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Recent innovations in the technology sector have changed the whole world around us, and blockchain technology is one of the most popular innovations in modern times. Millions of people around the globe are using blockchain technology these days, and the numbers are only expected to grow significantly in the upcoming years.
Due to the transparency and security of blockchain, businesses can use it to become faster and swift. Projects like Kickstarter are also transitioning to blockchain technology as well.
In this article, we’ll see how crowdfunding backed by blockchain technology can transform your business.
Crowdfunding and Blockchain
Before you can understand the role blockchain technology can play in crowdfunding, you’ll need to understand a few basic terms. That’s important because crowdfunding is a small domain, and blockchain implementation in this domain can be confusing. That’s why learning about some important terms is so important.
Crowdfunding is used by entrepreneurs around the globe to raise funding for their innovative projects. Here are a few important terms.
- In Equity Funding, the investor actually owns a percentage share of the business they invest in. It is one of the best implementations of blockchain in the crowdfunding domain, as NFTs can be used as proof of ownership of the equity you hold in a business.
- In P2P crowdfunding, the investor earns interest on their investment within a set deadline.
- In donations, people donate money to a noble cause or business in return for nothing.
- In rewarding, people are rewarded instantly for the contribution they make to a business. The amount of reward depends on the size of donation you make to the company or idea. This way, people are intrigued to give away more money.
These were the most famous crowdfunding models, which can also be applied to blockchain technology to maximize effectiveness and transparency in crowdfunding operations.
While there might be lots of different types and valuations of crowdfunding, the main idea behind every project is the same: collecting enough money from people to start a business and making it profitable.
In the case of crowdfunding with blockchain, you’ll also have to decipher the blockchain technology and learn how it actually works in this particular case. The technology can be a bit confusing for beginners who have never experienced it. Don’t worry, though, as we’ll break down the whole thing into small, easy-to-understand parts.
The basic idea behind blockchain is that it is a public record of all the transactions which are done on different decentralized platforms. Since blockchain technology is immutable and transparent, it can be used as a replacement for intermediaries in transactions of all sorts.
Because of the very nature of blockchain it does any business that implements it more sustainable, swift, and transparent. The crypto market has already grown to trillions of dollars and is only expected to expand in the upcoming years. Businesses are turning to crowdfunding more than ever before as inflation, and decreased margins bite. This provides them with quick money, which can be used to make the business profitable.
Finally, let’s take a look at how blockchain can transform the future of crowdfunding for the better.
Blockchain technology is guaranteed to transform the user experience in crowdfunding platforms. Since there are lots of financial transactions related to the crowdfunding industry, the blockchain is expected to make the industry more transparent and way faster than it currently is.
In a nutshell, crowdfunding can be changed and made better in lots of different ways with the help of blockchain tech.
Flaws in the Crowdfunding Industry
Crowdfunding applications currently have many flaws in their operations. That’s exactly where blockchain technology can help the crowdfunding industry improve itself. The current innovations and techniques used by blockchain technology can definitely change crowdfunding applications, but you must understand what types of issues can be resolved by the technology.
High Chances of Fraud
Because of the flawed security features in crowdfunding apps, there’s a high risk of fraud, and investors are always risking losing their money to crowdfunding-related frauds. Fraudsters can put forward false claims about reaching certain funding goals, lie about released products, and even run away with money leaving the investors empty-handed. This usually happens with unverified startups which still succeed in securing funding for themselves.
Every year, investors and donors lose millions of dollars to crowdfunding frauds around the globe.
Even recognized and trustable crowdfunding platforms are prone to hacking attempts. Many businesses suffer from funding theft even after they’ve secured the funds. This type of problem affects both the businesses and the investors equally.
Current Limitations
While every business or startup is free to start a crowdfunding campaign at any time, businesses with more public exposure are more likely to get more funding. You can spend some money to increase the outreach and public exposure of your project, and you’ll be guaranteed to secure more funds.
