News of DAICO Model Elevates Crypto Industry Amidst Heavy FUD
Examining the DAICO Model
Across the crypto world, the New Year has been marked by rampant news stories about scams, regulations and all-around FUD. But anyone in this industry knows you don’t need to look far beyond all the noise to find worthwhile, beneficial applications to digital currencies and blockchain technology. Just recently, Ethereum Co-Founder Vitalik Buterin released a post on the Ethereum Research Forum entitled, “Explanation of DAICOs”. In the article, Buterin details a new and improved model for blockchain-based crowdfunding. Based on his ideas, this framework merges the best of DAOs and ICOs to create a better, more secure and sustainable ICO protocol. Learn more with our concise analysis of the DAICO model.
Image Credit: https://ethresear.ch/t/explanation-of-daicos/465
The DAICO Crowdfunding Process
The process begins with the creation of a DAICO contract. The development team of the blockchain-based enterprise, who want to invite investors to participate in a crowdsale, publishes this DAICO contract.
The DAICO contract establishes the terms that will guide the mechanism fueling this new crowdfunding process. Additionally, the way in which funds raised are utilized are determined by the contract. A DAICO contract is made up of two distinct features, “contribution mode” and “tap mode.”
The contribute mode portion of the DAICO contract is where all of the information regarding the specific modalities that will guide the crowdfunding process is domiciled. This mode basically specifies the mechanisms that will be used to invest Ether (ETH) into a project using this new crowdfunding model. As in the case of conventional ICOs, when investors put up ETH into a project, they get tokens in return.
There are a number of funding mechanisms that can be chosen under this model. These include capped/uncapped token sales, whitelist, or even Dutch auction token sales. At the end of the contribution mode of the DAICO, the project will no longer be able to accept any more ETH. The tokens created by the project effectively become tradable as the DAICO moves into the tap mode.
The tap mode determines how the investor funds are utilized during the development of the DAICO project. This is one of the major parts of the DAICO model that closely resembles the DAO architecture framework.
Token holders (investors) will have the ability to vote on how much funds can be utilized by the development team at any given point in time.
Depending on the perceived direction in which the project is going, investors have two basic voting categories:
- Initiating a tap
The investors approve the release of funds to enable the development of a particular portion of the project. The tap can be denominated as per the preference of the project community.
- Deactivating the DAICO contract
If the token holders are not satisfied with the development of the project, they can vote to deactivate the DAICO. This means that the withdraw mode is activated and all unspent ETH are returned proportionally to the investors.
Potential Impacts of the DAICO Model
ICOs have grown in popularity over the years and in 2017, they became even more popular with a number of high-profile ICOs grossing hundreds of millions of dollars. Despite the apparent success of the ICO model, there have been strong criticisms against perceived flaws in the system.
Pump and dump schemes, fraudulent ICO campaigns, project centralization, and lack of investor output have called into question the integrity of the ICO model. As a result, countries like China have banned ICOs, while others are in the process of establishing stricter regulations on the market.
The DAICO model is an attempt by Vitalik Buterin to solve some of these issues. A strong proponent of decentralization and a vocal critic of the current blockchain landscape, Vitalik is attempting to provoke positive change within the market.
The Ethereum co-founder has on several occasions voiced his frustrations with the way in which blockchain technology is being applied. This new DAICO model is designed to combine the positives of the DAO and ICO models into one, robust crowdfunding and blockchain project governance model.
Benefits of the DAICO Model
1. Prevents Centralization
The underlying philosophy behind the blockchain is the elimination of centralization and the establishment of mainstream decentralization. With ICOs, it seems as though the only decentralized portion of it is the crowdsale proper. After that, a centralized team of project developers basically calls the shots. This is completely at odds with the spirit of the blockchain revolution.
With the DAICO model, crowd wisdom replaces the project team as the sole player in the development of the project. This closely mirrors the DAO framework, where every participant is given voting rights to vote on how best to advance the project.
2. Ensures Efficient Use of Investor Funds
This follows on from the establishment of decentralization in the development of blockchain-based projects. In the DAICO model, investors will have a say in how funds are released and utilized during the development of the project. Using the tap mode, the funds can be monitored to the barest “wei.”
This ensures enhanced fiscal responsibility on the part of the project team. Investors can deactivate the contract if things don’t go well. In this way, project developers will be motivated to become more responsible and accountable.
3. Robust Security
Both the DAO and ICO models have had serious security issues that have been exploited in the past. The DAO hack of 2016 led to the theft of $50 million. Many ICOs have turned out to be fraudulent campaigns while others have been hacked mid-ICO to the tune of millions of dollars. In the DAICO model, these risks are minimized considerably. Security risks usually have two main entry points, investors and developers.
Once a digital voting framework is established, there is always the risk of a 51% attack, as well as other game-theory based hacks that threaten the fidelity of the voting process. If a 51% voting attack is detected, the developers can lower the tap to mitigate against the vote manipulation attack. This invariably dilutes the effect of the vote manipulation attack. If the issue continues, the developers can simply create another DAICO.
If the security threat comes from the side of the developers, mismanaging funds for example, the investors can take the same action. They can lower the tap or deactivate the DAICO. Both investors and developers keep each other in check.
It is our sincere hope that a model like DAICO will bring some sanity into the cryptocurrency fundraising ecosystem. The current environ has been blighted by bad press stemming from the activities of dishonest developers and entrepreneurs.
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