What is a DAICO, Explained

What is a DAICO, Explained

1. What is a DAICO?

It’s an improvement on the ICO fundraising model that incorporates certain aspects of DAO’s.

The idea was suggested by Vitalik Buterin in January 2018 and is aimed at making ICO’s more secure by involving investors in the initial project development process.

It will further enable token holders to vote for the refund of the contributed funds if they are not happy with the progress being made by developers.

For projects that implement the DAICO concept, it will force a level of accountability on developers and give token holders additional peace of mind that they are guaranteed to either see at least a minimum viable product or get their money back.

2. How does a DAICO work?

It starts off as a Smart Contract in contribution mode.

The DAICO contract will have a mechanism where contributors can send funds to the project in exchange for network specific tokens. When the crowdsale period ends, the contract will prohibit anyone from contributing any further, i.e., normal token sale.

There is one variable that comes into effect after the contribution period has ended called the tap variable. This tap in the contract can be programmed to predetermine the amount (per second) that developers can withdraw from the token sale funds.

Initially, the limit will be set to zero, but contributors can then vote on a resolution to increase the tap.

3. What elements from a DAO are incorporated?

There are three main elements taken from DAO’s.

First, at no point is complete trust placed entirely on a centralized team. Decisions on funds from the get-go are decided by a democratic voting system.

Second, funding is not released in a lump sum, but a mechanism is implemented to spread it over time.

And finally, there is an opportunity to refund the contributed money. This decision is based on the ‘wisdom of the crowds,’ i.e., the contributors can vote for a refund of the remaining finances, if the team fails to implement the project.

4. How is it different from an ICO?

The main difference is access to funds.

With an ICO, once the token sale finishes, developers have complete access to all the contributed funds. Developers have to calculate in advance how much is necessary to produce a minimum viable product and once they reach this amount, called ‘the soft cap’, they can start to work on the product and spend the money on whatever they deem necessary. If they don’t reach this initial soft cap, they have to refund the money. But if they do, there’s no further real obligation.

With a DAICO, contributors can vote on resolutions (during the development phase) to either increase the tap or to return the remaining contributed funds (self-destructing the contract).

5. What are the benefits compared to ICO’s?

It puts more control in the hands of investors.

Contributors have much more to say and influence in the development stage of the project. If they are not happy with how the project is progressing, they can set the contract to withdraw and get a refund.

This completely mitigates the risk of scam ICOs where developers hold a token sale and then run away with the money as soon as the ICO is finished, without producing any product.

As the amount of funds that gets released from the Smart Contract is limited and strictly controlled, it will reduce the occurrence of 51% attacks. Even if a 51% attack does happen, where an attacker wants to send funds to a chosen third-party, the consequences will be contained to the amount that was authorized to be released by the contributors (or the developing team) at any one point (the tap).

With an ICO, once the team raises tens of millions of dollars, it suffers deterioration in its motivation to implement the project; or, at least, the activity decreases significantly. With DAICO model the team’s motivation to bring the idea to life, i.e. to deliver the product, is sustained over a lifetime period.

6. What are some of the potential challenges with DAICO’s?

As with any new concept, there will be some challenges that need ironing out.

If developers hold a large chunk of the distributed tokens, they potentially only have to influence a small percentage of contributors to sway their vote and get more funds released from the Smart Contract.

Contributors’ education is also crucial. They need to understand why the price of a specific token is rising or falling to make the right decision when voting on increasing the tap amount, or returning the funds. The best decision is one based on the facts relating to the project itself, not on emotions connected to the price of a particular token.

Finally, contributors can also completely disengage by putting all their trust in the DAICO concept itself and therefore feel it’s not necessary for them to actually partake in votes and resolutions, reducing the majority threshold and weakening the security of the mechanism.


7. What are some of the main characteristics of a DAICO?

It’s hard to say as the concept has never been implemented yet.

However, to answer the question, it is helpful to look at a project that plans to conduct the world’s first DAICO.

The Abyss, for instance, a next generation digital distribution platform based on a crypto reward ecosystem, plans to do this with the following DAICO features:

  • A resolution to vote on tap increases can only be initiated by project developers.

  • There’s a percentage limit by which the tap can be increased at a time (to prevent abuse).

  • The frequency of potential tap increases is limited (no more than say once every two weeks).

  • Only investor tokens can be used to vote, not those held by project developers.

  • Contributors will be informed well in advance of a planned poll.

  • When contributors decide to terminate the project, the Smart Contract will change to withdrawal and refund their money, while at the same time destroying tokens held by developers.



Vitalik Has a New Idea for ICOs – And It’s Being Tested

Investors need more control over ICOs

At least, that’s according to ethereum creator Vitalik Buterin. One of the early thinkers to shape the crypto funding mechanism concept, he hasn’t quite put the idea aside, last month proposing it could be combined with a decentralized autonomous organization (DAO) to best allow investors to have a say in how money raised gets handled.

Flash forward to today and what Buterin called a “DAICO” is already being developed, with gaming startup The Abyss building its own version for its upcoming token sale.

“This idea found a free place in my heart,” said Konstantin Boyko-Romanovsky, the project’s founder. “We really want to make something beautiful.”

