Exploring the Intersection of Blockchain & Crowdfunding
Blockchains like Bitcoin and Ethereum are, simply put, a new kind of public infrastructure.
Such platforms are not a panacea technology, but they can open up many new kinds of possibilities across many industries, not least among these industries being the traditional finance sector.
That’s because blockchains are “slow and auditable computer networks we can trust” and which are “good for computing auditable and trustworthy transactions,” Zenith Ventures’s Richard Burton recently aptly explained.
To that, I’d note that public blockchains make it possible to create new kinds of digital assets as well and thus pave the way for new avenues of global, permissionless, and frictionless commerce.
Accordingly, the fledgling blockchain-powered “Open Finance” upswell may become increasingly poised to influence — or even break down — the walled gardens of traditional finance for decades to come, not unlike how the internet became a commercial game changer around the turn of the century.
With all that said, the aforementioned Burton perceptibly added that it’s precisely the “things that we want to be slow and auditable [that] are pretty important,” like “Money creation, corporate governance, and contract enforcement,” and it’s such operations that blockchains are tailored for.
So, blockchains are unique in design and are uniquely suited to automate and streamline certain activities. These dynamics make the tech particularly well positioned to power innovation around the rising internet-based crowdfunding arena.
Why? Because crowdfunding neatly entails a trifecta of things that blockchains are good for: asset creation, corporate governance, and contract enforcement.
Like Blockchain, Internet Crowdfunding Relatively New
Dubbed as a type of alternative finance, internet crowdfunding is a relatively new addition to the mainstream.
Crowdfunding, which involves startups, projects, or individuals raising small amounts of money from many people over the internet, really began picking up steam between 2008 and 2010 when the first popular crowdfunding platforms launched, namely Kickstarter, GoFundMe, and IndieGoGo.
Ever since then, the sector has exploded as new crowdfunding platforms have risen all around the world across a variety of fields and niches. In that span, upstart enterprises have collectively raised billions of dollars to fund their operations in a faster and leaner manner than more traditional avenues could afford.
As such, crowdfunding has really only started coming into its own over this last decade, a reality that’s also been true of blockchains since the launch of Bitcoin in 2009.
In this way, both the crowdfunding and blockchain spaces are still maturing and offer “alternatives” to currently available mainstream options. Moreover, smart contract platforms like Ethereum may prove pivotal in unlocking new unlock new kinds of crowdfunding possibilities altogether.
Fundrise, Part of the new breed of niche-Crowdfunding Platforms
The Smart Contract Factor
By far, Ethereum is currently the most popular and most widely used smart contract platform. And that’s because Ethereum was the first platform to bring smart contract functionalities to the public, and the project’s ecosystem has maintained the ensuing momentum ever since.
But what exactly is a smart contract, you ask?
Think of a platform like Ethereum like a decentralized world computer, powered not by one or a few sources but by many stakeholders. This computer can be used to compute the functions of apps or the existence of digital assets, which are governed by smart contracts.
In short, a smart contract is a self-executing digital contract. If certain conditions are met, the contract executes according to its internal logic — no manual intervention required.
This design allows for the creation of programmable money and programmable assets, which are unprecedented innovations in the history of finance. Furthermore, smart contracts can be a powerful disinter-mediating force that mitigate the need for middlemen and excessive fees in transactions, or at least help intermediaries streamline and customize transactions as these programmed digital contracts execute on their own.
In the context of crowdfunding then, the smart contract possibilities seem endless.
Consider this example: a crowdfunded real estate project issues special digital tokens as a security to investors; in order to maintain regulatory compliance, the token’s smart contract “whitelists” addresses that have passed “Know Your Customer” processes, meaning only compliant users can hold the token. The benefit is that much of this hypothetical process would be automated by neutral public infrastructure, e.g. Ethereum.
Such tokens could then be traded more liquidly than ever in paperless fashion on decentralized exchanges (DEXes) like Uniswap without raising the ire of regulators, as only compliant users — with fully auditable transaction histories — would have access to the token’s liquidity. And this is just one hypothetical scenario. With programmable investments, much is possible.
