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DAICO Crowdfunding — Lowering Blockchain Startup Financing Risk

DAICO Crowdfunding — Lowering Blockchain Startup Financing Risk

M6 Labs
Coinmonks
Published in
6 min readDec 22, 2020

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Most agree that the future of business is on the blockchain. Globally, enterprises are turning to the shared digital ledger to improve efficiencies and remove transaction friction and costs. For blockchain solutions to rapidly scale, the blockchain startups building the architecture require capital to create and innovate.

Unfortunately, investors have assumed high risk and losses investing in blockchain startups through initial coin offerings (ICO). Among the top 25 initial coin offerings (ICO) nine have lost more than 80 percent of their value, representing a loss to investors of more than $1 billion. The high financing risk is slowing the adoption of blockchain technology.

A new fundraising model DAICO crowdfunding is ushering in a new safer era of blockchain investing. A DAICO (decentralized autonomous organization initial coin offering) links funding to deliverables by replacing a centralized fundraising team with a decentralized smart contract with built-in performance milestones. If the project fails to deliver, investors receive a refund, in the same way, you can charge back Amazon products on your credit card if they do not meet your standards or tastes.

For investors, the accountability mechanism provides a hedge against the risk of a blockchain startup failing to deliver on its promises.

What is a DAICO?

The idea of getting a refund for the purchase of investment securities was unheard of, until two years ago when Vitalik Buterin introduced the concept of the DAICO — a combination of a decentralized autonomous organization (DAO) and initial coin offering (ICO).

The DAICO is an ICO smart contract with built-in mechanisms to link funding to performance benchmarks. Typically when funds are raised a portion is reserved for the team, technology development, promotion like marketing and rewards, and administration. Under a DAICO, all or part (e.g., the team share) of the funds are placed in a community-governed treasury.

The governance structure, based on the DAO, has three main features:

  1. Governance decisions are made based on the wisdom of crowds, that is, token holders with voting rights.
  2. The funding protocol is trustless, relying on no centralized authority.
  3. The funding is distributed over time and contingent on meeting performance benchmarks.

This low-risk financing model is re-opening the floodgates to blockchain investing. Since the DAICO of Aavegotchi ($GHST) in September, the trading volume of the DeFi-enabled crypto-collectibles game is up seven-fold. The funds raised by the Aavegotchi DAICO are stored in the “vault” and released in drips from a tap mechanism as milestones are achieved. If the AavegotchiDAO governance team is unhappy with progress, they can shut off the tap.

Automating Startup Accountability

Security token offerings (STOs) were introduced in 2018 as a lower risk alternative to ICOs. The automated token offering combines the ICO with the legal protections of standard securities offerings in a smart contract recorded on the blockchain. The STO has helped to eliminate scams, which in 2018 were estimated to represent 80 percent of ICOs. Post-STO, however, investors have little influence over the operations of startups.

Though on blockchain platforms, investors have gained more control over governance. Token holders as platform owners typically have voting rights over protocol improvements, replacing centralized control. Blockchain platforms use a direct voting mechanism to reach consensus called on-chain governance. The community governance committee proposes, votes on, and implements protocol improvements through on-chain voting.

DAICOs extend on-chain governance of the blockchain startup to accountability for performance after the token offering. DAICOs use the same on-chain voting mechanism to ensure performance milestones are met. Investors invest in blockchain companies in exchange for future value creation. DAICOs encode those actions (milestones) that will create value into the smart contract. As value is created, funds are released. If no value is created, investors can vote to have their funds returned.

DAICO Platforms Lowering Startup Financing Risk

DAICOs can be used as an investment vehicle for blockchain startups or any tokenized asset. Investors are lowering risk by pooling investments in tokenized assets, from blockchain platforms to art work and real estate. STO platform Polymath Network tokenized $2.2 billion in U.S. commercial real estate through ST-20 tokens in February.

Polymath spearheaded the development of the ERC1400 standard to standardize STOs. Through transparency and streamlined due diligence and user experience process, exchanges, custodians, and wallets can easily onboard tokenized assets. Seeing an opportunity to further reduce operational risk through DAICOs, the STO platform is currently developing a DAICO module.

Investors have been deterred by the complexity of online token offerings. Most investors leave a token sale while trying to figure out the pricing, and only 2–3 percent return, finds OnGrid Systems, developer of DAICO crowdfunding platform the Token Offering Platform (TOP). TOP streamlines the custom token offering minting and selling process for DAICOs, STOs, and ICOs.

The PAID Network has gone one step further. Like other DAICO smart contracts, funding is released as milestone deliverables are fulfilled. The PAID DAICO also includes the arbitration process, providing an end-to-end governance solution. PAID Network is the developer of the SMART agreement, an attorney-free business smart contract that includes the negotiation, escrow, legal, and arbitration processes.

Arbitration in a Smart Box

PAID has integrated its arbitration solution into the PAID DAICO crowdfunding contract. If a startup misses milestones, say the Main-net launch experiences unreasonable delays, the governance committee can vote to request an audit and arbitration. Once the PAID token activates an audit, the project funds are frozen.

In scenario one, the developers provide evidence that the Main-net is ready to launch within a month. The auditors unlock the funds and the next tranche is released to the team when the Main-net launches on time.

In scenario two, the auditors review the documents and find the Test-net was a disaster. The technology failed and the developers cannot produce evidence that they can rectify the problem.

In the latter scenario, a second vote is called by community members who can decide to place the project on probation or cancel the project. If the project is canceled, a prorated amount of the investment funds is returned to investors.

In the composable enterprise, the DAICO will be one of the core smart contract blocks in a fully automated governance system. Polymath Network envisions startups creating their governance structure by choosing among token offering (e.g., STO or ICO), DAICO, and other modules. Governance decisions across these dynamic contracts are made in a matter of days or weeks. For example, the PAID Network audit process — from requesting an audit to arbitration resolution — takes one to two weeks. This speedy governance process allows investors to quickly withdrawal capital from underperforming blockchain startups and redeploy it elsewhere.

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