Blockchain Industry Case Study: Decentralized Crowdfunding

Ever since Satoshi Nakamoto created Bitcoin, the world was introduced to the beauty of blockchain technology. Many industries like finance, real estate, etc. have started integrating the blockchain technology to improve their overall operations. However, another area that can significantly improve with blockchain integration is crowdfunding.

The History of Decentralized Crowdfunding

Cryptocurrency projects have long used public crowdsale methods like ICOs, IEOs, and STOs to raise funds. These crowdsales have been truly revolutionary and have managed to accomplish many amazing tasks:

-They have provided the most straightforward path by which DAPP developers can get the required funding for their projects.

-Anyone can become invested in a project they are interested in by purchasing the tokens of that particular DAPP and become a part of the project themselves.

The truly remarkable fact about these crowdsales is that projects can raise millions of dollars with just a whitepaper. They are not required to show a basic version of their product to secure the funding. The first-ever recognized ICO was held by Mastercoin in July 2013. Mastercoin was able to raise about a million dollars.

What about traditional crowdfunding platforms?

Alright, so we know how public crowdsales have helped crypto projects to raise funds. However, what about crowdfunding platforms? Can the blockchain help in disrupting the platforms itself? Traditional crowdfunding platforms like Kickstarter and Indiegogo have raised billions of dollars in recent years, but they often take a considerable cut of the profits for themselves. 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 just incentivizes the platforms to take in as many projects as possible, regardless of its credibility, to make a profit out of it.

Along with that, these platforms suffer from a severe lack of transparency. As such, backers won’t be able to tell how creators are planning to use their funds in the first place. This has, in turn, reduced trust between backers and creators, which has resulted in lesser projects getting the funding they deserve.

Out of 142,301 projects that have ended up on Indiegogo, only 9.3% raised 100% of their goals or higher. On Kickstarter, more than 50% of the projects didn’t meet their funding goals. What this goes to show us is that the backers are afraid of crowdfunding a project. After all, nobody wants to get scammed, right?

How can the blockchain help here?

Blockchain-based crowdfunding platforms leverage smart contracts to bring in more trust and transparency into this system.

A smart contract is like a normal legal contract but it is automated and self-executing. While a normal contract requires the legal system and law enforcement as a last resource to execute the actions triggered by the contract, the smart contract can directly trigger actions on the digital domain, such as making a payment or transferring ownership of a digital asset. There are two really cool things to note about smart contracts:

It allows two parties to directly connect with each other without having to go through an intermediary.

It is entirely transparent, meaning the parties involved can see all the operations happening within the contract.

#1 Increasing Transparency

The creators and backers can enter into a smart contract with each other. Following that, the backers will be able to track how their funds are being used within the system. Some platforms like Pledgecamp leverage smart contracts to create a “backer insurance.” This insurance is a small portion of the backer’s funds, which gets locked up in an escrow within the smart contract. These funds are released only if the creators fulfill some pre-existing conditions and requirements. This helps in fostering trust among the backers.

#2 Reduced Fees

The fees are so bloated in a traditional platform because you are pretty much paying for the services of two intermediaries - the platform and the payment processor (like Stripe). By using native tokens, it will be possible for you to send payment to the creator’s wallets directly. Since you are mitigating these third-parties, you won’t need to pay such bloated fees.

Conclusion

Crowdfunding platforms like Pledgecamp, Whirl, and Starbase have paved the way for blockchain-integration. While there is no doubting the fact that crowdfunding has been a God sent for entrepreneurs, it is still long overdue for positive disruption. By bringing in decentralization and transparency - and by letting go of needless intermediaries - blockchain integration is the way to go.