Explanation of DAICOs


#26

As someone that is on the early startup stage and has been looking at the multiple funding options available (Bootstrap, ICO, Seed round etc), this seems great way to set it up in a responsible way as well putting a fair amount of control on the investors side.

Also depending on how the voting system gets implemented, this really incentivizes the developer team to be as transparent as possible, and keep the channels of communications with investors open.

One thing that does required further discussion is a mechanism for controlling the distribution of tokens from the get go, to guarantee that the development team doesn’t hold a high percentage of the original token supply and easily sway the votes.

The other promising thing that I see on this model is that while the DAICO proposal only focuses on the funding aspect, the same concept/contract could be expanded to other aspects of the organization governance.


#27

I think that diaco is just an example of such voting system that you mean. But currently It’s not possible to create flexible structure with Ethereum without extra cost. I’m trying to implement enterprise-alike resource management with contracts to allow companies own any type of tokens. But each new type of resource need to recompilation of all other contracts and new allocations which is very expensive.

@vbuterin What do you think about implementation of interfaces like in golang to allow some contracts to manage any interface implementation. For example we can create management contracts which can own every contract with methods isOwnedBy, isOwn and transfer. It will allow to accumulate resources within one contract without address changes and extra memory allocations. Or to make possible to pass functions as arguments.

Here it’s proposal for EIP-829.


#28
Who the hell am I

Hello world: First an intro. Hi all, I run a company in HK and Shenzhen (@vbuterin saw you speak a few months back, your Chinese is awesome, good job there!) that would consider raising in this fashion as an alternative to conventional investment. Because I have been approaching this point with my real world company I have been reading up a little bit on Private Equity (PE) deals and happen to have a meeting with one of the world’s most respected international law firms in the space on Monday in Hong Kong specifically to discuss alternate models of financing, so may be made aware of some other options shortly. I have a history of working in the crypto space … which is why after seeing an HN post on this thread I was therefore motivated to join here and contribute to the discussion - I can potentially provide a serious, real world, high visibility guinea pig deployment of this concept to a legitimate business in 9-12 months if it is adequately developed.

INVESTMENT TRANCHES

Concern: In the conventional finance world I am aware of one clear funding strategy which is used to institute control over companies which is investment tranches. This basically locks partial funds release until some kind of milestone has been achieved, for example an external audit completed or a certain business objective reached. Usually there are multiple tranches, and they are agreed ahead of time. However, there is also scope for discussion and movement. AFAIK you see this kind of approach used in all sorts of investment scenarios, from the mundane (home loan / mortgage scenario where investors manage risk throughout a construction project by requiring certain physical construction goals to be complete before the release of additional funds) to the exotic (large corporate deals). Note that in many cases, it is the nature of a project that certain tranches (large spending requirements) can be known and justified ahead of time, though actual execution tends to track less predictable project advancement rather than nominally agreed upon fixed schedules. The current proposal’s tap (rate-based) rather than event/tranche (chunk-based) design ignores this reality and makes it impossible to acquire a tranch without exotic workarounds (set high tap release rate, reset to low tap release rate).

Counter-proposal: I would therefore propose a revised design which perhaps allows a mix of:

  • The current design
  • A tranche-style release
  • A combination thereof
  • Some kind of subsequent ad-hoc tranche-style release to be voted on (fixed amount released)

TWO WAY GUARANTEES

Concern: Note also that in many scenarios the digital contract should be protecting the interests of the recipient, not just the new investors. For example, the recipient may also be invested in the outcome and may also be at great risk. The capacity of the current design to be effectively blocked over time (tranche never appears) is a huge risk for the recipient, who may manage their business under the expectation of timely funds release. Therefore I would suggest that some form of recovery scenario should be possible whereby a third party (eg. a set of three paid dispute arbitrators) can be appointed and gifted with keys to enable partial or complete control of funds in the event that it is required. While this goes against the “freedom loving crypto paradise” meme, it is very much a “real world businesses would prefer it” kind of reality.

Counter-proposal: Add a percentage of funds (usually 100%) that can be released or controlled by the agreement of multiple arbitrators (n of m) in the event that their involvement is triggered either by the investors or the recipient. Note that the arbitrators should be actual real world legal arbitrators with reputations to uphold and there should be an enforced arbitration period (eg. 7 days), with non-participating arbitrators increasing the arbitration period by a small factor, and a minimum number of participating arbitrators, so as to avoid “appoint thousands of arbitrators and fail to garner participation” issues or “kill the arbitrators to affect the outcome” type attacks. If arbitrators totally fail to check in (or lose their keys), funds could also be auto-released somewhere (eg. to a charity).

