How Crowdfunding using Blockchain leads to a safer Investment
Crowdfunding has always been present in one form or another for a long time. However, it truly entered its boom period thanks to the internet. Platforms like Kickstarter and IndieGogo have raised billions of dollars for projects around the world. It now looks like the blockchain technology can help the crowdfunding space enter its next stage of evolution. By bringing in speed and security, this technology can help Crowdfunding becomes a safer and more accessible investment. In this article, we will take a closer look at the biggest example of the blockchain technology disrupting crowdfunding — initial coin offerings or ICOs.
So, what exactly is an ICO?
Initial Coin Offering (ICO) is the cryptocurrency’s world public crowdsale. Whenever a project wants to launch a new coin or dApp, they can conduct an ICO to attract investors into their ecosystem. The most alluring part of ICOs is the lack of red tape and formality. More often than not, a company simply has to submit a whitepaper to qualify for an ICO. Companies have been able to raise millions of dollars in mere seconds, thanks to ICOs. In fact, these crowdsales have become so popular that even IndieGogo has started getting involved with ICOs. The reason why ICOs have gotten so popular is because of the following:
- High Level of Transparency.
- Low Cost.
The internet made crowdfunding extremely accessible to everyone. All that you need to do is to register your account and donate to the project that you are interested in. Unfortunately, platforms like Kickstarter will only allow you to donate and list your projects provided you belong to specific geographic locations. However, with the integration of blockchain, crowdfunding can move beyond borders and make itself more accessible to both backers and creators.
By leveraging the blockchain technology, one can create smart contracts between two parties, in this case, backers and creators. This will allow them to communicate with each other without needing to go through an intermediary like a crowdfunding platform. This allows the two to communicate without being restricted by the rules and regulations of the platform. This simple innovation has allowed ICOs to collect billions of dollars from around the world.
Plus, we can’t talk about the ease of accessibility without talking about how simple the funding process itself is. ICOs will allow companies to raise finances easily without having to go through the needless red tape that comes along with traditional VC funding and angel investing. To show you how straightforward ICOs are, Brave, a web browser founded by Brendan Eich (co-founder of Mozilla) was able to raise $35 million from its ICO in less than 30 seconds.
#2 High Level of Transparency
Traditional crowdfunding lacks any degree of transparency. The number of scams that backers have had to suffer through shows us that this space is in desperate need for transparency. Thankfully, where traditional online crowdfunding falls short in transparency, blockchain-based crowdfunding can thrive.
Transparency is one of the core tenets of blockchain technology. The data stored inside the blockchain is visible to all the nodes which belong to its network. Similarly, smart contracts which are built on top of the blockchain can leverage this transparency. A smart contract can include predefined conditions, wherein the creators can get funds from the backers only after they fulfill certain milestones. The backers can use the contract’s transparency to know for use that the creators are not bluffing.
#3 Low Fees
Kickstarter and Indiegogo are expensive for both creators and backers. Both Indiegogo and Kickstarter use Stripe for their payment processing. The fee system of both these platforms are as follows:
- Kickstarter charges a 5% listing fee and Stripe credit card processing charges of 3% + $0.20 per transaction.
- Indiegogo charges a 5% listing fee on contributions and Stripe credit card processing charges of 3% + $0.30 per transaction.
The problem with the listing fee system is that it incentivizes the platforms to take in as many projects as possible, regardless of its credibility, to make a profit out of it. However, thanks to smart contracts, it will be possible for backers to interact with creators directly. As such, creators can instantly get the funds to their crypto wallet without having to go through expensive payment processors.
The blockchain technology has found immense utility across multiple sectors and platforms. As such, it shouldn’t be a surprise to see wider adoption of the technology in this sector. A number of decentralized crowdfunding exists today as a result of the inception of blockchain, for starters projects such as Pledgecamp, Weifund, LightHouse, Blockchhive and Fundition are utilizing DLT with the intention of changing the traditional Crowdfunding space. The idea is to create crowdfunding mediums using a technology that offers a plethora of solutions to a number of common problems, from accessibility to transparency and even expenses.