ICO 2.0

Is Vitalik’s DAICO a better version of the ICO?

‘Tap’ping into the DAICO model

Is it a jalopy or a shiny new model?

For all the vast promise (and staggering success) of the ICO model, it isn’t without problems: Scams, failing startups, litigation and shutdowns. As the frenzy has reached a crescendo, and as regulation continues to be unclear, the ICO space is plagued with bad actors and scams, just as it continues to incubate great ideas and innovative startups. Worse, it is increasingly difficult to tell which is which.

Researchers, developers and influencers within the Ethereum community have been scrambling to come up with an ICO model 2.0, that adds checks and balances, accountability, and mechanisms to protect contributors. Options like the Continuous Token Model and Liquid Pledging have been explored.

Earlier this month, the co-founder of Ethereum, Vitalik Buterin, proposed a new DAICO model: one that merges ICOs with some of the benefits of DAOs (Decentralized Autonomous Organizations). In a DAICO, the token sale would happen as normal, but the Smart Contract would allow token holders to control the release of funds—called a tap—to the development team through a voting mechanism. The idea, presumably, is that voters would initially give the development team only a reasonable monthly budget, and raise it over time as the team demonstrates its ability to competently execute. If the voters are very unhappy with the project’s progress, they have the option to vote to shut the DAICO down entirely and get money back, proportional to the tokens they hold.

Many lauded this new model as a responsible way to do an ICO, giving a fair amount of control to contributors. Others reasoned it would incentivize development teams to be as transparent as possible. Yet others dove in with improvements, and implementation specifics. The Abyss announced that it was adopting the DAICO model for its upcoming token sale, making it the ‘World’s first DAICO.’

The ICO space certainly needs some mechanics to make sure development teams spend their money wisely. In the traditional venture funding setup, this role is played by VCs who would have the expertise and energy to oversee a startup on a regular basis. And because payday for a VC comes only when the company goes public, interests on both sides are aligned in the long term.

The picture changes if you supplant ICO contributors in place of VCs. Decentralized governance is extremely complicated and inefficient for startups. Not all contributors want, and can have, an intimate relationship with the projects they have contributed to. Now imagine, the development team needs to convince a majority of these token holders—often in the thousands—to release funds for a certain task. A DAICO could create a huge lag in a teams ability to execute. Requiring a vote for every budget change or project pivot, could hamstring production and scaling.

Secondly, Vitalik’s original proposal of a DAICO ties the release of funds to time. Many proposed that it should be tied to milestones. Both have shortcomings. Taking the time approach makes it likely that a development team can’t execute certain plans until a certain time. Why can’t this be planned before the ICO so the parameters are set accordingly? Because much is uncertain in the startup world and how far and accurately can any company, really, much less a startup, predict. Tying the release of funds to milestones, though better, leaves very little room for failure. If Thomas Edison had conducted a DAICO for a project to invent the light bulb, we might have still been living by lamp light.

Thirdly, the DAICO will expose the project to opportunists who can conduct a leveraged buyout of the company—A tactic that can also be used by the project’s competitors to derail it. Since all the raised funds are deposited in the smart contract, it can be used as collateral by someone to get money from banks or large funds to buy a majority of the project tokens and then control the company. Would that be good for a startup? Probably not.

To improve on the ICO model, we have to acknowledge that what is corrupting it, in the first place, is human behavior. The DAICO still leaves room for human manipulation, by assuming that contributors are rational and well-meaning. What happens to funds in case of a fork, or if a large holder of tokens is pushed out of central management? Will they have the emotional integrity to allow the DAICO to function? Will contributors be tempted, in the extreme case, to liquidate the DAICO if the price of ETH outpaces the project token? It’s easy to forget that bad actors can appear on both sides: As contributors or as entrepreneurs. The unique value-add of the blockchain is it works by diluting power, not transferring its concentration.

For all its shortcomings, the DAICO is a step in the right direction: To add protections for contributors, so there’s more accountability and fewer scams. But it needs to be done while preserving the simple elegance that made the Token Sale model the innovation it is. A DAICO’s voting structure is reminiscent of equity voting rights, making it more like an IPO (which is heavily regulated). It begs the question: What is the real innovation in a DAICO contract vis a vis traditional means of funding? An ICO version 2.0 is coming but, unfortunately, this is not it.

What do you think of the DAICO model? Do you agree with our analysis? Join the conversation below. We’d love to hear your take.

New Alchemy is a strategy and technology advisory group specializing in tokenization. One of the only companies to offer a full spectrum of guidance from tactical technical execution to high-level theoretical modeling, New Alchemy provides technology, token game theory, smart contracts, security audits, and ICO advisory to the most innovative startups worldwide. Get in touch with us at Hello@NewAlchemy.io

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