Crowdfunding and Blockchain are elements of FinTech. It has started to prevail for digital asset startup to raise funds through crowdfunding or for crowdfunding platform to adopt blockchain technologies.
Crowdfunding is a path to source funding from the general public either for a particular project or a company. Currently, most of the crowdfunding projects are conducted through a third-party medium. This type of service platform is an alternative outside of the conventional financial system. In short, a crowdfunding has three major elements: project initiator, project investor, and crowdfunding platform.
Disadvantages of Conventional Crowdfunding Projects
In the traditional crowdfunding projects, it’s necessary to have the existence of a trusted third party to operate the campaigns. A few popular crowdfunding platforms include Kickstarter, Indiegogo etc.. Usually, project investors will send funds to the service platforms’ bank account. When the projects funded amount achieve the minimum requirements, the service platforms will transfer the funds to the project initiators. When the opposite happens, which means the fundraising campaigns fail, the platforms will return the funds back to the investors. In this process, investors want their funds to be used on the proposed subject, and the initiators would like to be assured the funds arrive to their accounts securely. Due to this relationship, crowdfunding platforms become the middlemen between two parties. Nevertheless, in reality these platforms are not liable beyond their jobs of facilitating the activities between investors and initiators. This means the platforms cannot guarantee the invested capital is used reasonably. Initiators or the platforms, it’s almost impossible to make their actions absolutely transparent. For example, Indiegogo states Indiegogo does not guarantee the raised funds will be used as proposed by the initiators, and the authenticity and accuracy of information regarding the fundraising projects posted by initiators.
Blockchain as an emerging technology, won’t be possible to eliminate actions that cause loss of trust, but can improve inequity between different parties due to accessibilities of certain inside information. In the future, fundraising campaigns can have built-in smart contract to enhance investors’ confidence and initiators’ incentive to manage the funds appropriately.
Crowdfunding is one of the most straightforward applications of blockchain technologies. The most direct way to apply blockchain is to adopt digital assets such as bitcoin as a payment method. For instance, in 2014, Ethereum raised 30,000 bitcoins for R&D purposes. The asset value was equivalent to 18 million USD at the time.
The edges of blockchain ICO
- Low Cost:
By raising funds in digital assets, both parties in these campaigns can cut their transaction expenses. Project initiators are allowed to adopt blockchain protocol to launch or manage crowdfunding campaigns as an alternative of launching campaigns on third-party platforms, which charge service fees.
- Market Liquidity:
Ideally, crowdfunding with digital assets enable investors to redeem, convert, and trade assets easily with others. This is an obvious advantage that digital assets have over the conventional system.
- Transparent Rules and Auditing:
When investors support a particular project by sending blockchain digital assets, this transaction history becomes a public and immutable record on the network. The record of the utilizations of the funds will also be recorded on the public ledger. This feature reinforces the possible weaknesses of conventional auditing and payment methods. Besides what is just mentioned, the utilizations of smart contracts on blockchain can also ensure when the fundraising campaigns fail to reach the threshold, all funds will return back to investors. None of this process require a third party to provide trust, and be charged service fees.
The Challenges of Blockchain Crowdfunding:
There are two major challenges in the space of blockchain crowdfunding.
- The first is blockchain technologies remain to be in its early stages. There hasn’t been a uniform standard in among different types of blockchain system. It remains difficult to communicate with different blockchain systems. This fact of partition in the ecosystem certainly weakens advantages of blockchain. In the meantime, it remains to be a developing phase for the formulations of blockchain crowdfunding standard and model
- The second aspect is the support of law. Nations remain unsynchronized regarding their stance on blockchain and digital assets and the regulatory progress. However, it’s common that the pace of legislations falls behind the progress of innovations. In the current phase, we should explore actively in the space, and perfect the blockchain crowdfunding related standards to gain support from relevant officials eventually.
Source: What is ICO? What Changes Are Brought Into Crowdfunding by Blockchain? (Translated by MaiCoin)