Exploring the Fundamentals and Advantages of a Decentralized Approach to Fundraising

I am speaking with Alex Strześniewski, founder and CEO of AngelBlock. In this interview, we will explore decentralized fundraising, understanding how it leverages blockchain technology and smart contracts to enable secure, transparent, and efficient fundraising processes. 

In addition, we will uncover its advantages, such as increased accessibility, reduced costs, enhanced liquidity, and broader community engagement.

Hi there, introduce yourself and tell us what you do.

My name is Alex Strzesniewski, and I'm the founder of AngelBlock, a decentralized and non-custodial fundraising protocol for crypto.

I've invested in numerous crypto-related startups and been an advisor, most notably to Aleph Zero - a privacy-enhancing Layer 1 blockchain. 

How would you define decentralized fundraising, and what are its fundamental principles?

The most important yet overlooked aspect is self-custody. The differentiating factors are quite apparent from the get-go if we compare centralized vs. decentralized exchanges.

In crypto, we have a lot of platforms masquerading as decentralized, but they're essentially centralized black boxes - this is especially apparent in fundraising.

Self-custody of funds and the decentralization of services has steadily gained traction over the past years.

Still, the implosions of prominent companies such as FTX, Celsius, and BlockFi have only fueled the fire of adoption, further highlighting the necessity for familiarity for new and old users alike. 

There's a lot of use of the term "decentralized fundraising," meaning that the investment comes from a broader group of investors or contributors.

That definition is lacking. It's a first step. The second, more important step is the custodianship of funds - who holds them during the rise? Finally, how transparent is the entire process?

With decentralized fundraising conducted with smart contracts, there should be more clarity.

Tell us some of the main advantages of adopting a decentralized approach to fundraising compared to traditional centralized fundraising methods.

The main aspect is the usage of smart contracts that hold the funds. This allows for interesting protocol designs that would be too cumbersome for traditional fundraising.

In addition, once the fundraiser is completed, the payout of funds can be subject to certain milestones or paid out in time-based tranches that significantly decrease the likelihood of scams and rug pulls. 

The limitation here is only on the side of the imagination of an engineering team, as such protocols allow us to do things that were simply impossible before.

For example, governance can be automated with a simple message signature to ensure the proper distribution and usage of startup capital and grants.

One thing we see on the market is startups raising via a token sale in a mostly private sale setting, getting some good traction but still needing to launch a tradable market with their current investor cap table.

Depending on how a raise is structured, you could fill out a multi-million dollar raise by having 20-40 private sale investors.

Decentralized fundraising is the next natural step in this process better to decentralize the holding of a given digital asset, allowing it to better diversify the group holding it. 

Can you provide examples of successful decentralized fundraising initiatives and their impact on the organizations or causes they support?

One example is the Ethereum ICO, which is most likely rudimentary compared to the infrastructure and tools available to conduct such a raise.

Unfortunately, for every decentralized raise like Ethereum's, we have hundreds that are the total opposite.

The ICO boom of 2017 could most definitely be classified as a financial success in decentralized fundraising, but in reality, it shone a light on all of the issues and pain points.

That's why it's crucial to focus on what decentralized fundraising is or could be in the future. 

What challenges or obstacles do organizations typically encounter when transitioning to decentralized fundraising, and how can they overcome them?

One of the significant obstacles organizations face when transitioning to decentralized fundraising is the inherent apprehension associated with adopting a relatively new and innovative solution.

The fear of stepping into uncharted territory can act as a deterrent, particularly given the technical complexities and regulatory nuances associated with blockchain, smart contracts, and decentralized technologies.

There's also a misunderstanding that comes with a solution like this - we see projects not ready to fundraise, attempting to go through the fundraising process, and thinking that a potentially larger number of participants will ensure they hit their target.

Unfortunately, decentralized fundraising is not a panacea. 

Challenges generally revolve around understanding the technology, navigating regulatory landscapes, and altering established patterns of trust and custody.

Overcoming these requires a commitment to continuous learning and adaptability. However, it's also worth mentioning that apprehension often diminishes as familiarity and understanding increase.

In this regard, seeing more projects successfully utilizing decentralized fundraising can help to overcome the 'recency to market' bias.

At AngelBlock, we have a series of projects lined up to use our decentralized fundraising infrastructure.

As these projects come to fruition, they will serve as compelling case studies that demonstrate the potential and functionality of decentralized fundraising.

