ICO a DAO - Can Decentralized Autonomous Organizations Save ICOs?by Sebastian Schuhl
In January 2018, Ethereum co-founder Vitalik Buterin outlined a proposal for eliminating the downsides of many initial coin offerings (ICO). Buterin wrote, “the following is a quick exposition of an idea I had for improving the ICO model by merging some of the benefits of DAOs.” The thought experiment highlighted how a “DAICO” could eliminate the temptation for exit scams and leverage the wisdom of the crowd to distribute project funds.
In the following post, we will dive into some of the ways in which a DAICO (an ICO for a decentralized autonomous organization, short DAO) can improve on ICOs and better leverage positive community sentiment. Already, ICOs revolutionized the way founders can fund their ideas, but a few too many fraudulent actors have spoiled its reputation. The DAICO is likely just the ticket to eliminate such actors from the equation.
Despite the democratization that ICOs brought to the crowdfunding model, the tool has also been leveraged for fraudulent schemes. With founders raising multi-million dollar sums in only a few hours, the temptation to take the cash and run is considerable.
The crypto research company Diar, reported in August 2018 that nearly $100 million had been lost to exit scams that year. The largest scam from Shenzhen Puyin Blockchain Group in China managed to lift $60 million via three different ICOs called ACCHain, Puyin, and BioLifeChain.
But assuming a team does generate an original crypto use case, how can investors keep them accountable after the ICO?
Projects like TenX, for instance, which marketed a crypto-capable debit card before raising $80 million with their ICO in 2017, ended up falling short of their objective. Following Visa’s departure with card provider WaveCrest in January 2018, TenX missed the Q1 deadline for their debit card product, but continued to tell investors that it would be “coming soon.” TenX is still afloat, of course, and their cards are on offer, but only to a limited number of the population.
Investors in their ICO based in Singapore, Australia, and New Zealand, for instance, have been serviced. The rest, like those in the United States or Europe, are unfortunately still waiting for their cards.
One of the more interesting developments in the crypto space after digital currencies has been decentralized autonomous organizations, or DAOs for short. DAOs are basically stacks of smart contracts that can operate without interruption from intermediaries to meet relatively complex ends.
Smart contracts, in their simplest form, are programs that can perform certain tasks if other certain tasks are first performed. Think, “if x, then y” but for things like insurance policies, value transfer, payroll, and any other situation that would demand a traditional contract.
And as one combines a handful of these different kinds of smart contracts, one could hypothetically automate whole partitions of companies with lines of code. A certain amount of funds could be released on the first of each month, for instance, and if members of the company completed their tasks, this would trigger the smart contract to automatically move funds to the members’ wallets.
Removing intermediaries from activities like payroll also restores a degree of trust and accountability for everyone involved. Instead of relying on one person to handle everyone’s salary each month with accuracy and speed, one could instead design a smart contract that resolves all of this.
These three DAO iterations are looking to reimagine how entire organizations operate. In the first, Aragon wants to omit the significant overhead needed for administrative upkeep and streamline how a community achieves its goals. Functions like identity management, ownership, human resources, payroll, voting rights, and even token generation events are all run through the Aragon DAO.
DAOStack offers something quite similar and has already attracted other projects like DutchX, Sapien, Gnosis, and Liberland. All four adopters envision a future in which organizations place their trust in technology rather than in legacy systems and intermediaries. Colony breaks it down even further and looks to redefine the very nature of work: “It’s about how decisions get made, how labor is divided, and who controls the purse things” and not all the excess procedures that encase the important stuff.
With DAOs, only the ideas and objectives matter. The rest we can hand off to lines of code. This is the promise of smart contract platforms and opens a huge number of possibilities for how to reimagine business operations.
Vitalik Buterin’s DAICO
Hopefully, you haven’t given up on the promise of ICOs. The ability to crowdsource an idea from anyone in the world, regardless of social status, race, or location is incredibly powerful. The regulatory details of such a revolution are still being hammered out, but there’s little doubt that a polished version of an ICO will change the face of fundraising.
DAOs and tokenized crowdfunding are a near-perfect match. As mentioned above, the critical point of failure for the handful of fraudulent campaigns has always been members of the company. Fortunately, there’s a technology for that in which greed can be replaced entirely through decentralized alternatives.
In an ideal world, founders would give a DAO an Ethereum address to which people could contribute funds at designated intervals. Once the cap had been reached for each interval, contributions would close, and once the entire ICO had finished the DAO could lock up the funds in a public wallet.
According to Buterin’s model, this public wallet would then become a centerpiece for the project’s community. Proposals from the project’s team would be submitted to investors who would then decide their stance on the suggestions. This could be a request to access more of the funds in the DAO for development, hiring, or marketing expenses.
Alternatively, the DAO could leverage a “tap” through which a specific amount of funding would continuously flow to the company. The specific breakdown for each project will likely differ, but the general concept should be clear.
One could design the DAO to only release funds once deadlines were met, too. Or, if the team proves truly incompetent, the community could vote to have all funds returned. These votes are subject to game-theoretical attacks, but already a DAICO paints an interesting picture for how to improve token funding mechanisms.
Instead of tempting project leads with $80 million right off the bat, a DAICO can keep teams focused on achieving measurable objectives. And as we mentioned in previous posts, such a mechanism also gives community members a feeling of ownership over their investment.
Ultimately, funds that are disseminated via community votes or via a tap over a longer time horizon will better align investors with founders as well as keep the latter accountable every step of the way.
Creating Decentralized Environments
If Bitcoin is the longest running decentralized experiment, surely DAOs are the next experiment in how we govern communities.
Removing banks from the financial ecosystem is an incredibly powerful idea. It empowers the individual to navigate the digital world as their own bank. Not just that, but Bitcoin has proven itself as one of the best ways to support this kind of empowerment. In its ten years, the technology has had an uptime of 99.98% since its inception January 3, 2009. Can the same be said for our financial system?
As interdependent as our global economy has become, banks are still single points of failure. If a government wanted to stop something like Bitcoin, it would be far more difficult. It is as omnipresent as the Internet itself with no founders, board members, or borders.
Decentralized technologies, often powered by distributed ledgers and blockchain applications, are fundamentally disruptive to how we think about social structures.
After Bitcoin, cutting through the red bureaucratic tape of starting a business, finding funding for that business, and keeping your ship afloat is also undergoing steep change. The advent of smart contracts and DAOs have painted a newer vision for all of the administrative tasks needed to organize such a venture.
Buterin’s DAICO is just one example of how the modern business will be community-based and move away from traditional oligarchies in which board members and CEOs decide how funds are distributed. The ideas are still relatively nascent, but the combination of many of these first attempts will indeed reveal a completely new trust paradigm - one where the trust element between, for example, communities and founders will become “less human” as decentralized technology will enable more “trustless” environments.