Relatedly, a European Crowdfunding Association (ECN) report earlier this year found that blockchain and associated innovations could become game changers in the crowdfunding industry going forward:
“Blockchain and [distributed ledger platforms], in general, can drive change in the financial services by introducing transparency, simplification and efficiency. The key benefits of these new technologies are related to their ability to create trust in a distributed system, increase efficiency in real-time or near real-time reporting of transactions, and support high resilience.”
Underdog Blockchain Projects Turn to Crowdfunding, Too
Internet crowdfunding is still considered alternative finance, so it’s still an insurgent industry that is in the middle of earning its reputation.
The blockchain arena is in a similar boat, insofar as it has generated buzz while at the same time many influential people still don’t take it seriously.
With that said, many crowdfunding platforms cater to making it easier for new projects to raise money than if they were to go through traditional venues, a reality that has made these fledgling services a growing funding option of choice among blockchain-centric projects looking to raise capital without going the initial coin offering (ICO) route — a path that is more regulatorily onerous in most jurisdictions around the world.
For example, in November 2019 the AI-managed cryptocurrency portfolio Ember Fund announced plans to raise up to $1 million USD on the crowdfunding platform Republic. Expect more ventures like this to come in the years ahead.
Some Crowdfunding Platforms Already Eye On-Chain Operations
The melding of blockchain tech with crowdfunding companies isn’t just theoretical — some startups have already pushed ahead on putting the innovative combination work.
For instance, consider the case of Pledgecamp, which hails itself as the “future of crowdfunding” via “blockhain protected investments.” This platform uses smart contracts and a dual-token system to facilitate a crowdfunding service underpinned by blockchain.
“Blockchain allows strangers across the world to engage in complicated financial transactions within a programmable framework of trust,” the Pledgecamp team has previously said.
To be sure, Pledgecamp may succeed or fail, but it won’t be the last company of its kind to base its operations directly on blockchain infrastructure.
ICOs and IEOs: a Novel Form of Crowdfunding
Another major development in the crowdfunding arena has been the rise of ICOs, which are transnational in scope and thus often clash with securities rules in many countries.
Even still, rules or no rules, token platforms like Ethereum are permissionless so in many cases users can get ahold of ICO’d projects that launched first and asked questions later. In other instances, stricter ICOs are gatewayed through KYC processes that box out non-compliant would-be registrants.
In any case, ICOs represent a new kind of crowdfunding model — legal in some places and illegal in others — that is made possible by its underlying infrastructure, blockchain tech.
Of course, 2017 was a boom year for ICOs while 2018 and 2019 have seen the phenomenon dwindle, but that dwindling seems to have resulted more from ecosystem fatigue rather than a lack of technical viability. In fact, it’s trivial to spin up any asset on Ethereum; what’s more complicated is handling the more practical legal matters that are associated with traditional commerce.
To that last point, one phenomenon that has arisen over the last year as part of an effort to make ICOs more palatable and trustworthy has been that of “initial exchange offerings,” or IEOs.
ICOs and IEOs both entail token sales as part of a project’s crowdfunding raise, with the key difference being that IEOs are directly facilitated by cryptocurrency exchanges. Binance Launchpad’s facilitation of the Tron-backed BitTorrent (BTT) token earlier this year really kicked the trend off, and other major exchanges like Bitfinex, Bittrex, and Coinbase have followed suit in exploring the new crowdfunding practice.
Read: What is an IEO?
The DAO & Newer Experiments
Another important wrinkle to consider at the crossroads of blockchain and crowdfunding is the advent of DAOs, or decentralized autonomous organizations.
Thus far we have mainly been talking about “crowdfunding” with regard to the relatively new industry that’s sprung up around mainstream-facing crowdfunding platforms.
Yet, in zooming out and speaking of crowdfunding in a much more general sense, there is arguably no related experimentation more interesting than what the cryptoeconomy is seeing around DAOs right now.
So what are they? A decentralized autonomous organization is a novel kind of organization that has its internal rules managed on-chain by blockchain smart contracts. In this sense, DAOs are similar to community councils comprised of like-minded stakeholders that 1) associate voluntarily around a common goal or goals, and 2) use smart contracts to trustlessly enforce participation rules and operations.
In this sense, there’s no real limit to what you can create a DAO for — you could set one up to help manage the funds of a recurring poker match between a small group of friends, for instance. But people do debate what these hybrid physical-and-digital organizations could and should be, and while the space is still young and experimentation is still early, two main styles of DAOs have risen to the fore: for-profit venture DAOs and goal-orientated funding DAOs.
