What is a blockchain?
A blockchain is a distributed, decentralized, digital ledger consisting of blocks used to record transactions across several computers so that no single block can be altered retroactively without the subsequent alteration of all blocks in the blockchain.
To explain what a blockchain is, let us take the comparison of google docs and conventional documents. Conventional documents exist in one place at a time, just like transactional ledgers. They can be stored in our computers and applications like dropbox but cannot be found in multiple places at once.
On the other hand, Google Docs can be accessed from multiple devices at the same time. These docs live in the cloud, and anyone having access to them can make edits and see the edits being made by everyone in real-time.
A blockchain is like Google docs and beyond, with many additional facets such as immutability, decentralization, transparency, and security. Unlike a Google doc, which anyone with access to can easily edit, once an entry is made into a blockchain, it gets distributed over a diverse network and is locked.
Blockchain, which is the underlying technology of Bitcoin, is used for many applications. Thanks to the disruption that blockchain tech has proven to be, we have entered into a new era of crowdfunding. Blockchain is much more than a disruption. It is a foundational technology with the potential to transform and reform the finance and credit systems we have been so accustomed to.
Crowdfunding is a method of seeking funds to finance various stages in a business — whether it is the establishment stage or the development stage. Crowdfunding allows businesses with good products and service ideas to raise funds with the help of regular people in small investment amounts.
This approach allows faster and more economical funding. As crowdfunding has gained popularity, it has become an extremely viable alternative to venture capital and traditional stock IPO.
Traditional crowdfunding platforms offer several benefits, including efficiency, easier presentation, built-in PR and marketing, and near-immediate validation of concept and reach. These platforms have also allowed non-traditional projects like those started by in-need founders or hopeful creatives to a new audience to pitch their cause to.
Kickstarter, Crowdfunder, and Indiegogo were among the earliest companies to popularize this method. Kickstarter revealed that 78% of the campaigns which raise 20% of their goal ultimately become fully funded, while 11% of projects finish having received no funding.
The traditional crowdfunding platforms, with their multiple advantages, have some downsides to them as well:
- These platforms take a fee for every listed project.
- Not all of these platforms accept services as a possible project.
- Startups are required to pay for marketing and advertising, which comes as yet another strain on the already limited funds available.
- In several cases, startups turn up as scams. Investors are left with no way to re-gain their lost money as these fraud startups either run away with the money or perform poorly.
- A startup might have no protection of its Intellectual Property and leaves itself exposed to experienced investors who may steal the idea and market it later to their advantage.
This is where blockchain comes into the picture. The blockchain offers founders and entrepreneurs transparent access to funds from anywhere globally and makes the funding process safe. The platforms which use blockchain help maximize the success of a project due to multiple blockchain utilities. Let’s discuss.
How does blockchain support crowdfunding?
The blockchain hosts a crowdfunding platform that allows huge funding possibilities for startups. These startups can raise funds by creating their native tokens and selling them in exchange for the capital. Blockchain crowdfunding happens in a peer-to-peer fundraising mode.
Blockchain removes the need for an intermediate third party or a central authority to control the funding process proceedings. Some popular crowdfunding cryptos include Coinspace, Swarm, and Judobaby, among various others.
Some of the major benefits of blockchain crowdfunding include:
- Decentralization: Blockchains act independently and don’t rely on or entrust responsibility to an intermediary/central authority to create funds. The absence of obligations attracts investors. This eliminates fees and makes crowdfunding cheaper for creators. The investors can directly seek to invest in the blockchain projects they consider profitable or investment-worthy.
- Access Equity: Blockchain uses asset tokenization to provide investors equity or ownership. Investors can simply buy these tokens, representing a share in the project, and invest in it.
- Universal Opportunity: Projects which use a blockchain-based crowdfunding model can be funded. People with an internet connection can contribute to projects.
- Flexible options: Creators and entrepreneurs are granted more liberty when using blockchain and asset tokenization. VC funds and other sources of capital are often pegged with intrusion and dilution of the control, which may result in biased decisions. On the other hand, Blockchain crowdfunding results in community ownership and governance.
- Peer-to-peer: Cryptocurrencies can be exchanged on a peer-to-peer network, making the entire fundraising process transparent and the investments more liquid.
- Smart Contracts: Blockchain-enabled smart contracts can provide greater accountability in crowdfunding. These contracts provide built-in milestones that prevent funds from being released without provenance for a campaign’s legitimacy. This also prevents large amounts from being misused by ill-intended or are not qualified to run a crowdfunding campaign.
For any upcoming or existing project, businesses have to develop methods for raising funds. Bitcoin crowdfunding provides such businesses and individuals with powerful tools to raise funds. The best example of this could be Ukraine’s funding of war efforts via crypto donations.
Rather than being dependent on a single investor or one major funding source, one can decentralize the entire funding process by acquiring multiple backers and supporters to provide money by employing a crowdfunding campaign. One can decentralize things further and reach an even wider audience by accepting Bitcoin as a payment method.
DeFi crowdfunding platforms ensure financial security by helping a startup collect funds to start their business in a decentralized environment. These platforms aim at making crowdfunding processes more decentralized and bringing sovereign investors from the crypto market.
No organization holds any authority or regulatory authority over the system, as the system remains anonymous. DeFi crowdfunding platforms burgeon in the crypto market for outstanding business development services. The evolution of DeFi platforms in the crypto market is supported with essential financial assistance.
Crowdfunding via ICOs and IEOs
Initial coin offerings (ICOs) are the offerings of new cryptocurrencies on a blockchain platform. Here, creators of the project post what they are doing, and these projects are then funded by a group of investors interested in backing them.
OpenLedger is one such project. It operates like a stock market for crypto equity. Companies can release an ICO via this platform to raise funds, and then traders can trade this crypto equity on OpenLedger.
As ICOs have lost their appeal through the years, their place has been taken by IEO, where a cryptocurrency exchange oversees their token sale. IEOs are preferred by investors since there is a greater due diligence level than ICOs.
Things to look for in a Blockchain Crowdfunding Platform: Prefer blockchain crowdfunding platforms that have fully customizable smart contracts that allow you to define the terms of the contract and take into account the conditions under which funds are released to the creator. This allows the donor to select a campaign offering terms they agree with. Thus, a transparent relationship between the donors and creators is created, where they are both protected.
Blockchain technology has already revolutionized crowdfunding. It has advanced the interaction between innovators, donors, and consumers. Donors can now safely contribute to their favourite projects using smart contracts. Consumers can purchase digital products and support any creator. Innovators have an opportunity to initiate their business, resolve issues and fabricate new technologies by providing a trustless and decentralized framework.