Decentralized Autonomous Initial Coin Offering (DAICO)

A Decentralized Autonomous Initial Coin Offering (DAICO) is a model for raising money through a token sale in which the funds collected are held by a smart contract rather than handed straight to the project team. The contract releases money to the team gradually, at a rate called the "tap", and token buyers can vote to raise that rate, lower it or close the contract and return the unspent funds. The design was proposed by Ethereum co-founder Vitalik Buterin in January 2018 as a response to the problems of the initial coin offering boom.

As its name suggests, the DAICO combines the fundraising of an ICO with some of the voting features of a decentralized autonomous organization. It was meant to sit between two extremes: a conventional ICO, where a team receives all the money at once and contributors have no further control, and a fully investor-run DAO, which can be slow and vulnerable to poor collective decisions. Only a small number of projects adopted the model, and it remained more influential as an idea than as a widely used structure.

Imagine paying a builder to put up a house. In a typical ICO the builder gets the full price on day one and the buyers simply hope the house gets built. In a DAICO the money sits with a trusted holding agent, which pays the builder a fixed amount each week. If the buyers see good progress, they can agree to speed up payments; if the builder disappears or the work stops, they can vote to end the deal and get back whatever has not been paid out.

The holding agent in a DAICO is a piece of code on a blockchain rather than a person or bank. Its rules are public, so everyone can see how much money remains, how fast it is being released and what it would take for buyers to reclaim it.

During 2017 and early 2018, hundreds of projects raised money by selling tokens directly to the public, sometimes collecting tens of millions of dollars on the strength of a whitepaper alone. Many of these projects never delivered a product, and some were outright frauds. Because the full amount was usually transferred to the team when the sale ended, buyers had no practical way to hold teams to their promises. Buterin's DAICO proposal tried to address this by building accountability into the fundraising contract itself, so that the team's access to money depended on keeping contributors satisfied.

1. Contribution phase. The team deploys a contract that accepts contributions, usually in ether, and issues tokens in return, much like a crowdsale. The tap starts at zero while the sale is open.
2. Tap phase. When the sale ends, token holders approve an initial tap, a maximum amount the team may withdraw per second or per period. The team can draw funds only up to this limit.
3. Raising the tap. Holders can vote to increase the tap if the project needs more money and is making progress. In Buterin's original outline, the tap could be voted up, while the main protection against a failing team was the option to close the contract altogether.
4. Self-destruct and refund. If holders lose confidence, they can vote to shut the contract down. The remaining funds are then returned to token holders in proportion to their holdings.

The effect resembles milestone-based vesting or an escrow arrangement in traditional finance, except that the rules are enforced by code rather than by a trustee.

• Limits on exit scams. A team that intends to take the money and run can withdraw only what the tap allows, which reduces the damage of a rug pull.
• Ongoing accountability. Contributors keep some influence after the sale, which encourages teams to report progress and keep spending modest.
• Transparency. Anyone can inspect the contract to see how much has been raised, released and left in reserve.

The model had practical weaknesses. Voting depended on token holders paying attention and coordinating, and many did not vote at all. Large holders could dominate decisions, and a team holding many tokens itself could influence its own tap. Holding funds in ether also exposed the project to sharp price swings, so a team could find its budget halved in a downturn even if the tap stayed the same. Smart-contract bugs added another layer of risk, since funds locked in faulty code can be lost or stolen.

Wider changes in the market also limited adoption. After 2018, regulators, led by the US Securities and Exchange Commission, made clear that many token sales were securities offerings, and the public ICO model largely gave way to venture funding, exchange-run sales and later the initial decentralized offering. A DAICO structure does not by itself change how a token is treated under securities law. Ideas from the DAICO, such as gradual release of funds and holder oversight of a treasury, survive in later DAO treasury designs and governance token systems.

• Ethereum Research: Explanation of DAICOs