This democratization of the startup funding space has helped hundreds of blockchain startups get off the ground. To improve the current state of the ICO market, Ethereum founder Vitalik Buterin has suggested a new and improved version of initial coin offerings called the DAICO
What is a DIACO?
DAICO stands for Decentralized Autonomous Initial Coin Offering and is a new fundraising concept that merges the benefits of DAOs and ICOs to improve the current format of digital token sales. As Buterin explains in his DAICO proposal, in a DAICO, investors contribute funds to a blockchain project during what he refers to as the “contribution period.”
However, unlike during traditional ICOs, with a DAICO once the contribution period is over, investors still regain some control over the funds as they can vote on how much the developers receive in the months to follow through what he refers to as a “tap.”
Token holders can vote to increase the tap or decrease the tap, depending on the requirements of the project to develop the platform successfully. Furthermore, token holders also have the right to vote on the self-destruction of the contract and receive a refund of their remaining invested funds should the project not stick to its proposed roadmap.
DAICOs, thus, provide investors with more control, more transparency, and reduces some of the risks of the current ICO model.
Pros and cons of DAICOs
Like an ICO, DAICOs allow early-stage startups to raise funds without the need for venture capital, bank loans or any other type of traditional financing mechanism. By being able to vote with their tokens, investors are empowered and can decide how much funding the developers receive over time and can terminate the smart contract and receive back their remaining invested funds. In short, investors have the ability to hold the developers accountable throughout the development stages of a project.
Not only does this help to incentive developers to be transparent and to meet their roadmap deadlines, but it also makes it very difficult for individuals to pull off ICO scams as investors are able to self-destruct the contract at the first sign of any fraudulent activity.
In light of the high number of ICO scams, this creates a huge benefit for investors as it drastically reduces one of the ICO market’s most pervasive risks. Thereby, it would also reduce the risk of investing in token sales in general, which could attract more investors to this new digital asset class.
The main drawback of DAICOs is the regulatory risk that is embedded in this form of startup funding should the developers decide to issue a utility token as opposed to a securities token. While it is still unclear whether all ICO tokens will be classed as securities or not, it currently looks as if several global regulators, including the SEC in the US, will go down that route.
That would mean that all tokens, including utility tokens, would need to be registered as securities to be compliant with securities laws. From the perspective of the project being ICO funded, while DAICOs should increase transparency for investors, they will also place additional community management pressure on a project’s key personnel — an aspect of the sector that is often fraught with challenges and requires a unique skill set and personality type.
The Abyss — the world’s first DAICO
DAICOs are no longer just a theoretical concept. One blockchain startup has already adopted this new form of fundraising. Malta-based gaming platform, The Abyss, held its DAICO from April 16 to May 16, 2018, and managed to raise over $15 million from 4,897 investors. The Abyss is developing a “next generation digital distribution platform” that enables avid gamers to capitalize on their hobby through the platform’s rewards system that pays participants in digital tokens for referring new gamers to the platform.
The Abyss DAICO smart contract has been set up so that the project’s developers are able to take out half of the soft cap funds (worth $3 million) once the contribution period is complete and the tap is set up so that the developers receive 500 ETH per month to support the platform’s development process. If the developers require more funds, they can launch a poll, which allows token holders to vote on whether the tap can be increased or not.
The Abyss DAICO also included Buterin’s smart contract self-destruction mechanism. Should investors be discontented with the developers’ performance, they are able to vote for a refund of their remaining funds.
As the Abyss team states on its blog. “The refund poll will be summoned once a quarter: more specifically, on July 1, October 1, January 1, April 1 of the respective year. The voting lasts 1 week, and starts immediately after initiation. The refund is available during 2 years (after the end of crowdsale), with the last refund poll starting on April 1, 2020,”
In light of the fact that The Abyss project managed to raise over $15 million dollars in the overcrowded token sale market could be seen as a testament that there is investor interest in DAICOs.
DAICOs could replace ICOs but will need to be compliant to thrive
Due to the benefits that DAICOs bring it would not be surprising to see DAICOs accounting for a growing percentage of ICOs in the coming months. However, it will only make sense for startups to go down the DAICO route if the newly-issued tokens would be compliant with securities laws in the jurisdictions it aims to operate and sell its tokens in.
There is a high likelihood that regulators will class all digital tokens launched during a token sale as financial securities as the primary intention of contributors is to generate an investment profit and not — as many startups launching utility tokens claims — to enage in the networks they are developing. Hence, for DAICOs to take off and replace “traditional” ICOs they will most likely need to issue compliant security tokens that have been registered as securities with all relevant regulators.