Disclaimer : The views in this blog are based upon my personal opinion. Please invest in ICOs after careful research and at your own risk.
Initial Coin Offerings (ICOs) were first introduced with a divine thought of removing the exchanges from the middle and letting the general public interact directly with the project owners. The idea was so brilliant that ICOs gained momentum in a very short amount of time. Everyday one or the other company comes up with its own ICO. But as they say, there are always two sides to a coin. Soon ICOs became a way to earn easy money and even get away with it. I have seen a lot of news and forums about ICOs being fraudulent, or projects not getting completed on time. And then there are coins that really do nothing and people just buy them because it is a crypto token. To avoid all this, discussions have been going on about a way to secure people’s money spent on ICOs.
In a recent post on ethresear.ch, Vitalik Buterin came up with a new concept for the ICOs, DAICOs. DAICO stands for Decentralized Autonomous ICO. This combines the ideas of Decentralised Autonomous Organisations(DAOs) and ICOs. DAOs are those organisations, that are not run by a centralised entity but are governed by bylaws that are written as computer code and are immutable and decisions are taken with a consensus process that happens on the blockchain. The power lies in the hands of all the members of the DAO and not just one person.
DAICOs mainly use three components of DAOs:
- Decisions based on popular opinion which benefits the public.
- Distribution of power in the hands of the general public.
- Spreading the funds over time instead of giving it all away in a single moment.
The company that wants to hold an ICO releases a smart contract which will hold the funds collected during the ICO. The funds are not released to the developers immediately at the end of the ICO but remain locked up in a smart contract, rules of which can only be changed with a consensus of the token holders.
A variable called ‘tap’ is introduced. This variable defines the amount of funds that can be withdrawn from the smart contract (in wei/sec). It is initialized to a value of zero.
Two types of resolutions can be held after the ICO:
- Increasing the tap value.
- Withdrawing the amounts held in the smart contract and distributing the proportionately.
The value of tap can only be increased with a consensus vote but it can be decreased by the unilaterally by the owner of the project.
This solves a lot of problems related to ICOs discussed earlier. This mechanism gives the control of the funds to the general public.
The tap amount allows to keep a check on the development of the project. It can be set to a low value initially and gradually increased depending on how much is needed at that moment. In this way the developers cannot run away with the funds because only a certain amount of it is released each second. In case they try to run away, the token holders can always withdraw their funds from the smart contract after organising a vote.
Moreover this keeps the developers always working, because now there is a threat that funds can be withdrawn at any moment if the project deadlines are missed.
Although there is always a possibility of a 51% attack, but the risk of malicious use of funds is minimized and both the developers and the voters have to be compromised in order to cause a real loss which is as absurd as it sounds.
DAICO is a not a silver bullet to all the ICO problems. Of course there are certain limitations to the implementation of DAICOs. The token holders or the voters need to be constantly engaged in the development process of the product and need to be notified of an upcoming resolution well in advance. Also if the developers own a large chunk of the tokens, they can easily sway the consensus result by influencing only a small group of token holders. Then there may be times when the price of the token shoots up to 5x or 6x its initial price due to market speculations and advice of the so called “crypto experts” (Yes, I am talking about you McAfee!). In this case the voters will be reluctant to vote for a self destruct of the contract or lowering the tap value even if the developers are not delivering up to the mark or missing deadlines. In a startup, the timelines are changing continuously and there are certain times when there is an instant need of funds. Voting for this can lead to a lag in the release of funds and a lag in the development; so voting needs to be conducted regularly.
People have already started proposing solutions to these problems like linking the tap value to something tangible like an alpha release, a beta release and so on. This active participation shows that this idea is definitely something and people have already started basing their ICOs on this new mechanism. Abyss is holding the world’s first DAICO.