DAICO Explained and Other Governance Solutions
Vitalik Buterin suggested in January 2018 the idea of a DAICO, an improvement on the ICO fundraising model that incorporates certain aspects of DAO’s, introducing a governance mechanism. In this article, we want to give you an explanation of the DAICO and share two other governance solutions.
Need for governance
It is essential to maintain the interests of different participants in a decentralized system aligned. For that to be possible, the system needs mechanisms to coordinate its participants around their common incentives to avoid imbalances in their power.
When it comes to ICOs, at the moment there is an imbalance of power between ICO launchers and ICO token holders, which is in favor of ICO launchers who have an almost absolute power over raised funds. This leads to an increasing need for governance, to prevent bad practices and to protect token buyers from scams and projects that aren’t executing correctly their roadmap or aren’t managing well the funds raised.
Let’s take a look at 3 different governance solutions that aim to solve conflicts of interests of participants of decentralized networks/ICOs:
1. DAO+ICO=DAICO
The DAICO aims to make ICOs safer and more attractive by involving investors in the management of the raised capital and enabling them to vote for a refund of the contributed funds if they are not satisfied by the way the raised funds are being managed.
How does a DAICO work?
The process of a DAICO starts with the creation of a DAICO smart contract. Once this contract is created and published, the DAICO can start.
Just like a normal ICO, during the fundraising period contributors send funds to the project in exchange of their specific tokens and once the token sale is over, the contract will prohibit anyone to contribute any further.
The DAICO contract continues to be operational after the fundraising period, something that does not happen with ICO smart contracts. After the contribution period, the DAICO goes into “tap mode”.
Basically, a DAICO contract is based upon two parts:
- Contribution mode
When the DAICO contract is in “contribution mode”, anyone can contribute ETH to the contract and get tokens in exchange, like in an ICO. The team can choose the mechanism they want: a capped sale, an uncapped sale, a dutch auction, a KYC’d sale, etc. - Tap mode
Once the “contribution mode” is over, the contract goes into “tap mode”. The tap in the DAICO contract determines the amount (per second) that the launcher can withdraw from the token sale funds.
When the DAICO is in the “tap mode”, ICO Token Holders can vote on resolutions, such as: raising the tap (lowering the tap is not possible); or permanently self-destructing the contract (putting the contract into withdrawal mode).
Token Holders give the project a reasonable monthly budget and raise it over time as the team demonstrates its ability to execute the project with the allocated budget. If they do not agree with the execution, the ICO Token Holders can vote to shut down the DAICO and get their ETH back.
The idea of putting in escrow the funds of an ICO and unlocking them progressively aims to align the incentives of the ICO launchers and the token holders. However, governance is a matter of balance and this mechanism could potentially create an imbalance of power in favor of the ICO token holders, for example: a large ICO token holder could at any point try to self-destruct the contract for reasons totally unconnected to the execution of the project (to discredit the project, to arbitrate between the remaining ether and the price of its token or any other reason).
2. Aragon
The Aragon Project proposes a token-based digital jurisdiction with no borders in which governance plays a key role. In this project, governance will rule aspects such as token issuance (generation of tokens, revenues, etc.), fund allocation (rewards) or the network rules (the establishment and removal of bylaws).
The main elements of the Aragon Network are: the bylaws that define user permissions, the governance system to make decisions, the capital system for issuing and controlling tokens and an accounting system to manage funds. The main decisions are made by ANT (Aragon Network Token) holders through a system of proposal and voting.
Regarding governance, Aragon’s Arbitration mechanism proposal is one of their most interesting features. In this sense, they advocate a three level arbitration system:
- First, the arbitrage applicant (posting a bond) opens an arbitration. Then a sample of 5 randomly chosen judges post a blind bet (resolution). Afterwards, all of the judges reveal their secret bet, rewarding the judges that voted for the right answer (by majority) with a reputation of non-transferable tokens and penalizing the others.
- Second, if the applicant is not satisfied with the decision, they can request an upgrade to the next level, a prediction market (i.e. Gnosis or Augur) in which all of the network judges can participate.
- Finally, if the applicant is not satisfied with the two previous steps, they can request an upgrade to the ultimate level, which is a court composed of the top 9 judges, who are rewarded if they voted for the right answer and penalized if they vote the wrong one.
This mechanism could solve several types of disputes that could arise in a decentralized network but it could face relevant issues when put it in practice:
- First, the final decision is mostly based on individual decisions, so a strong reputation system is needed for that. In this sense, reputation is a pending matter when talking about blockchain.
- Second, part of the mechanism, the prediction markets, depends on third party developments that are not “Unstoppable Organizations.”
- Finally, the process involves many steps, so it could be easy to find a lack of liquidity in the decision making (there is a chicken-egg problem between the problems to be judged and judges that solve them).
3. Coin Governance System
The Coin Governance System (CGS) is an on-chain governance mechanism that aims to solve the imbalance of power between ICO launchers and ICO investors, which currently is in favor of ICO launchers (who have an almost absolute power over the raised funds once the ICO is finished).
The CGS introduces a decentralized judge: the Community of CGS Arbiters, that is responsible for solving conflicts between ICO launchers and ICO token holders and will by doing so help to keep the interests of both parties aligned. This community is independent from the ICO launcher and the ICO token holder and are incentivized to vote correctly.
The Coin Governance System works as follows:
- ICO Launch & CGS Deployment
Once an ICO with CGS is finished, the raised capital will be held in escrow and the CGS will release the ETH gradually to the ICO launcher. - Claim Submission
If ICO Token Holders think the project is not being executed properly, they can submit a claim to the CGS by depositing a certain amount of ICO tokens. - Voting Period
If the claim receives enough support from other ICO Token Holders, it will be handled by a decentralized judge: the community of CGS Arbiters. - Scenario 1: Outcome is “OK”
If the outcome of the voting is “OK”, CGS Arbiters believe the project is being executed correctly. In this case, the CGS smart contract goes back to normal and continues releasing ETH to the ICO launchers as before the claim. - Scenario 2: Outcome is “KO”
If the outcome of the voting is “KO”, CGS Arbiters believe the claim has grounds. The CGS smart contract will enter into “withdrawal mode” and ICO token holders can withdraw remaining Ethers. - Back to Normal
Once a claim process is finished (whatever the outcome may be) the CGS will continue releasing the remaining ETH as before the claim.
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