Initial Coin Offerings (ICOs), sometimes called a crowd sale, a fundraising event or a token generation event (TSE), follow a company’s release of its own cryptocurrency to raise capital for further project development and establishing its presence and worthiness in the community. This decentralised access to capital is fast disrupting the traditional fundraising models of venture or angel fiat investors.
In the recent past, insane amounts of funds raised through ICOs, such as Tezos’ US$232 million or Filecoin’s US$257 million token sale, have further made this model highly popular among budding entrepreneurs.
The Need for a Mature ICO Model
With its success, the system has also gone on to reveal some existing gaps that need to be addressed. The advent of malicious players in the market and change in government regulations have made it necessary for the system to evolve and adapt.
Filecoin, despite its glorious beginnings, is now facing lawsuits for securities fraud, owing to changing regulations. Scams, such as Mybtgwallet.com, led to investors losing a whopping $3.3 million to scammers. Start-up teams are also using the earliest proof-of-concept model to raise millions of dollars, which is based on hype rather than the team and the product-market fit.
Such “pump and dump” schemes have led to massive swings in ICO pricing.
The DAICO Concept
Vitelik Buterin published a paper on the concept of “DAICO” in January 2018. DAICO, which is a combination of the Decentralised Autonomous Organisation (DAO) concept on Ethereum, and the old ICO model, aims to minimise certain risks and complexities that exist in the ICO model.
For starters, the concept will put more control in the hands of investors. They will have greater influence on the earlier stages of development and can also withdraw their funds, if they are not happy with how the project is progressing. It will reduce the occurrence of the 51% attacks and also help in reducing the amount sent to a third-party, with a mechanism called “tap” in place.
Taps allow token holders to control the amount of funding the team has access to. So, in case a team wants funds to hire new members or market its product, it will have to raise a request for an increase of the tap value. This will keep investor funds safe and keep the team motivation levels high, beyond a successful fundraising.
Challenges of DAICO
DAICO is Buterin’s answer to fraudulent projects. However, like all new concepts, this platform will also come with its own set of challenges. The education of contributors is the prime aspect here. How do we trust investors to make the right decision regarding a viable project, much of which they might not even understand? They will also have to learn about the price fluctuations of tokens in the market to make informed decisions on raising tap value or returning investor funds. Ethereum itself faces challenges in scalability and there is no guarantee that it will remain the dominant platform for future ICOs.
For now, The Abyss is the first project that goes on token sale on the new DAICO platform. More will be known about the system after its successful implementation.