CONVERTIBLE DEBT

Concern: Another major means of structuring investments in order to influence the behavior of recipients is convertible debt. Convertible debt is basically a loan with the regular strings attached (interest payments, compounding, etc.) but also clauses allowing the loan to be converted to equity in the recipient’s organization under certain conditions. For example, this may auto-trigger if payments fail to be made, allowing the investor to obtain a large percentage of the recipient organization at a discount rate. It may also normally be subject to buyback (recipient can purchase away these rights by paying back the loan) or other specific clauses (if company goes public, rights to convert to equity at a preferable rate are guaranteed).

Counter-proposal: None. Unsure whether such a structure could fly in ETH-land.

FIAT BASELINE

Concern: In our real world business case projected expenses need to be denominated in fiat currencies. However, we do not necessarily want to do an uncapped ICO-style raise and take heaps more money than we need for a fixed supply of tokens, rather do a capped raise. The issue with a capped raise is that by the time the expenses roll around (projected tranches) ETH’s value may have moved significantly.

Counter-proposal: Allow the entity raising funds to embed some sort of plan, exchange rate projection, or other information (arbitrary document checksum and magnet URL?) with the raise in order to explain the assumptions around which the project is based. Therefore, if the fiat economy goes off a cliff (ha!) or exchange rates vary tremendously (quite frequent swings of up to 30% even amongst major currencies are the norm) then all parties are clear on how this will be mitigated or otherwise impact execution. Failing this, some set of one or more ‘fail to arbitration’ or ‘fail to re-raise event’ options could be hardcoded as options with specific terms that investors agree to up front.

PAYING THE ARBITRATORS

Concern: Nobody works for free, and the auditor option (cynically “fetch a grown up” button), when pressed, needs to grab someone with enough ‘skin in the game’ (reputationally and legally) that they are adequately disincentivized from malpractice. This costs money.

Counter-proposal: Tranche release or fund lifetime should have the capacity to include staged arbitration payments. Most lawyers and arbitrators will want to put in work up front (client due dilligence) so will require up-front payment. Ongoing payment (tap-style) would be ideal as a sort of annual drip for them, to keep them breathing. Finally, a per-incident payment (eg. serious arbitration case requiring actual research and time investment, suddenly activated mid-holidays with a 7-day limit) should be reasonably enough compensated as to make it worth their while to do a good job. Larger firms will have people not on holiday, and will cost more. You get what you pay for, to a certain extent.

IDLE FUNDS

Concern: In a traditional investment context, there is a very common configuration in which funds are nominally committed to an investment vehicle however they are not actually transferred until a ‘call-down’ is received. This is a notification that the funds are required, and they are contractually obligated to arrive within a certain time. This is apparently the most common Venture Capital fund configuration. The benefit of that configuration is that funds can be earning interest or otherwise managed against risk until required. In the configuration being proposed, funds are locked until released, which is sub-optimal.

Counter-proposal: Consider allowing a call-down. This could be viewed as effectively as a form of reverse-tranching affecting the investor rather than the recipient. Taking that parallel further, the tap concept could also be applied here. Alternatively, acquiring all funds up front then defining a strategy for and allowing funds management (by some entity, automatic or appointed) prior to tranch-based calldown over the course of a fund could be implemented.


#29

what if the dev team place buy orders that are a bit higher then the refund price in order to gain 51% ?


#30

Thoughts here are sound. However, does not highlight the flaws of these are they have been tested over the past two decades in the current fraudulent system.

Aim is to borrow what simplifies AND strengthens.

-Richie Etwaru


#31

This certainly reduces the fraud stemming from “Lambo ICOs”. I’m not sure why 51% is the magic number, well strike that - I get that we want a democratic voting process, but even in the best democracies some things are better decided with 60%, or 75% votes.

The majority’s opinion does not mean its the best/right one. Can we strengthen a mechanism of elastic majority? where we start at 51%, but based on some elements of the venture, majority can be redefined.

Regards,
-Richie Etwaru


#32

The majority is almost never right unless there is a mechanism for punishing those who are wrong and rewarding those who are right and that mechanism is applied over time and future votes are weighted based on history of reward/punishment (which actually means it is no longer a “majority” based vote).


#33

This is where/why identity, and reputation of human nodes need to be on-chain. While nodes with good reputations can flip, and take bad actions - we can lower fraud a bit more if the investors and programmers longitudinal identity and reputation are onchain.

-[RE]


#34

Great idea. But ICO still need auditing service to be more reliable. I would like to create a ICO auditing company for ICO which will audit from team, code, PR campaign to what they have done according to roadmap.


#35

On-chain identity is not necessary for a reputation system. In fact, it is likely to make the reputation system worse as it encourages human biases to come into play. Address 0xabcd may have an excellent track record of , and that is what matters, not what their LinkedIn profile, Facebook, or reddit history is.


