Crowdfunding using Blockchain-Enabled Technology
Crowdfunding offers the opportunity to raise capital through a collective effort, and that is very important. However, there are still many issues to be addressed:
Not fully-transparent
High fees due to many middlemen
Not fully-secured
The crowdfunding platforms hold a lot of power over the start-ups (centralized control)
By applying blockchain technology, crowdfunding can become more decentralized and offer significantly better terms for all participants. Blockchain uses a decentralized network of computers, and cryptography, to store and secure important information that is found on the internet.
Different types of Blockchain Ledgers
Blockchain technology offers three main types of ledgers:
(a) public ledgers (fully-decentralized, based on a consensus mechanism for validation, for example, proof-of-work)
(b) private ledgers (partially-decentralized, offering higher anonymity)
(c) hybrid ledgers (combine and balance the features of public and private ledgers)
Blockchain-Enabled Crowdfunding and Smart Contracts
A smart contract can link different crowdfunding parties together (investors, fundraisers, and platforms) by verifying information and transactions using the blockchain. In a blockchain-based crowdfunding model, crowdfunding platforms can easier handle key issues related to any project, such as:
-
Payments
-
Voting
-
Fund management
Crowdfunding and the New Decentralized Finance (DeFi)
DeFi stands for Decentralized Finance and it is a revolutionary blockchain-enabled financial ecosystem. DeFi aims to create a permissionless and transparent financial environment that is open-sourced and available to everyone without centralized control.
Major DeFi Principles:
-
Create a fully-decentralized financial ecosystem
-
Available to everyone and open-sourced
-
Algorithms replacing middlemen (lower fees)
-
Enabling composability (combing different blockchain protocols to create new services)
Nowadays, there are several DeFi applications such as payments, lending, and insurance. Currently, most DeFi applications are built on top of Ethereum, but there are also projects built on other protocols, such as Polkadot, Cardano, and EOS.
Possible Use of Blockchain-Enabled Crowdfunding Projects
These are some strong cases for future blockchain-enabled crowdfunding projects.
(1) The Decentralization of all crowdfunding operations
Blockchain technology is entirely based on a decentralized model where no one possesses the power to exclude someone else.
The decentralization of crowdfunding promises to offer significant advantages to the crowdfunding industry. For example, fewer restrictions, more flexibility, and more open to new ideas. Via the use of decentralized crowdfunding and the blockchain, all decent crowdfunding projects will be eligible for funding.
-No exemptions due to crowdfunding platforms' regulations
-Geographic location becomes irrelevant
-The public decide who can participate
-Open to new funding ideas
(2) Smart Contracts can Enhance the Security and Flexibility of Fundraising
A Smart Contract refers to a programming code that is stored on a blockchain and automatically executes when predetermined conditions are met. Blockchain-enabled smart contracts offer significantly enhanced credibility in crowdfunding transactions. These contracts can prevent funds from being released without proven legitimacy.
Key Projects:
(3) Fewer Middlemen and Lower Transactions Fees
Blockchain technology offers the opportunity for automated processes without the need of many middlemen. The fewer the middlemen, the more funds become available for a crowdfunding campaign.
Key Projects:
(4) Lending via the new DeFi Ecosystem
In the new DeFi world, anyone can lend or borrow money without the need for a bank account. Digital assets (i.e. Ethereum or Bitcoin) are deposited as collateral for borrowing FIAT money. DeFi provides some key advantages to lenders such as:
-Instant transactions
-No bureaucracy (no need for a documentation)
-Full transparency
-Equal terms for all lenders and borrowers
-No credit scores
-Lower rates for borrowers and higher rates for lenders (as there are fewer middlemen involved)
Key Projects:
Looking into the Future of Blockchain-Enabled Crowdfunding
Blockchain creates the perfect opportunity for the Crowdfunding industry to grow, and practically address all its problems. In the future, crowdfunding will be part of the revolutionary Decentralized Finance (DeFi) ecosystem that is coming to change the whole financial industry.
As Dr. Sean Stein Smith wrote: “Crowdfunding, with the decentralized nature of founders, projects, and financiers, offers a unique opportunity for blockchain to deliver benefits to a broad set of users... the opportunities connected to blockchain use in crowdfunding, including helping entrepreneurs maintaining control over projects, and increasing transparency connecting funds to project outcomes, are significant and certainly worth further analysis.”
Sources:
-
Expertsignal.com: Decentralized Finance (DeFi) Guide
https://expertsignal.com/index.php/cryptocurrencies/defi-guide
-
The Applications of Blockchain Technology in Crowdfunding Contract (Zhao Hongjiang & Cephas P.K Coffie)
-
IBM.com: Blockchain’s potential to revolutionize crowdfunding
https://www.ibm.com/blogs/blockchain/2019/09/blockchains-potential-to-revolutionize-crowdfunding/
■ Blockchain-Enabled Crowdfunding
Crowdholder.com
