Why Vitalik's proposed "DAO+ICO" fundraising method failed to gain traction?

"DAICO," which stands for "DAO + ICO," is a new fundraising method proposed by Ethereum founder Vitalik Buterin in January 2018 during the ICO frenzy. He aimed to integrate the concept of Decentralized Autonomous Organization (DAO) into the ICO fundraising process to address the issues present in traditional ICOs, ensuring that blockchain projects can raise funds smoothly while safeguarding the interests of investors.

By: Hao Kai, employed at Hashkey Capital Research

However, after studying the operational mechanisms and practical implementation of DAICO, we have reached a conclusion: DAICO does not effectively resolve the problems inherent in traditional ICOs.

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This conclusion is primarily based on our findings:

• The game between investors and project parties does not always drive projects towards favorable development;
• DAICO has not received recognition and adoption from the mainstream blockchain market;
• Many have proposed improvements to the design of DAICOs, but their specific effects need to be tested in practice.

Therefore, at present, DAICO is not considered a successful fundraising method.

To explain our conclusion, let's start with the ICO craze.

In 2017, driven by the high returns on some digital currency investments, the fundraising model of Initial Coin Offering (ICO) quickly became popular. The following figure shows the fundraising situation of digital currency projects through ICO in 2017 and 2018, as compiled by CoinSchedule. Although the statistical methods of different institutions may not be entirely consistent, the overall trend is similar. By early 2018, projects were able to raise billions of dollars monthly through ICOs.

Figure 1 Fundraising amounts through ICO in 2017 and 2018, Source: CoinSchedule

Although ICOs have to some extent promoted the popularity and development of blockchain, the ICO market as a whole has appeared chaotic and unregulated, with many criminals using ICOs as a cover for scams. The main drawbacks of ICOs include:

The risk for investors participating in ICOs is very high, and one significant reason is that project parties do not guarantee any returns on investment, development progress, etc. After easily raising tens of millions or even billions of dollars, it is difficult to ensure that they will continue to consider investors as part of their community.

The following table shows some projects that may go online in 2019 and distribute tokens. From the table, it can be seen that well-known projects such as Telegram, Filecoin, and Dfinity raised a substantial amount of funds, but their development progress has not been ideal, as they have not gone online yet (as of January 2020).

Table 2 Projects possibly going online in 2019, Source: ICO Analytics

After the ICO ends, project parties can immediately access all the funds raised and are free to use them as they wish. Investors have no way to intervene in the use of funds, and their rights are not guaranteed. For example, in October 2018, the Rchain project faced cash flow problems, but in the financial data provided by Rchain, board compensation actually increased, which clearly did not align with the interests of investors.

The following table shows the change in ETH balances raised by some project parties as of April 2019. From the table, it can be observed that most project parties choose to withdraw all ETH within a short period without detailed explanations or plans for fund usage.

Table 1 ETH balances raised by project parties, Source: diar

Due to the inherent nature of digital currencies being transnational, investors from all over the world can participate in ICOs. Once project parties engage in fraudulent behavior, it is difficult for investors to recover their losses through legal means. Therefore, China has strict regulations on ICOs. The "Notice on Preventing Risks of Fundraising through Token Offerings" (2017) and related documents have repeatedly emphasized that issuing digital currencies such as Bitcoin and Ether to raise funds from residents within the country constitutes illegal securities activities.

In view of the drawbacks of ICOs mentioned above, the blockchain field needs a more reasonable fundraising method. In January 2018, Ethereum founder Vitalik Buterin proposed a fundraising method called DAICO, aimed at addressing the issues present in traditional ICOs, where the interests of both project parties and investors can be safeguarded while enabling smooth fundraising for project parties.

DAICO combines the concept of DAO (Distributed Autonomous Organization) with ICO, integrating DAO's idea into the ICO fundraising process. Based on the traditional ICO, DAICO adds a smart contract between investors and project parties. After the fundraising ends, the smart contract continues to track the project's development progress and gradually releases the raised funds under certain conditions.

Let's briefly introduce the operating mechanism of DAICO:

The process of fundraising through DAICO by project parties is shown in the figure below.

Figure 3 The process of DAICO

1. Project parties initiate the DAICO contract

2. Investors contribute ETH to the DAICO contract and receive ERC20 tokens, a process similar to traditional ICOs;

3. After the contribution period ends, a new status variable Tap appears in the contract. Based on the Tap value, project parties withdraw ETH from the contract, with the Tap value determining the speed at which project parties can withdraw ETH from the smart contract;

4. Token holders can vote to either "increase the Tap value" or "refund" based on the project's progress. If token holders vote for "refund," the process ends;

5. If token holders vote for "increase the Tap value," the Tap value in DAICO will be raised, allowing project parties to withdraw ETH at the new Tap rate. Until the vote for "refund" is passed or all ETH is withdrawn, token holders can continuously vote to "increase the Tap value."

Funds raised through DAICO are not distributed all at once to project parties but are gradually released through smart contracts and voting mechanisms. If project parties want to access all the raised funds, they must continue to develop the project. DAICO can effectively overcome the incentive issues present in traditional ICOs, aligning the interests of project parties and investors and significantly reducing the risk of fraudulent activities by project parties.

At the same time, investors can intervene in the distribution process of raised funds. For excellent projects, investors can vote to increase the Tap value, accelerating the unlocking of funds to help project parties expedite development progress. If investors are dissatisfied with the project's progress, they can vote for a refund to receive back the remaining ETH proportionally. It is important to note that investors cannot vote to decrease the Tap value, but project parties can voluntarily vote to reduce the Tap value.

