Escrow is an on-chain fund escrow component provided by DAOSquare Incubator for Venture DAOs, which can offer trustless, on-chain security protection for token-based private investments.
Traditional third-party escrow operates as follows: The buyer pays the purchase amount to a third party outside of the buyer and seller. After receiving the buyer's payment, the third party informs the seller that they have received the buyer's payment and notifies the seller to ship the goods. The seller ships the goods to the buyer. After receiving the goods, the buyer informs the third party that they have received the seller's goods, and the third party then pays the seller.
In traditional private equity investment and Crypto private investment, investment transactions are usually one-way, which means the investor pays the investment funds to the investee, while the equity or token promised by the invested project is agreed upon through a paper agreement, thus there is a risk of default.
The Escrow component provided by DAOSquare Incubator can technically solve the risk of default. Through this component, the tokens promised by the investee in the investment transaction (such as ERC20 Tokens) can be locked in advance in the investment transaction. Once the investment transaction is completed (investment funds are transferred to the investee project's account), future allocations will be executed.
This solution can achieve escrow protection without the need for third-party intervention, improving the security of investment transactions while also increasing their efficiency.
Payback Token
Simply put, a Payback Token refers to a token that is promised to be returned to the investors when you (investee) receive the investment funds. It is usually issued by your startup project and represents certain benefits and rights in the project.
When using the Escrow component, the investee needs to approve the Payback Token to the Escrow contract to implement the executable investment agreement.
Please note that the Payback Token provided by the investee must circulate on the blockchain deployed by the DAO. For example, if the Venture DAO is deployed on Base, then the Payback Token must also be circulating on Base.
How it works
First, you need to enable the Escrow component when initiating an investment proposal in Vintage/Flex/Collective DAO and write the relevant rules, such as the token address to be held in escrow, the quantity, and future release rules (Vesting Schedule), etc.
Once the proposal is successfully submitted, it will require the investee to approve the project tokens to the Escrow contract within the agreed-upon time frame (before the Start Voting is executed in the Vintage and Collective modes of Venture DAO, and before the end of the fundraising period in the Flex mode of Venture DAO) according to the quantity stipulated in the investment proposal. These tokens are referred to as Payback Tokens, which are the payback received by investors.
DAO Mode | Agreed-upon Time Frame | Description |
Vintage & Collective | Before the Start Voting action is executed. | Before the Start voting action (execution transaction), the investee needs to complete the Approve action to approve the Escrow contract to make the Payback Tokens in escrow. Once the Start voting action is successfully executed, the Payback Tokens will be transferred to the Escrow contract and enter the voting period.
Once the investment proposal is approved and executed (execution, an on-chain transaction), the DAO's investment funds will be transferred to the investee (Fund Receiver set in the investment proposal). At the same time, a vesting for this investment will be created, storing the vesting schedule set by the investment proposal, including the lock-up period, release intervals, etc. The vesting contract will automatically release tokens to all investors participating in this investment according to the agreed time and rate. All investors participating in this investment will automatically qualify to receive the Payback Tokens (entering the vesting process). |
Flex | Before the end of the fundraising period. | Before the end of the fundraising period, the investee needs to complete the Approve action to approve the Escrow contract to make the Payback Tokens in escrow. At the end of the fundraising period, if the fundraising is successful (the fundraising amount is equal to or greater than the Minimum Funding Goal) and executed, the DAO's investment funds will be transferred to the investee (Fund Receiver set in the investment proposal), and the Payback Token will be transferred to the Escrow contract.
At the same time, a vesting for this investment will be created, storing the vesting schedule set by the investment proposal, including the lock-up period, release intervals, etc. The vesting contract will automatically release tokens to all investors participating in this investment according to the agreed time and rate. All investors participating in this investment will automatically qualify to receive the Payback Tokens (entering the vesting process). |
In this process, the Investment Proposal, Escrow, and Vesting work together to complete a secure, trustless token transaction, escrow, and release process. Their respective tasks are as follows:
Investment Proposal | Write the number of transactions and rules (price, quantity, lock-up period, release period, release rules). |
Escrow | Escrow the Payback Tokens according to the number of transactions written in the Investment Proposal. |
Vesting | Release the Payback Tokens in Escrow to all investors involved in this investment based on the token release rules in the Investment Proposal. |
For specific instructions on Escrow in the investment, please refer to the investment sections in Vintage/Flex/Collective DAO. Additionally, this process may involve Management Fee and Carry, please refer to the Management Fee & Carry section for details.
Advantages
Without Escrow, the tokens or shares will be delivered later by the fundraisers, which may pose a risk of default. Additionally, seeking third-party escrow protection would introduce many new problems, such as increased transaction complexity and privacy concerns. However, the Escrow provided by DAOSquare Incubator operates based on smart contracts, without additional human involvement and extra transaction costs. Once Escrow is successfully deployed in an Investment Proposal, no one can tamper with its parameters or control its operation. Escrow achieves truly executable investment agreements through the principle of "code is law," providing crucial assurance for simultaneous payment and delivery.
Special Remarks
- Escrow is an optional component. This means that an investment can still operate perfectly without using Escrow.
- The use of the Escrow requires the escrow of the invested project's token, so it is not applicable to non-token investments.
- The Escrow can only be used on the premise that the token release rules of the invested project have reached a consensus. If the token release rules of the invested project are not clear at the time of investment initiation, this component cannot be used correctly.
- Before submitting an token-based investment proposal using Escrow, the investee should determine the price, quantity, and release rules of the Payback Token with the investors. Additionally, investee should provide the address of the Payback Token and the address of the approver (who operates the Payback Token approval).
- If an Investment Proposal enables the Escrow, but the investee does not approve the token on time (before the Start Voting action is executed in Vintage and Collective DAO, or before the fundraising period ends in Flex DAO), the investment proposal will fail.
Related Reading
- Please refer to the Invest In A Project section in the three-mode DAO for detailed information on investment proposals, token approval, voting, and more.
- Read the Vesting section for a detailed introduction to Vesting.
- If you are a DAO manager and want to know how to use the Escrow in a token investment proposal, please refer to the "Use escrow in Investment" section in “For DAO Managers”.
- If you are a project founder or representative and want to know how to escrow your tokens in a token investment proposal, please refer to the "Escrow Your Tokens" section in “For Startups”.