As the cryptocurrency continues to grow, with 1,465 cryptocurrencies now in circulation, the competition is intensifying, with the benefit of hindsight likely to go against the marketers who were first to market. The various platforms that support the rapid growth in start-up companies raising funds through the Initial Coin Offering Market are about to change again.
Innovation has been in catch up mode since the arrival of the blockchain technology and 2017 was unprecedented in the number of ICOs and funds raised, which exceeded $6bn in 2017, with a total of 895 ICOs launched through the year.
Through the first few weeks of January alone, a total of $874.8m has been raised in the ICO markets and on the current trajectory, 2017 numbers are going to pale into insignificance.
What is DAICO?
The incentive to evolve the existing initial coin offering platform has certainly been significant when considering the Chinese government’s decision to ban initial coin offerings and fraudulent activity plaguing the ICO market. So it comes as a little surprise that a new decentralized fundraising platform is about to go live.
Russian-Canadian programmer Vitalik Buterin, who is the co-founder of Ethereum and Bitcoin Magazine, is looking to deliver a more democratic method of controlling Initial Coin Offerings, which is carried out on Buterin’s Ethereum platform, through the rollout of DAICO.
DAICO, encapsulates all of the original characteristics of the ICO’s fundraising process, whilst incorporating a Decentralized Autonomous Organization (DAO) protocol, giving investors greater control over the use of funds by companies and development teams through the lifetime of the project or company in question.
Buterin believes that the incorporation of the DAO protocol into the ICO platform reduces the risk of votes of any kind being subjected to 51% attacks, bribe attack, and other game-theoretic vulnerabilities, in order to manipulate outcomes.
The Difference between ICO and DAICO
The initial part of the fundraising process is similar to both the Initial Coin Offering and Decentralized Autonomous Initial Coin Offering platform.
Start-up companies and projects are able to raise funds, with investors buying project of company tokens with invested Ethereum coins.
At present, the respective project teams or company founders decide on the fundraising targets, with the terms of the Initial Coin Offering pre-defined. Common conditions advised include whether there is a capped or uncapped token sale, a dutch auction, a Know-You-Customer sale or other conditions defined by the team, including when the tokens will be remitted to the investor post end of the initial coin offering period, at which point the tokens become tradable and join the rapidly growing list of cryptocurrencies in circulation.
Once the token sale period ends, the two platforms diverge in terms of process, with the DAICO platform introducing a ‘tap’ step
In an ICO, it ultimately is in the hands of the project or company to use the funds as and when they see fit, with no oversight or control given to the investors. The principal of decentralization is flawed here, with a project or company’s funding essentially centralized in a decentralized world.
In contrast, the Decentralized Autonomous Initial Coin Offering Platform, through a mechanism referred to as ‘taps,’ gives the control of project or company funding to the investor.
A DAICO essentially has two criteria, the frequency of funding and the amount of funding released through each ‘tap.’
When a company or project requires access to additional funds that had been raised during the DAICO, the management team will need to make a request for an increase in ‘tap’ value.
The decentralized nature enables token holders to then vote on the request and ultimately decide whether the tap can be increased.
In the pre-blockchain corporate environment, key investors have board member representation to monitor the decision making process and use of funds to invest in the company’s future. As with the board of a corporate, board members vote in a decentralized manner, but the decentralization occurs with only a handful of shareholders, other board members having been hired to represent the company and be involved in the decision making process without the influence of each and every shareholder.
With a DAICO, each token holder will have a say on how a company or project uses the millions of Dollars raised during the token sale.
In addition to voting in favor of or against an increase in a ‘tap, token holders are also able to cancel a DIACO through a vote, returning remaining invested funds to the investors. The purpose of this particular feature is to not only ensure that fraudulent activity can be brought to an end but also to prevent frivolous spending, thus limiting an investors loss through the cancellation process.
In the event of a 51% attack that maliciously raises the ‘tap,’ the development team is able to simply reduce the ‘tap’ to the actual amount requested, or simply not draw on the excess funds. Token holders are not permitted to reduce the ‘tap’ by vote, this can only be carried out by development or management team. In a worst-case scenario, where a 51% attack cancels a DIACO, the developer can simply create a new DIACO.
Buterin adds that, with the DAICO platform, the two most damaging kinds of 51% attacks, i) sending funds to some other 3rd party chosen by the attacker, and ii) lowering the tap to keep funds stuck in the contract indefinitely are simply not possible with the DIACO platform.
DAICO – A Democratise ICO
Buterin’s intention is to give token holders the ability to control a development team’s budget and loosen the purse strings as the team progresses and hits the milestones outlined in the white paper.
Where investors are satisfied with the progress, voters are likely to loosen the purse strings to give the development team greater flexibility to progress the company or project. On the flip side, investors can also bring an end to the project or development with a simple majority vote, which results in the remaining Ethereum coins being returned to the investor.
A DAICO is considered to reduce investor exposure to attacks, bribe attacks and other vulnerabilities including fraudulent activity.
While some may argue that start-ups require an element of freedom and that not all investors have the know-how to be fully involved in the funding requirements of a development, the avoidance of fraudulent and irresponsible behavior is an appealing one and will likely see DAICO well received.
It will be interesting to see how start-ups and project teams embrace the reasoning behind the creation of DAICO and launch on the DAICO platform, giving up the freedom that the ICO platform has to offer.
For now, Abyss is the first DAICO to hit the market, with the start of the DAICO scheduled for 7th February 2018. The Abyss team believes that DAICO will provide tangible solutions to ever-changing security needs, while also delivering transparency.
With so much bad press, DAICO is expected to minimise fraud, whilst specifying contribution and resolution rules and is expected to eliminate voting attacks that plague the ICO market.
It will be interesting to see whether Buterin takes it one step further, with the introduction of Source-Level Decentralized Autonomous Initial Coin Offerings, where the allocation of voting rights could be based upon the number of tokens held by investor, or simply by reputation, which comes from the consistency in quality of an investor’s contribution.
It would make perfect sense for an investor with more to lose to have a greater influence on whether funding the project or start-up should continue or be shut down, as it would make sense for an investor who has contributed more to have a greater understanding of funding requirements.
For now, next month’s first DAICO will give the cryptomarket a new platform to consider and all eyes will be on The Abyss and, not only how successful its token sales is, but also what issues the developers face as they look to gain access to funds in order to rapidly develop and grow the platform.