For the judgment of the pros and cons of a financing model, we need to analyze from the perspective of the investor’s risk and income, as well as financing costs of the project team.
When a company moves from a start-up to its maturity, it is usually accompanied by multiple financing processes, from the seed round, the angel to the A, B, C …rounds and finally to the IPO. The risk-to-benefit ratio is different for each round. The earlier the round, the higher the risk is, the lower the price is, and the higher the return is. Such a multi-round financing model is reasonable. In the process of the company’s growth, the company’s income and risks are continuously evaluated, and reasonable prices are given, which can effectively control the risks of investors.
In the ICO of the blockchain project, many projects have rasied vast amounts of money one-off in the initial stage to support the development of the project for many years until the project is realized. It is unreasonable that such an approach puts investors at high risk. The project that drives investors to participate in such a huge risk is usually due to the high return after the listing the project team promise, but in fact, the project itself is still in the early stage, and it is almost struggling to make a profit. The return after listing is also false，unsustainable, or with more massive scams and more people’s losses.
In the initial version of Vitalik ‘s DAICO design, a project’s financing has its hard-cap and time limit, so this is a one-time financing, and risk control is mainly achieved by controlling the use and outflow of funds. Although this reduces the investor’s risks, but a funding of this comes with high advertising and issuance costs, and this high costs could become the team’s false publicity power. At the same time, one-time financing does not provide incentives for investors. For example, in multi-round financing, angel round investors can exit in subsequent rounds and does not necessarily wait until the company is fully listed.
A better financing mechanism is continuous financing using blockchain smart contract technology. In the simplified multi-round financing mode, each round comes with a fixed price. The financing amount for each round is the number of shares sold multiplied by the price. It can be represented by the blue rectangular area in Figure 1. The sum of all areas is the total amount of financing. Then, on the graph of the relationship between stock quantity and price, there must be a continuous curve. In a specific stock issue quantity, the area under the curve is equal to the sum of all rectangular areas , as shown in Fig. 2 yellow area. Such a curve can achieve the effect of risk pricing in multi-round fundraising and has other characteristics that are more suitable for startups. In the simplified model, we can use a slash to indicate the relationship between the price and quantity of the stock, such as y= kx, where y is the stock price, x is the total number of stocks issued, and k is the slope. We can write such a formula into the contract for stock issuance. In 2017, Simon de la Rouviere first proposed the concept of this curve mechanism as a token issuing mechanism called Token Bonding Curve.
Different from multi-round fundraising, under the continuous fundraising mode, stocks can be bought at any time, and the issue price of shares increases with the increase of circulation. Therefore, the evaluation of stock risks is also continuous, and investors can choose when to buy based on their risk preference.
The continuous financing model can reduce the cost of financing and issuance because financing is continuous. A project can only start to operate when the amount of kick-off funds is raised. When the project continues to develop, it will continue to attract investors to buy and the project team do not need to spend a vast amount of money on publicity to attract funds.
In order to provide incentives to investors, the contract will retain a liquidity reserve contract. Part of funds in buying stocks will enter the reserve pool and the contract calculates the current selling price based on the selling curve formula. Under the liquidity reserve system, the selling formula is consistent with the buying formula, y= kx. Then buying a certain amount of tokens in the early stage and selling them after the increase in circulation, investors can make profits because of the rise in price. It is like an angel round of investors who exit from the subsequent financing round. Of course, there may be a risk of a run on the 100% reserve, which will affect the development of the project. Therefore, FutureDAO uses the fractional reserve mechanism, such as 30% of the purchasing funds enter the reserve for early investors to exit, to ensure that project development funds are not affected by investor exits.
Investors continually buying and selling is the ongoing risk pricing of the project team. The liquidity reserve design allows early investors to take on high risks while also having high returns. At the same time, continuous financing will also reduce the cost of the founding team’s publicity. On this basis, shareholders can vote to decide how to use the raised funds, further reducing the risk of fraud faced by investors. We believe that DAICO with a sustainable financing model will become a financing model in the future.