As Boyko-Romanovsky alludes to, the ICO model has been called into question for enabling entrepreneurs to raise big money without a product or platform already built. (Even Boyko-Romanovsky has gotten burned by several ICOs, which is why he believes better tech could help ensure a token’s team isn’t interested in a cash grab.)

And by adopting the DAICO model first, he also wants to show investors that The Abyss is truly about disrupting platforms for selling video games (like Valve’s market-leading site, Steam) by making the promotion of video games more flexible and delivering more money to developers.

Still, while the concept will get a test run with The Abyss project, others are skeptical it will be widely embraced.

First and foremost, like ICOs, the DAO concept has a rough history, since the first DAO had a vulnerability that allowed a “attacker” to transfer $60 million worth of ether to themselves. (The consequences and uneasiness of the fallout still reverberate throughout the community.)

Yet, former Monax legal counsel and ICO skeptic, Preston Byrne pointed to a deeper question: Do ICO investors really want to be bothered with governance?

“Most DAO users are less interested in managing their chosen project than they are in offloading their coins at a massive profit on new entrants as quickly as possible,” he wrote.

But Boyko-Romanovsky believes the industry has matured enough, with a significant number of sophisticated, institutional investors coming to the table, to want such insight into the inner-workings of an ICO issuer.

He told CoinDesk:

“DAICO, this is true crypto for me, because it utilizes the best from ethereum.”

Minimum viable DAICO

So, just how exactly does the DAICO combine two of ethereum’s more popular concepts?

In Buterin’s post, he describes a smart contract in which token holders vote to set two mechanisms: a “tap” and a “refund.” First, the tap is the rate at which the smart contract would allow the issuing team to draw down ether from the smart contract that holds funds raised in a crowdsale.

“The intention is that the voters start off by giving the development team a reasonable and not-too-high monthly budget, and raise it over time as the team demonstrates its ability to competently execute with its existing budget,” Buterin said in the post.

The refund then allows users to vote whether they should “self-destruct” the ICO, which simply empties out the smart contract of all remaining ether and returns it to the token holders in proportion to however many tokens they hold.

To Boyko-Romanovsky, it’s a slick idea.

“Most people don’t understand what is DAICO and how it will change the industry,” he said.

But one that was even more attractive since Buterin himself proposed it.

He told CoinDesk:

“We got much, much more attention because of this.”

Upgrading Vitalik

But as much as Buterin’s DAICO idea spoke to Boyko-Romanovsky, the developer is tweaking the mechanism a bit to make it more appropriate for The Abyss.

For instance, The Abyss DAICO will have another way to increase funds to the team, called a “buffer.” The buffer is an option for a one-time payment, so if one month they have a major expense which the flow doesn’t cover, they can propose a buffer vote to token holders.

On top of that, the project’s tap is more limited than the one Buterin proposed.

For one, the flow can never be increased more than 50 percent month over month. So, if the tap is 100 ETH per month now, it can’t go higher than 150 ETH per month during the next vote. On the vote after that, it couldn’t go higher than 225 ETH per month, and so on.

Even then, the rate of raises could still happen quite fast, so The Abyss team inserted another limit. After each tap and buffer vote, no vote of the same type can happen again for two weeks.

The team also defined some rules about what it takes to establish a “quorum” - the number of people it takes to make a vote legitimate.

The number of voters in each vote has to equal no less than half the number of voters in the prior vote. So, if 100 people vote in the first poll, at least 50 people have to vote the next time to make a quorum. That said, if 200 people vote on that second poll instead, then at least 100 people would be needed to hold a legitimate vote the next time.

Token refunds?

Perhaps, though, the most radical change The Abyss team made was in what it takes to launch a refund vote.

The Abyss will seek three to five crypto luminaries to serve as “oracles” over their ICO, and a majority of those oracles must agree to a refund vote for it to be initiated. If the oracles vote for a refund poll, then the token holders get a chance to vote on it.

This change protects an honest developer running a DAICO from investors moving for a refund because a rapid increase in the price of ether makes them want to cash out ether now, instead of wait for ICO returns later.

Having added that stipulation, though, Boyko-Romanovsky said, “I am not afraid that my project will be closed because of refund or something else.”

And the industry will soon see, as The Abyss’s ICO starts next month, with a hard cap of $60 million in ether.

“People are asking why we need $60 million, but we really need big money to compete with Steam,” Boyko-Romanovksy said.

The project’s KYC will be run from Switzerland, where the company is domiciled, although the team works from Russia. According to the company’s website, in the U.S., only accredited investors can participate in the ICO, but everywhere else the crowdsale is open to anyone.

With the KYC and restrictions on investors, the project looks to be playing by the rules, something that aligns with Boyko-Romanovsky interest in being a trusted member of the crypto space.

According to him, just as the DAICO concept has attracted attention because of Buterin’s support, potential investors trust people more than they understand the technology or underlying business models of platforms run with tokens.

And in that way, Boyko-Romanovsky concluded:

“I want to become in this market: No matter what I do, what I do is very good. I think people will see in one year. I will get people’s trust.”

The Abyss

1 Like

💰 YEN · YouTube ·️ YEN.CAMP 🧠