The most famous, or rather infamous, decentralized autonomous organization to date was known simply as The DAO. It was set up as a crowdfunded and investor-director venture capital fund that was worth $150 million at its height. In the summer of 2016, an attacker used a vulnerability in The DAO’s code to siphon off 3.6 million ether (ETH) from the fund.
As the Ethereum project was still early, the platform’s community leaders rallied around a hard fork to mitigate the hack’s economic fallout, a move that led to the Ethereum vs. Ethereum Classic schism — those who stayed behind on the “old” chain became the ETC camp.
MolochDAO
Somewhat understandably, the dramatic episode seemed to largely chill innovation around DAOs for over two years. Things seemed to pick back up in early 2019, when SpainkChain co-founder and chief executive officer Ameen Soleimani launched MolochDAO, a grassroots crowdfunding group set on funding open-source Ethereum development efforts on their own.
MolochDAO quickly became a hit, with the group raising its first $1 million for grants and the like in a matter of months. And the project, with its code being open source and thus easily copyable, led to a flurry of new DAO upstarts popping up throughout the rest of 2019.
One of these newcomers is MetaCartel DAO, which is focused on supporting and funding projects on the “Ethereum application layer,” so dApps. The group is prepping a new spinoff organization, MetaCartel Ventures DAO, that is essentially a hybrid between the for-profit and goal-orientated DAO styles.
With all that said, the DAO ecosystem is still early, but among other things it opens up new kinds of crowdfunding and fund management possibilities. Whether these organizations end up gaining wider traction in society remains to be seen, but in the very least a safe bet is that many more DAO experiments are coming, and many will have crowdfunding elements.
Laws Still Developing Around Blockchain and Crowdfunding
Another factor to consider at the intersection of blockchain and crowdfunding is that since both sectors are still nascent, jurisdictions around the world are still actively grappling with how best to legislate these arenas. .
This dynamic makes it so that enterprises in both spaces flock to regions that have proven to be friendly hubs for their ecosystems, like Silicon Valley and the U.K. for crowdfunding platforms and Germany and Singapore for blockchain projects.
Accordingly, if other countries remain slower than the aforementioned places in modernizing their laws in these fields, then look for these innovation hubs to become that much more popular among alternative finance startups going forward.
Big Questions Ahead of Further Adoption
Let’s say hypothetically that the mainstream crowdfunding sector does continue to increasingly embrace blockchain tech. In speculating on that possibility, a number of interesting questions come to mind.
For one, what platform should be used? A few years ago, some theorized that smart contract platform fragmentation — where different smart contract platforms become popular in different places and sectors for different reasons — would eventually reign.
To date, though, we’ve seen the opposite happen: around the world the vast majority of recent activity and development in the smart contracts field have centered around Ethereum, the reigning smart contract platform. Resources and community knowledge has abounded in kind.
As things currently stand then, Ethereum is easily the leading public blockchain for companies looking to build using smart contract tech. Of course, Ethereum was already the home of ICOs, but its tech can be just as readily used by crowdfunding companies in the future.
Considering that reality though, crowdfunding firms that were planning to use Ethereum would have to seriously consider some big picture questions, like how to approach on-chain assets if Ethereum experiences another contentious hard fork. Some analysts have argued Ethereum has become “unforkable” because of large DeFi projects, which offers an example of how crowdfunding startups would have big questions to ask but also informative community resources to lean on all along the way.
Moreover, if the meld of crowdfunding with blockchain is to make further inroads to the mainstream, then standing questions around user experience (UX) and asset custody will need to continue to be addressed.
There is already movement on these fronts, though. For example, starting in 2020 German banks are set to be allowed to directly custody their clients’ digital assets, which paves the way for banks custodying digital crowdfunded investments, like security tokens representing real estate or equity. This is just one avenue of potential improvement that could make wider adoption of these assets considerably more likely.
Altogether, the intersection of blockchain and crowdfunding is an intersection to keep a close eye on in the years ahead, as it will most certainly produce more noteworthy innovations and melds that could have tangible impacts on billions of lives.
Open questions may abound, but it’s clear that neither blockchain or crowdfunding are going away any time soon. In fact, the opposite seems true: these two arenas seem poised to swell in the decades to come.
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