The original intention of DAICO's design is for investors to decide whether to continue supporting a project based on the performance of the project parties and the development of the project. However, it is important to note that both investors and project parties participate in DAICO with the goal of maximizing their profits. Therefore, profit will largely determine the voting choices of investors and project parties.

According to the secondary market prices, even if developers misuse funds or delay project progress, rational investors will not choose to vote for a refund when the ERC20 tokens issued by project parties have a higher exchange rate against ETH than the initial rate. They will opt to sell ERC20 tokens on the secondary market to gain higher profits. Meanwhile, some project parties seeking short-term gains may wish to refund because the remaining ETH value in the raised funds is lower than the value of ERC20 tokens distributed to investors.

Similarly, based on the secondary market prices, even if project parties continue development and ensure the project progresses smoothly, some investors may still choose a refund to minimize investment losses if the ERC20 tokens issued by project parties have a lower exchange rate against ETH than the initial rate.

It is important to note that project parties raise funds in ETH, which is susceptible to fluctuations in the overall digital currency market. The significant price fluctuations of ETH can affect the incentive mechanism in DAICO. For example, when ETH is in a downward trend, project parties may wish to unlock and sell all ETH quickly to avoid larger losses. In this scenario, regardless of the actual progress of the project, project parties will vote to increase the Tap value. Therefore, using ETH for fundraising may not be the best choice.

Overall, the voting mechanism designed in DAICO may not effectively incentivize excellent projects or eliminate bad projects. The game between investors and project parties may not always lead projects in a favorable direction.

The distributed game distribution platform Abyss was the first project to raise funds through DAICO. In May 2018, Abyss raised over 15 million USD through DAICO. Abyss provided specific requirements for each voting session, including voting time, voting weight, participation ratio, etc.

The following figure shows several voting instances listed on the Abyss website. From the figure, it can be seen that Abyss conducted a total of 5 votes, with 4 votes to increase the Tap value being approved and 1 vote to decrease the Tap value not being approved. Abyss has not conducted any refund votes since November 2018. During this period, there have been no refund votes.

Figure 4 Voting instances of Abyss

According to CoinMarketCap data, the token price performance of the Abyss project has been poor, with a drop of nearly 90% compared to the issuance price and around 50% compared to ETH price.

Based on the analysis above, in this situation, rational investors should request a refund, but in reality, there have been no refund votes. The reasons for this phenomenon are twofold: investors have confidence in the Abyss project, believing that the poor price performance is only temporary, or investors have already sold off their ERC20 tokens and do not care about the project's development. The latter reason seems more likely.

Aside from Abyss, projects like BitGame and Tokedo have also used the DAICO method for fundraising, but these projects are generally not well-known, indicating that DAICO has not been widely accepted in the mainstream blockchain market.

DAICO integrates the DAO concept into the ICO fundraising process to balance the rights of investors and project parties to some extent. Its original intention is for investors to decide whether to continue supporting a project based on the performance of the project parties and the development of the project.

However, DAICO may not effectively address the issues present in traditional ICOs.

Firstly, many investors are more concerned about their short-term profits and are not interested in the future development of projects. They do not vote based on the actual development of the project. Additionally, some investors do not participate in voting, allowing project parties to still have a decisive influence on voting results.

Secondly, voting results are directly related to the number of tokens. If project parties control the majority of tokens through methods like reservations, purchasing from the secondary market, or collusion, they can act according to their own wishes, rendering the voting mechanism designed in DAICO ineffective.

Thirdly, the acceptance of DAICO in the blockchain market indicates that it has not gained recognition and adoption from the mainstream blockchain market. This model does not attract project parties or investors significantly.

Many people have proposed improvement solutions for the DAICO design:

• Using stablecoins like DAI for fundraising. Stablecoin prices do not fluctuate and are less influenced by the overall digital currency market, reducing the impact of price factors on investors and project parties during voting. However, since most digital currencies do not have a rigorous valuation calculation during fundraising, the token prices may still fluctuate significantly on the secondary market, indicating that fundraising with stablecoins may not fundamentally solve this problem.
• After the fundraising ends, not distributing ERC20 tokens to investors immediately, but waiting for project milestones to be achieved (such as the mainnet launch) before distributing. Before this, investors participating in DAICO only have voting rights but cannot trade ERC20 tokens on the secondary market, and the token price will not change. Combining this issuance mechanism with the design of fundraising using stablecoins allows investors and project parties to vote based solely on the project's progress without being influenced by price factors. However, this method prevents investors from quickly liquidating their assets and may reduce the enthusiasm of some investors.
• Introducing an "agency" mechanism on top of the DAICO model to objectively judge the actual progress of projects, addressing the issue of bad projects being overvalued and good projects being undervalued. However, finding a completely objective agency and resolving the cost issue of the agency need to be addressed first. This cost can be borne by investors, similar to "investment advisory fees" in reality.
• Requiring specific requirements for the voting weight, participation ratio, and voting incentives for each address in the DAICO model to increase investor participation in voting and reduce the likelihood of project parties dominating the voting process.

In summary, DAICO may not effectively address the issues present in traditional ICOs, and this model has not been widely adopted by the mainstream blockchain market. Although others have proposed improvement solutions for DAICO, the specific effects need to be verified in practice. Currently, DAICO is not a successful fundraising design.

This article is authorized and reproduced by ChainNews, Source: ChainNews (ID: chainnewscom)

Further Reading

• 【Newcomer's View】Issuing Tokens to Obtain Startup Funds: A New Form of Fundraising Emerged from the Blockchain: ICO
• Research Indicates: ICOs are Gradually Evolving into More Rational Fundraising Activities

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