Most importantly, organizations must understand and embrace the principle of decentralization, fostering an ethos of transparency, trustlessness, and distributed ownership.

The transition can lead to significant benefits in the fundraising process and long-term success with a thorough understanding and thoughtful implementation. 

In what ways does decentralized fundraising empower individual donors and promote community engagement in philanthropic efforts?

Decentralized fundraising significantly empowers individual donors by democratizing participation in the fundraising process. Rather than having decision-making powers concentrated in a few hands, it gives power directly to those who contribute funds.

In addition, through mechanisms such as post-fundraise governance, individual investors can participate actively in crucial decision-making processes.

This participation goes beyond merely contributing funds, allowing donors to influence how their contributions are utilized and how the project or cause evolves.

This direct involvement is a powerful engagement tool, promoting community participation and fostering a stronger connection between individual investors and the projects they support.

In a way, it transforms donors from passive contributors to active stakeholders in the fundraising effort.

Are there any specific industries or sectors more suited for decentralized fundraising, and why?

Of course! The obvious thing here is whether the project has a token - preferably a coin or utility token. Tokenized equity is still problematic from a regulatory standpoint.

At the moment, it really defeats the purpose of "decentralization" as it would require stringent onboarding and exclusion of the vast majority of interested participants. 

How does technology, such as blockchain and smart contracts, enable and support decentralized fundraising initiatives?

Blockchain and smart contracts form the fundamental infrastructure for decentralized fundraising. Blockchain technology helps to ensure that all transactions are transparent, secure, and immutable, thus fostering a sense of trust in the fundraising process.

Smart contracts, which are autonomous, self-executing contracts, eliminate the need for third-party intermediaries. They automate the execution of agreements based on predefined rules and conditions.

A vital example of this in decentralized fundraising is the fund release mechanism based on achieving certain milestones. For example, suppose a project has set up a fundraising campaign to release the funds in stages as they hit predefined targets or milestones.

In such cases, a smart contract could be programmed to automatically release the funds to the project once the investors vote on achieving these milestones through a decentralized governance process.

This ensures that donors' funds are used responsibly and as intended.

What potential risks or concerns are associated with decentralized fundraising, and how can they be mitigated?

There are many lessons that users can learn from the last 10+ years in blockchain and the constant pursuit of decentralization.

Hacks and exploits are some of the first things that come to mind, with the first step towards mitigation obviously being strenuous audits. 

Unfortunately, not all auditors are built the same, and many recognizable names in the space produce subpar audit results.

Therefore, a continuous bug bounty is a great supplementary action to working with meticulous auditors. 

Exit scams and rug pulls on the side of the project raising are also always a significant concern. They happen on a day-to-day basis in crypto. The industry has lost close to 3 billion USD to rug pulls in 2021 alone.

Over 100,000 scam tokens were deployed throughout 2022, which was the first year of the bear market, yet these figures are astounding. 

Infrastructure that allows for checks and balances, especially in a process as delicate as fundraising, is paramount.

One of the founding pillars of this technology is the mitigation of the double-spend problem - it's one of the most important features which differentiates this system from the legacy system, and yet we're accustomed to 

How does decentralized fundraising promote transparency and accountability in allocating and using funds?

Decentralized fundraising leverages blockchain technology and smart contracts to ensure the utmost transparency and accountability in allocating and using funds.

The final and immutable nature of blockchain technology ensures that every transaction is permanently recorded and can't be changed. 

This makes it possible to trace precisely how and when funds are being used and by whom.

This level of transparency and traceability inherently encourages accountability, as misuse of funds can be easily identified and addressed.

An innovative component of this system is the use of milestone mechanics. In this setup, funds are not released in a lump sum but are instead distributed in stages based on the achievement of predefined milestones. 

This ensures the project progresses as planned before additional funding is allocated.

In addition, the conditions for these releases are governed by open-source smart contracts, which can be audited by anyone, fostering high transparency.

Can you share any best practices or practical tips for organizations or individuals looking to adopt a decentralized approach to fundraising?

Absolutely. Firstly, understand the technology and the ethos of decentralization. Embrace transparency, both in terms of your operations and the usage of funds.

Educate your community about the benefits and workings of decentralized fundraising. 

Leverage smart contracts to automate processes but ensure they are thoroughly audited for security. Keep abreast of global regulatory developments and ensure compliance. 

Finally, remember that at its core, decentralized fundraising is about empowering your community - so keep them involved, listen to their feedback, and maintain open lines of communication.