What We Know So Far About Vitalik Buterin’s New DAICO Fundraising Model
The founder of Ethereum recently proposed a new crowdfunding model designed to minimize the risks associated with initial coin offerings (ICOs).
In a post on the Ethereum Research Forum earlier this month, Vitalik Buterin outlined a method for merging ICOs with some of the benefits of the DAO. The end result is a system that improves the existing ICO model by reducing both risk and complexity.
Buterin’s new decentralized fundraising platform will be called DAICO, which combines the existing ICO concept with a Decentralized Autonomous Organization (DAO). Put simply, a DAO relies on smart contracts to hardcode specific rules that an organization follows from inception. Although this concept has been around since 2009, it has only recently been put to use with projects like “The DAO.”
Prior to being shut down by U.S. regulators for violating securities laws, The DAO sought to improve governance by democratizing ownership of tokens and allowing creators to implement whatever rules they wanted. This is more or less what the DAO system promotes. The rules hardcoded into the system essentially dictate how the organization operates.
Buterin proposed the following diagram to illustrate how the DAICO concept evolves:
DAICOs vs. ICOs
As pointed out by Coinsquare, the DAICO fundraising model begins very much like an ICO. It allows startups to raise funds and investors to pay for tokens via Ethereum. And like ICOs, DAICOs can structure their crowdraise however they like, including implementing strict KYC standards. After the crowdsale, the tokens can be listed and traded on any exchange.
Where the two methods differ is around how the funds are ultimately used. The current ICO model allows team members to use the funds in any method they choose, whereas DAICOs enable investors to control which portion of the funds team members can access. If the team wants to spend money on marketing, hire employees or invest in infrastructure, they need to “tap” their investors for approval. Investors then vote on whether to grant the company permission to utilize the funds for that specific purpose.
This difference may appear subtle, but could have significant implications on a market that has attracted its fair share of scammers, con artists and opportunists. For starters, investors will be able to hold startups accountable after the crowdsale is over. Under the DAICO model, startups can’t get away with merely promising to spend money a certain way because they ultimately need their investors’ permission to access the funds. Buterin’s proposal also has the potential to weed out dishonest projects looking to raise a quick buck before vanishing.
On paper, DAICOs support the development of what Buterin has called “Tokens 2.0,” an era of high-quality tokens that goes above and beyond what the existing market offers. In Buterin’s view, the era of higher quality tokens is a lot closer than most people think.
ICOs generated billions of dollars in revenue for startups last year, with December marking the most active month on record. If time is of the essence, the DAICO model could have a profound impact on the fundraising model in the not-too-distant future.
There’s still no timetable for when this model could be launched. In the meantime, Ethereum remains the undisputed king of crowdraises even as platforms like Stellar begin attracting higher quality projects.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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