Blockchains for Crowdfunding

It is no secret that Crowdfunding hold a tremendous potential in helping entrepreneurs and creators in pushing their projects forwards and gathering much needed financial resources. In 2018, The crowdfunding market size was valued at 10.2 billions dollars and was set to almost triple by 2025.

It is undeniable: crowdfunding platforms give unprecedented opportunities to creators and make it possible to finance projects that would have been otherwise neglected and/or undervalued by traditional investors.

It enables the process of investment to be democratized and let anyone  invest and contribute to innovative projects they are interested in. The problem is that crowdfunding through crowdfunding platforms has many pain points that may get in the way of the successful deployments of brilliant, disruptive ideas.

When it comes to using Crowfunding platforms one of the main issues is the level of control exercised by those profit-motivated platforms: Often the platform acts as a gatekeeper, reinforcing rules that may sometimes be arbitrary or even detrimental to creative projects.

The project can also be at risk if they happen to disagree with often ambiguous terms of service. Another problem is the fees taken by such platforms. Often such fees are quite expensive and could be used by the creators to actually move their project forward. Why pay the platform money that was meant to actually finance the project? 

Crowdfunding faces the issues that appear in any service that rely on third parties. The problem is that it beats up the democratic philosophy behind Crowdfunding and the problems it’s supposed to solve: that is the free contribution of the crowd to a project they happen to believe in. It distorts a creative endeavor that’s the fruit of collaboration between creators and enthusiasts into a business scheme. And this is precisely where Blockchain-reinforced Crowdfunding comes into play.

As we know, Blockchains are meant to enable decentralized, peer-to-peer exchange of value. So how can this advantage be leveraged for funding startups?

In 2012, a Bitcoins enthusiast and software developer,  J.R Willet sought to raise capital for a project he wanted to start called MasterCoin. J.R. Willet wanted to exploit the bitcoin infrastructure by adding a layer in top of it in order to perform complex financial transactions  such as smart  property and saving wallets. To fund the project, one simple idea was implemented: contributors could send bit coins to development teams. In exchange, they received  digital tokens that could be used later on the Mastercoin service and whose value increased as the project gained leverage (i.e. they could be sold later on as their values increased). This novel way of crowdfunding worked like a charm: Willet managed to raise a fund of 5000 Bitcoins  (approx $500 000). This method of raising capital came to be known as Initial Coin Offering, and the possibilities that it opens up for crowdfunding are endless.

So how does the funding work? In general, the process goes as follows: A startup company announces an idea and sets a date for funding the project. Contributors then pledge digital currencies (such as Bitcoin)  in exchanging for a number of digital tokens. Since ICOs generally come from tech companies, those tokens can then be used to use the services on the platform built by the startup. Eventually, as the value of the startup goes up, those tokens can then be sold for profit on digital exchange markets.

One of the fastest ways to set an ICO is through the Ethereum infrastructure. As of now, Ethereum is the main platform for conducting ICOs. Ethereum even created a standard called ERC-20 that defines how Ethereum-based tokens must be implemented in order to ensure compatibility within the whole Ethereum network. Put simply, ERC-20 tokens define for developers what needs to be implemented in their tokens in order to ensure compatibility and integration with the rest of the Ethereum ecosystem such as wallets and marketplace. In terms of crowdfunding, this ensures the would be investors could trade their acquired tokens as most crypto-exchanges support ERC-20 based tokens.

As they leverage the potential offered by blockchains, ICOs have many benefits both from a creator and an investor perspective. It ensures that startups can gain support from contributors from all over the world, without any geographical factor entering into the equation . It also guarantees that the self-funding startup will have control over their product as they don’t have to go through the hurdle of dealing with crowdfunding platforms  and international financial institutions, which not only spare them paying costly fees but also guarantees that the startup will not be subject to the whims and rules of such institutions. This opens up the doors for alternative ideas that could not have been able to find funding through traditional means such as Crowdfunding platforms and venture capital funds. 

Even though the concept of Initial Coins Offering is relatively new, it already has been used to successfully raise funds, most often for ambitious Blockchains related projects. 

In attempting to evaluate the potential of ICOs, one would be well-advised to consider both the amount raised by the tokens distribution event as well as the return on investment as time elapsed.

The most known example of a project that successfully launched itself through ICO fundings is Ethereum itself, effectively raising $18 million in 2014, in the period of 42 days. Ethereum is of course, one of the leading blockchain-powered technologies in the world today and Ether, Ethereum’s crypto-currency went from $0.30  at its inception to $240.70 as of now (July 2020).

Another notable case of raising funds through ICOs is EOS, which managed to raise a whooping $4 billion through its ICO in 2017. The project managed to raise the sum based on investors confidence alone. The product has only been launched in 2018. EOS’s positioned itself as  the most powerful infrastructure for decentralized applications. Investors confidence can be explained by the fact that it supposedly targeted solving the main pain points attributed to Blockchains such as performance, speed, and scalability. The enthusiasm of the investors is understandable since those pain-points are supposed to be the main reasons impending a large-scale, disruptive democratization of Blockchains. While it is already the 5th most powerful  cryptocurrency in the market, $4 billion is an enormous sum and whether EOS will manage to fulfill the high expectations it set for itself is a question remaining to be answered.

ICOs are a viable alternative to traditional crowdfunding. It offers many advantages such as more freedom, less involvement from intermediaries and less fees. The current benefactors are mainly blockchain related  projects, but it is to be expected that other projects will eventually manage to self-funds through ICOs.