Usually, the startup culture is more friendly toward Business to Customer funding as compared to supporting Business to Business ideas. Many successful entrepreneurs are creating service-related applications and securing lots of funding through crowdfunding platforms. This is why most of the funds are limited to tech and games.
Intellectual Property Theft
Intellectual property theft is another big problem with crowdfunding platforms. There are not enough security measures taken by these platforms to secure the intellectual property of small business owners and entrepreneurs. This way, many large companies steal ideas from small startups, use their own funding and develop the project much faster than the startup. When this happens, the original creator either has to spend lots of money to patent his idea or has to rush the implementation process to compete with the big company.
The products which are released in a rush are usually lower in quality. So, no matter how many funds a startup secures, very few people will buy their substandard products. This is a problem way bigger than it seems to be and usually stops many creative individuals and startups from using crowdfunding applications to start with. Moreover, the rush to introduce the product faster than the competitors can leave the entrepreneur with a lack of resources and time for proper marketing.
Additionally, there are lots of limitations in the crowdfunding applications currently used by the industry.
High Fees
While everyone knows about the standard fee charged by every crowdfunding platform, the processing fee can quickly change depending on the location of your project.
Even the most popular crowdfunding platforms, which do not charge any fees take around $0.30 for every donation your startup receives. These are termed transaction fees.
So, we can confidently say that every crowdfunding platform charges you fees or transaction charges in one way or the other. Blockchain technology has the potential to change this downside of crowdfunding platforms as well.
Blockchain: The Future of Crowdfunding Platforms
Blockchain technology has the potential to change the crowdfunding sector forever. Therefore, let’s take a look at the potential benefits that blockchain technology can bring to the crowdfunding sector.
Making Everything Decentralized
Decentralization is undoubtedly the biggest feature of blockchain technology. Moreover, crowdfunding platforms can cut down on their fees significantly by using blockchain technology to automate most of the processes. That’s because blockchain technology will eliminate the need for any third parties in transaction processing. This way, crowdfunding through blockchain platforms will because very much accessible for startups around the globe.
Moreover, since blockchain is decentralized, it won’t have as many limitations as the crowdfunding industry currently has. Today, you can start crowdfunding only if your startup has a reasonable audience before the project even starts. However, with the help of block-backed crowdfunding, you can start the process with little to no audience and on multiple platforms at the same time. Moreover, startups that create services will also have a strong chance of securing funding on such platforms.
Smart Contracts
With the help of smart contracts, people on the blockchain can view parties on both ends of a transaction. This minimizes the possibility of fraud. Moreover, since no third party is required to verify the transaction, it becomes much faster. This way, you can get instant access to funds whenever you need them. Businesses and investors can also communicate freely with one another under the decentralized system. So, for high efficiency and improved speed, crowdfunding platforms should start converting to blockchain technology as soon as possible.
With the help of blockchain technology, intellectual property can also be saved easily. Smart contracts will make sure that no one gets unauthorized access to any sensitive information about a crowdfunding project.
Tokenizing Equity
Tokenization is another feature of blockchain which can help resolve lots of problems in the traditional crowdfunding market. When investors invest in a crowdfunding project, they can instantly receive tokens to verify the percentage of equity they have in the company. Developers can take advantage of this feature.
Here are some of the benefits of tokenization.
One of the main benefits of tokenization is better visibility for your project. As an investor, you can easily see what others think about the project before investing money. This way, other investors will also be able to track the most successful crowdfunding projects with perfect transparency.
Blockchain has the potential to make the crowdfunding industry secure and transparent as well. This is another major issue of the crowdfunding industry resolved by blockchain technology easily. Smart contracts used in this technology can be directed to release funds only once the funding process reaches a specific milestone. This helps prevent any fraudulent players from exploiting the system. Moreover, investors receive tokens as a reward for investing in the project. This provides investors with a sense of ownership and makes it very hard for any startup to run away with the investment.
