Blockchain technology is gathering momentum, creating new and interesting opportunities for people around the world. Prior to the advent of Blockchain, one of the most innovative fundraising concepts was just beginning to gain viability with the start-up community; Crowdfunding. Crowdfunding has grown steadily as an extreme alternative to venture capital funding. As a result, non-traditional projects had a new audience to pitch to and raise funds for their cause. Now with blockchain disruption, crowdsourcing could be revolutionized to unlock new use cases and enable global outreach.
Before diving into how blockchain technology and decentralization will revolutionize the crowdfunding industry, let’s take a look at what blockchain is and what it does.
Blockchain Technology and Decentralization
There’s a common misconception that Bitcoin and Blockchain are one and the same, however, that is not the case. The blockchain is the underlying technology behind the success of cryptocurrencies. It acts as a data structure that holds various records and while ensuring utmost security, transparency, and decentralization. While creating, storing and facilitating transactions of cryptocurrencies is one of the applications of Blockchain technology, there are numerous other.
Additionally, there are some features that make this revolutionary technology stand out. Perhaps one of the most ingenious notions to come out of the blockchain revolution is the use of smart contracts. Different from traditional deals, smart contracts are self-executable and self-verifiable contracts. In fact, smart contract implementation may soon disrupt industries that operate on a contractual basis, such as finance, insurance, and real estate, among others. For example, smart contracts can manage the supply chain, and ensure ethical sourcing of healthcare products.
The Crowdfunding landscape
Crowdfunding an equally big concept only less complicated. It is a popular way to democratize fundraising for startup projects and charities, a miracle of the modern Internet age. When crowdfunding works, it brings new products to life. However, the model is still extremely inefficient. It’s centralized, just like venture capital firms, with a central authority controlling the platform. For this reason, preferential treatment is awarded to campaigns the crowdfunding platform may deem as worthy of public support.
Consequently, approximately 78% of campaigns end up falling short of their funding goals. Also, only 1.2 percent of crowdfunding campaigns go to developing countries, which actually starve of start-up funding. As such, blockchain disruption in the crowdfunding sector is not only inevitable but also necessary. So, how can blockchain beat the crowdfunding industry?
Initial Coin Offerings
Above all, the crowdfunding sectors is a perfect fit for blockchain disruption. In particular, the blockchain’s industry 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 such as US dollars.
A majority of crowd-sales are governed by smart contracts, which dictate the terms and conditions of the sale of the tokens. Tokens sale participants send their contributions via smart contracts, which automatically allocates tokens to the participant. In this scenario, the developers are the counterparty. Hence, they collect contributions from crypto-investors who invest in the projects newly issued tokens. In the end, the company benefits from its ICO by bypassing various hurdles set by venture capital firms and banks.
Future developments in token crowdsourcing
Indeed, the crypto-world will never seize to evolve. One of the latest inventions, Initial Exchange Offering (IEO), could soon disrupt how start-ups raise fund through token sales. In this new system, the 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 subject to an agreement between the platform and the developer. In details, this agreement includes the number of tokens set aside for the development team, the percentage of tokens the platform will hold off from the sale, and the flat rate price for the tokens.
As a result of listing a token, the exchange receives a given percentage from the sale of tokens. Besides, the process of marketing a new token also attracts new users to the exchange. Since the exchange is equally invested in the project, feasibility and viability studies are done prior to showing interest 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.
Making the case for Initial Exchange Offerings
The number of ICO scams is alarming. The lack of regulation and legislation is the driving factor for this problem. In response, IEOs will provide a more secure setting for investments into the crypto-sphere. To illustrate, while literally, anyone is eligible to launch an ICO, only select projects that pass the feasibility screening will list on exchange platforms. Thus, the investors are assured of the legitimacy of a company’s token sale. Unlike the preferential treat awarded to certain projects in crowdfunding sites, screening solely to protect investors from swindling activities rather than drive traffic to certain projects.
In the same way that crypto-exchanges employ refined technology to patrol their platforms against fraudsters, IEOs will enjoy an equal degree high level of security. But wait, there is more. The exchange will conduct AML/KYC on behalf of the participants, instead of the token issuer in the current ICO model. However, the fact that investors get to invest through exchanges, locks out potential investors who like to make anonymous investments in crypto-assets. Additionally, the developers will have to factor in the cost incurred when setting the flat rate of the token, increasing the cost of each token.
A new era in crowdfunding is on the horizon. Blockchain technology is facilitating the democratization of capital for startup companies. However, ICOs, the preferred model for start-up financing on the blockchain, sits on the precipice. Despite this minor setback, blockchain-based start-up financing is making a comeback crypto-exchanges taken on more responsibility in ensuring only authentic projects are allowed into the market. With IEOs, investors can be confident that their investments go into worthwhile projects.
What do you think? Is blockchain-based crowdfunding here to stay?