A method for decentralized funding of projects that introduces a form of governance in the ICO process, allowing backers to vote for the return of their funds if certain conditions are met.
Proposed in 2018 by Vitalik Buterin, the creator of Ethereum (ETH), it aims to combiner ideas from Decentralized Autonomous Organizations (DAOs) and initial coin offerings (ICOs) in order to increase the investors’ trust in the latter and put more control over the allocation of raised fund in their hands.
ICOs are a method of raising funds for the development and marketing of new cryptoassets that is indigenous to the cryptocurrency industry. When conducting an ICO, the developers who are seeking funding sell a part of the total supply of their cryptoasset to the general public. There is usually a soft cap — a funding target that needs to be achieved, otherwise, the campaign is traditionally considered a failed one and all the collected funds are returned to the contributors.
If the soft cap is reached, on the other hand, the developers gain full access to it, as well as to all the funds that were raised in excess of the target, as soon as the ICO period ends. This places all the power to decide over how the proceeds should be used in the hands of the centralized team behind the project, which can result in bad outcomes.
ICO teams are sometimes unable to finish their products in a reasonable amount of time, resulting in vaporware. Worse, some ICOs turn out to be outright scams that were not intended to go into a development phase at all. With little to no ability to enforce refunds due to a lack of defined regulations in the ICO space, investors’ only option in such cases is often to rely on the team’s ethics.
Buterin’s DAICO concept proposes to lock all the proceeds of an ICO into a decentralized autonomous organization (DAO) smart contract and put the governance over that DAO in the hands of the investors.
The funds would not be released all at once after the fundraising campaign is over, but rather be unlocked at a certain per-second rate called the tap variable, voted upon by the investors. Moreover, if the development team proves unable to finish the project, the contributors can vote to refund whatever resources remain to themselves.
DAICO is a relatively recent and yet unproven concept, but in theory, it is expected to make the governance of ICO funds more democratic and offer investors a degree of protection from fraud.