Blockchain technology can also help avoid the costs of marketing problems for businesses. It can help avoid these problems by letting the employees own the company. Tokens can be used as a currency by the company to mitigate most of the issues related to costs.
How Blockchain Can Help Make Crowdfunding Better
The main method through which blockchain technology can transform crowdfunding platforms is by improving their functioning.
Let’s discuss some of the most beneficial features of blockchain technology that can be added to crowdfunding projects to make them more effective.
By introducing smart contracts, which require multiple signatures for any decision, Blockchain can help crowdfunding investors decide the future of the company they invest in. Smart contracts can also be used by blockchain technology to execute transactions when certain milestones are reached automatically. This can make the crowdfunding process much easier and safer.
If a crowdfunding project exceeds the maximum allowed limit of tokens, the additional tokens can easily be frozen by blockchain technology. The frozen tokens can then be added to other crowdfunding projects. This way, the tokens can be used as the currency for a specific crowdfunding platform, and users can use that currency to fund every project on it.
Blockchain technology can also help make capped contracts. In these contracts, the minimum amount of money required by a crowdfunding project to become viable is enlisted. If the project fails to receive the minimum amount of funds required, the tokens can automatically be refunded to the investors. This way, the investment remains safe and doesn’t go towards a failed project. This is a security feature of blockchain, which increases an investor’s trust in the system.
A time limit can also be set in blockchain-based crowdfunding projects. After the specified time period, the user isn’t allowed to withdraw the funds. This helps crowdfunding projects in getting investment with a sound and long-lasting base. This makes the deal fair and profitable for all parties involved.
As blockchain technology gets more recognized in the crowdfunding sector, more crowdfunding applications are expected to implement this beneficial technology in them. This will ensure long-lasting success in the crowdfunding sector and will minimize the risk of fraud.
Types of Crypto Crowdfunding
Here is a quick overview of all the different types of cryptocurrency crowdfunding. This will help you choose the right type of funding for your project.
Initial Coin Offering
These crowdfunding projects help attract funding for new projects by selling coins for specific crypto. The project introduces its own tokens and puts them on sale to sell equity in exchange for investment.
Before you dive into an ICO project, make sure that you review the project under question thoroughly. Moreover, if the project fails to secure a specified minimum investment needed by it to sustain itself, the funds are given back to the investors. There are even mobile applications that can implement ICO.
Security Token Offering
These tokens are backed by actual assets and are given away to investors who invest in startups through blockchain-based crowdfunding projects. The security token can be used by the investor as proof of ownership of actual assets. Although there are lots of potential uses for this technology, you will have to go through the legal requirements in your area before making such applications.
Initial Exchange Offering
IEO is actually an evolutionary form of ICO. This model can also be used by startups around the globe to gather crowdfunding for themselves. This model provides its investors with a high return on investment as well.
In this type of technology, you are required to create your own crypto tokens and sell them to gather money for your startup.
Initial DEX Offering
In this model, you can use a separate decentralized crowdfunding system to gather investment for your startup. You can use this system to launch new tokens through the provided blockchain. Since this method is easy to use and straightforward, it is gaining popularity much faster than the ones mentioned above.
Even with all these features and ease, you will still need a unique idea and good marketing to secure lots of crowdfunding.
Takeaway
Crowdfunding is one of the only ways through which new startups and unique ideas can secure lots of investment and get converted into reality. However, due to the limitations in the crowdfunding market, small businesses find it hard to secure a considerable amount of investment just because they do not have enough public exposure.
However, this problem is being resolved by blockchain technology since it provides every startup with a fair chance to receive crowdfunding in a decentralized manner. This type of crowdfunding is also transparent, immutable, and fair for all the parties involved in the deal.
There are different types of blockchain crowdfunding available, and developers can tap into this novice market to develop specific applications focusing on the implementation of blockchain technology in crowdfunding. As an investor, you’ll be able to enjoy peace of mind knowing that your investment is safe.
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