#36

I agree. However I assumed this problem was a forgone conclusion. We need a method/medium to “seed” identity. If we all start from no identity, it will be hard to establish norm and subsequently a ranking system. So existing identity, while not impervious could “seed” the on-chain identity engine.

Not a perfect method, but “lowers” the Lambo ICOs

-[RE]


#37

There are several companies that are already offering services like this, no?


#38

What about locking down a significant amount of the original tokens? Let’s say 50% and selling the remaining ones through the ICO. Biggest challenge I believe is going to be a trust/identity one in regards to who holds the majority of coins.


#39

I’m not sure DAICO is necessary for the following reasons:

  1. It may actually kill innovation, unless you honestly believe Tesla, Apple, Amazon and Google for instance could have been built under this kind of mechanism. I know this from working at Macromedia before our acquisition by adobe and Steve Jobs used to pop in. Bear in mind Amazon now one of the biggest companies on earth made losses for over several years. That should tell you it is about the long term vision of unique entrepreneurs and not one size fits all. Another way to think of it is, how many Elon Musk rockets have exploded, yet he is probably the most revered entrepreneur of our lifetime. Mechanisms like the DAICO will not work for innovators like Jeff Bezos and Elon Musk. Ethereum should avail from trying to be judge and jury. Leave that to the legal fraternity

  2. However here is what you can do to discourage bad actors. Instead of complicating the elegance of Ethereum to help create an equitable world where humans can access funding they need towards a more egalitarian type one civilisation, perhaps insist before the ICO on an MVP. Then after the presentation of an MVP, let the ICO potential contributors vote. If the MVP scores 51% then let the ICO proceed as it does now.

Ethereum is doing a great job helping change the world. I do not think Ethereum should be worrying about governance. Focus on scaling the technology and making it seamless like Apple and Google. This is your big moment Vitalik and do not feel it is your responsibility to solve everything. Just my humble opinion and I accept if I am wrong.

Thank you so much for providing great technology in Ethereum for our fragile world.

Cheers
Robert Haastrup-Timmi
Blockchaincompany.info


#40

Well my concern would more rest with the founders of the startup, the basis of having a source of money that can be turned off at anytime and really without any warning, will stop any serious founder from really getting in there, rent the offices needed, recruit the staff, and so forth, as all these costs are based on yearly contracts, so if the source of funding is not there when bills are to be paid the founders would have to cover all that them selfs.
So it might work for a small team that works from home, are students, or are wealthy as it is, but for you average Founder those are not the cases.
Secondly, why not just do the rounds in a similar way as is done in the VC world ? Start with a small amount raised towards a convertible Token, and at the next round of fund raising the holder of the convertible receives an automatic discount, and then each round is evaluated based on merit of being concluded.
Using monetary regulations like a weapon over the founders heads, do not to me sound like the best way to filter out the Scammers.
A scammer filter can be created by setting up proper research of the Startup and it’s founders, in a similar way VC’s do it.
As in the end it is the investors choice to make the decision if he believes in the product and that the founders can make that product fly.


#41

If the dev team holds 30% of the tokens, then the likelihood that they will Lambo it is reduced. We have to cater for that in the formal that highlights the vulnerabilities. Really good conversation, we may need to play this out in a pilot, to really feel the vulnerabilities.

-[RE]


#42

+1 for “Lambo ICOs”

For full refund (impeachment) I guess a larger percentage would be appropriate.


#43

@vbuterin I like the idea. My concern is governance. What happens to the funds in case of a fork where various dev subteams have opposing view for the future of project? This is actually not specific to DAICO but perhaps being a DAO rather than centralized ICO it should have more provision for this.


#44

Hi Robert, you raise a valid point, that peeks my interest.

I agree, but neither extreme (Lambo ICO, or Amazon running a loss for 1/2 a decade) will “scale”. The challenge in front of us, is that uninformed investors, are being scammed by ICOs with no plan, no business model behind the token, no discipline, and little governance. Yes, we can blame the greed of the investors, but the negative backlash of the bad actors will hurt the entire community.

If we can advocate for, and differentiate a DAI-CO, from an I-CO, we may be able to help the investors identify scams, and eventually save the community from the negative backlash that the banks will fund.

We need a solid pilot DAI-CO, that is the poster child for this model. Happy to help raise capital for it!

Humble regards,
-[RE]


#45

I guess that if crowdinvestors in DAO will vote for projects bases only on “voice from their hearts” sounds not like rationalistic idea. This way all complicated projects have no chances to living, only gambling will be.
We got a vision that objective, rational criteria needed, as “smart escrow”.
I seems we have a decision: we develop “proof-of-accounting” token mechanism to calculate real value of issued tokens every investor can get access to project’s accounting to view project’s health.

https://darfchain.com/content/proof-accounting-token?from=ether_1601