29 March 2018

Advantages of a DAICO

Category: Investment laws

Recently one of the founders of Ethereum, Vitalik Buterin, came up with an idea to make Initial Coin Offerings (‘ICO’) safer. But what is wrong with an ICO? In principle, there is nothing wrong with ICOs in their current form. However, unmotivated project developers can pose a practical risk. Imagine the developers behind an ICO raise considerable funds in cryptocurrencies to develop their project. After receiving the cryptos in their wallet and completing the ICO there is no further incentive to finish the project. A possible solution for that, is the so-called DAICO.

How does a DAICO work?

One of the key problems with the classic ICO is that the total value of the ICO becomes directly available to the developers. The idea behind a DAICO, a combination of DAO (Decentralized Autonomous Organization) and an ICO, is that investors receive voting rights. A DAO relies on smart contracts or pre-programmed rules that describe what can happen in the system. After the rules are set, a DAO enters in a funding phase. When the funding phase is over, a DAO becomes autonomous and independent.

In a DAICO (a combination of a DAO and ICO), voting rights are linked to the amount of ETH available to the developers. The amount of ETH is tapped. This means that the developers only receive an amount of ETH once in a certain timeframe. When the developers reach certain pre-set benchmarks, investors can vote to widen the tap, hence the amount of ETH available per period. As a result, developers have an incentive to reach the pre-set benchmarks and for investors it is a way to ascertain the steadiness of the project. Investors have the ability to cancel the project and claim invested ETH. This option occurs when developers fail to reach targets or threaten to run off with the tokens.

Is DAICO better than ICO?

There have not been any DAICO launched yet. Estimations are that the ICO system requires changes. One of the advantages of the DAICO is the fact that when a project/DAICO is discovered to be fraudulent, the investors can terminate the project.

The DAICO system mitigates the risk of developers cashing in all the ETH following an ICO and running off. Because of the tap system, only a small portion of the available ETH will be transferred to the developers per timeframe. If they choose to run with that small portion, the project can be terminated and the investors’ loss is limited to the tranche(s) already released.

But of course, also a DAICO is not perfect. A DAICO is not 100% secured from the Ethereum collapse and investors are exposed to this risk. Besides that, it has never implemented yet. This means that the disadvantages are not yet really known and the security may be questioned (referring to the hack of the DAO). Nevertheless, the inventors of a DAICO say that security is their number one priority.

Is a white paper required with a DAICO?

A white paper is required. A white paper details everything an investor needs to know about the DAICO before making up their mind if they want to invest in the DAICO. Focus points will be the cap of the funds, the number of tokens to be distributed, which benchmarks are set for the developers and the value of the token compared to ETH.