While Blockchain technology is democratizing capital for startup companies. Blockchain-based crowdfunding could reshape the entire crowdfunding sector.
Crowdfunding allows businesses with really great products and services and ideas to raise funds from the regular people in small investment amounts. The crowdfunding sector exploded as new crowdfunding platforms rose all around the world across a variety of fields and niches.
The crowdfunding industry today represents a $1 billion dollar industry that is expected to grow to $1.55 billion dollars by the year 2022 (source).
Over the past years, sites like Kickstarter and Indiegogo have revolutionized the startups world. Ideas that didn’t have mainstream business were flourishing that wouldn’t have been possible through traditional crowdfunding investments.
Crowdfunding grew steadily as an alternative to venture capital funding. As a result, non-traditional projects had a newer audience to pitch to and raise funds for their cause.
Blockchain crowdfunding might just be the next step in the startup evolution where interesting projects can come to life.
Decentralizing The Funding Model
Most of the traditional business funding takes either of the three forms:
- bank funding
- venture capital
However, the problem for most people is that self-funding is incredibly limited.
Bank funding already requires having an existing business with good revenues and cash flow while venture fund capital almost always requires a product or service that has a mass appeal.
Usually, fundraising, charitable giving, and crowdfunding lacks transparency between donors/contributors, recipients of these funds, and the goals of the program.
All this makes traditional funding very limited and hard for newer businesses. It can inhibit growth for products and services having even the huge potential.
Moreover, these established crowdfunding companies are centralized bodies, charging high fees while also influencing the projects according to their vision.
A blockchain-based network can address some of these problems in a conventional crowdfunding system.
Blockchain, at its very core, is a decentralized and distributed way to store and share information between different network members, including the allocation of information and capital connected to potential business projects and initiatives.
A New Era of Crowdfunding
Blockchain makes the whole funding process safe while offering completely transparent access. Crowdfunding platforms using blockchain can help maximize the success of a project.
The transparency of information available to network members and recipients enables real time tracking and monitoring of where data is located, and which members have access to this data.
Blockchain technology in crowdfunding works by allowing startups creating their own digital currencies and sell them. This allows to raise funds from early investors, while investors can also have the potential to make money if the value of the cryptographic shares increases.
Blockchain crowdfunding platforms can also be given a boost because it will give the blockchain community a new way to fund its own projects.
The ledger within blockchain would allow for accurate record-keeping of all campaign activity:
- before the campaign starts
- during the donation period
- after the campaign is funded
This level of visibility into a project can help all the parties involved, including creators, backers, and platform administrators.
By having an immutable receipt, one can have proof of their contribution and the reward due to them. That is something that cannot be guaranteed by the current system.
Furthermore, using blockchain technology allows for a more seamless payment experience reducing the chance that both creators and backers fall prey to scam.
Initial Coin Offerings: Raising Millions In Seconds
Blockchain’s answer to crowd financing- Initial Coin Offerings (ICOs) is already popular among start-ups today.
In a nutshell, ICOs, which are actually analogous to public offerings, involves issuing tokens which act as the company’s shares without equity exchange. Investors purchase the crypto-assets (tokens), instead of shares, using either cryptocurrency or fiat currencies.
Hence, they collect contributions from crypto-investors who invest in the projects through the newly issued tokens. In the end, the company benefits from its ICO by bypassing various hurdles set by venture capital firms and banks.
However, the number of ICO scams is quite alarming. The lack of regulation and legislation is the main factor for this. In contrast, IEOs can provide a more secure setting for investments into the crypto-sphere.
Security Token Offering (STO)
Security Token Offering is a crowdfunding occasion where organizations offer to open their advanced tokens sponsored by outside resources. An STO is neither an IPO nor an ICO, but an amalgamation of the two. Assets can be raised through three kinds of security tokens:
- Equity Tokens
- Debt Tokens
- Real Assets Tokens
IEO: Changing The Token Crowdsourcing Landscape
Indeed, the crypto-world never seizes to evolve. One of the latest, Initial Exchange Offering (IEO), could soon disrupt how start-ups raise fund through token sales.
In this new system, tokens are sent to a suitable exchange, which acts as a counter-party, making them available to individual investors. The price and condition for the sale of the tokens are subjected to an agreement between the platform and the developer.
Since the exchange is also equally invested in the project, feasibility and prior studies are done in listing a particular token. Once the exchange is satisfied, the exchanges demand a fee from the developers and compliance with the platform’s terms and conditions of use.
The Advent Of DAOs
Another important point to consider at the crossroads of blockchain and crowdfunding is the advent of DAOs, or decentralized autonomous organizations. There is arguably no experimentation more interesting around DAOs right now.
DAOs is basically a decentralized autonomous organization that has its internal rules managed on-chain by blockchain smart contracts.
DAOs are similar to community councils comprised of like-minded stakeholders that
- associate voluntarily around a common goal or goals
- use smart contracts to trustlessly enforce participation rules and operations.
The most famous, or the rather infamous, decentralized autonomous organization to date was known simply as The DAO.
It was set up as a crowdfunded and investor-director venture capital fund that was worth $150 million. Although, in the summer of 2016, an attacker used a vulnerability in The DAO’s code to take off over 3.6 million ether (ETH) from the fund.
However, as the ethereum project was still early at its early stage, the platform’s community leaders rallied around a hard fork to mitigate the hack’s economic fallout, a move that led to the Ethereum vs. Ethereum Classic.
Decentralized Crowdfunding Platforms
- Starbase– Starbase is a token payment and crowdfunding platform. It connects people who wants to develop challenging projects such as investment in startups or other kinds of innovative ideas with people like investors, engineers, designers, or marketers who wants to support these projects from all over the world.
- TokenRaise– TokenRaise allows everyone to create Token sale campaigns through ICO or STO. The platform offers support & certification services to crypto-asset projects using the highest of industry standards
- WeiFund– WeiFund is an open platform for crowdfunding campaigns where anyone can launch a campaign using one of WeiFund’s contract templates or by integrating their own smart contracts.
- PledgeCamp– Pledgecamp offers transparency through smart contracts and ensures that entrepreneurs and the platform they host their projects on are equally invested in a campaign’s success.
Although, it’s clear that neither blockchain or crowdfunding are going away any time soon. In fact these two arenas seem poised to rise in the decades to come.
Crowdfunding has opened up paths to raise assets and at the same time empowers retail and institutional financial specialists alike. The intersection of blockchain and crowdfunding will most certainly produce more noteworthy innovations that could have tangible impacts on billions of lives.
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