudsters or just bad business practices take their hard earned money they put in ICOs go to waste. In 2017, multiple different lawsuits tried to go after one of the biggest ICOs ever to date, Tezos, for 232 million dollars. People can be wary of ICOs and they’re starting to demand better management and only the best ideas are getting properly funded.
What would happen if you combine these two concepts that are traditionally thought of as dangerous in their own ways?
Vitalik Buterin, creator of Ethereum, just proposed that this combination, a DAICO, could be the solution to the bad actors in the ICO space and with the correct auditing of code we could avoid another issue like we saw in the original DAO.
A DAICO is a programmers solution to a problem mainly with people who are ruining the most efficient and best way to raise funds in today’s world.
First, let’s talk about each concept and then I’ll describe how the combination can get rid of the negatives each provides.
What’s a DAO?
A DAO (Decentralized Autonomous Organization) is a smart contract that allows either one team or many to solve a solution that is funded by a group of investors. Traditionally the projects supporters will have tokens that give them a level of voting rights that can be down to how every penny is spent and who ends up getting hired.
A very different concept from the traditional business that is mostly done behind closed doors. Every person who supports the project monetarily becomes a voting member of a board. You’re leveraging the wisdom of the crowd in the decision making concept of the entire company, which by it’s own logic should lead to the best outcome.
Since you are requiring active participation from the community you need an active community who is knowledgeable about your product, speculators or unsophisticated investors can be dangerous to the project’s success.
One of the most successful DAO projects, MakerDAO, has a complex stable coin product and it’s token MKR should only really be bought by people who are interested in learning about the technology behind it because of the voting rights the token gives.
So in a world of crypto speculators how can a DAO be successful?
What’s an ICO?
An ICO (Initial Coin Offering) is a way for a team to raise funds to build a new technical project or business. It breaks the traditional VC funding model by allowing everyone who believes in the project to be able to invest their cryptocurrency. You can get worldwide support and funding for the best ideas developers minds can come up with. In return all of your supporters get tokens that are traded on different exchanges.
This model is attractive to speculators and the project developers because each can become uber rich overnight in certain circumstances even if their project ultimately isn’t actually a success in the market.
Traditionally when you create a startup you work for pennies because you believe in your idea and your team. You may go through an accelerator and get a small amount of money to live off of while you develop your MVP and try to grow your business. If you’re really lucky you’ll do a seed round. Then if you’re even luckier and create a successful business you’ll continue raising money and either get bought out or hit the holy grail of doing an IPO. At this stage if you’re that one startup that gets this far you will not have to worry about money, it’s the startup dream.
When you raise money through a ICO you usually have access to tokens you created as part of a team pool either immediately or within one or two years. Therefore you become uber rich before even having a product start development in certain circumstances.
The model is backwards and can lead to projects that raise massive sums of money to not actually create a product because there is no financial incentive to work your hardest.
Traditionally with an ICO you also have access to the millions of dollars in Ether or other cryptocurrencies you raise, giving the opportunity to go buy a Lamborghini with company money.
What happens when you combine them?
In a DAICO you have the power to raise money from around the world but you’re also giving a level of control back to your supporters through two main methods: a small monthly dispersal of money to the team that has limits and an emergency mechanism to allow supports to shutdown the project.
This limit of funds per month or time period forces the team to act like a traditional business and grow over time with the permission of their community and not overspend or having money embezzled as it’s locked up in the smart contract.
In the rare cases that the money is being used for the wrong purpose the supporters can vote together to stop the bad actor and get a proportional share of the remaining funds back, limiting risk to investing in an ICO.
Why every ICO should be a DAICO
DAICOs can instill a massive sense of trust into it’s supporters because they always have an emergency switch to get their money back if people believe they are being ripped off by the project founders.
Obviously not every situation should have a full DAO on top of an ICO and there will be different levels of DAOs used depending on the project.
For example, if you’re creating a technical product like in my last, sadly failed, blockchain startup ENTX then it makes sense to have a full DAO and tap system because this will be a product that takes time to develop and supporters should expect milestone based work.
On the other hand with a ICO like MinerOne it makes sense that the project creators need access to the majority of project funds immediately to build out their mining farm and give dividends to their users.
Now back to my failed blockchain startup. We raised a small seed round through an ICO and shortly after the founders split up. Luckily we were able and willing to return all of our investors money in Ether and in full. If a DAICO was in place then we would have been forced to return all of the funds whether we liked it or not.
This month I joined Block 16, an ICO launching company, with my old friends and business partners from Leet where we will be implementing our own DAICO for investor money in our private raise.
DAICOs are the future of ICO fundraising and if you see the next ICO you want to invest in using this new methodology, know that your money in safe from being spent on lambos.
About the Author: Petros is a Blockchain Architect at a growing ICO launching company Block 16. We are a full service blockchain agency that does token design, network syndication, marketing services and blockchain development. If you would like to reach out to me send an email to petros@block16.io.
