Crowdfunding has become an increasingly popular way to raise capital for new projects and businesses. Since its earliest days when the U.S. reward-based platforms Indiegogo and Kickstarter started, and the equity crowdfunding platforms Seedrs and Crowdcube launched in the UK, it has become an established source of funding for entrepreneurs and early stage startups. However, familiarity with the concept and procedures has attracted some scammers and fraudsters. Also, higher levels of competition for backers’ support mean projects can require a significant amount of time and effort to be successful. BOLD Awards has taken a look at decentralized finance (DeFi) which is emerging as a powerful new tool, enabling decentralized crowdfunding to address cost and security issues, and more.
What is Decentralized Crowdfunding?
DeFi platforms use blockchain technology to create a more transparent, efficient, and accessible crowdfunding experience. Blockchain technology on a distributed network of computers means that there is no single point of control, which can help to reduce the risk of fraud and abuse.
Transactions are conducted in cryptocurrency or tokens, which could be established ones such as Bitcoin and Ethereum, or ‘in-house’ digital currencies issued by a crowdfunding platform. Using crypto enables DeFi crowdfunding platforms to utilize smart contracts to automate the crowdfunding process. Smart contracts are self-executing contracts that are stored on the blockchain. This gives rise to several benefits.
Benefits of Decentralized Crowdfunding
There are several benefits to decentralized crowdfunding that enable game-changing developments.
Increased transparency: DeFi crowdfunding platforms are typically more transparent than traditional crowdfunding platforms. This is because all transactions are recorded on the blockchain, which is an immutable public ledger. Details of Due Diligence searches can also be retained on blockchain for public scrutiny.
Reduced risk of fraud: DeFi crowdfunding platforms’ use of smart contracts automates the crowdfunding process to help reduce the risk of fraud. Smart contracts also reduce the scope for human error.
Increased accessibility: DeFi crowdfunding platforms can be more accessible than traditional crowdfunding platforms because they do not require fundraisers to go through a lengthy approval process.
Reduced costs of decentralized crowdfunding: DeFi crowdfunding platforms can be more cost-effective than traditional crowdfunding platforms, particularly for cross-border payments in crypto which are not subject to foreign exchange fees or delays.
Cross-border investing expands the user-base: investors based anywhere can support DeFi crowdfunding projects, as long as they have access to the required crypto, including initial decentralized exchange offerings (IDOs) and initial coin offerings (ICOs).
Greater backer protection: traditional crowdfunding immediately pays fundraisers the full amount raised. Smart contracts can arrange to pay funds in tranches subject to meeting certain KPIs. This means that if company founders start to make bad internal decisions, or the market swings against them due to external factors they cannot control or deal with, at least some of each backer’s investment could be returnable.
How to Use Decentralized Crowdfunding
To use decentralized crowdfunding, you will need to find a DeFi crowdfunding platform that supports the type of project you are raising capital for. Once you have found a platform, you will need to create a project and set a fundraising goal. You will then need to promote your project to potential investors.
If your project is successful, investors will be able to contribute funds to your project using cryptocurrency. The funds will be held in a smart contract until your fundraising goal is met. Once a fundraising goal is met, the funds will be released, either in full or in performance-related tranches.
Examples of DeFi Crowdfunding
The Ethereum Name Service (ENS) is a decentralized naming system that allows users to register domain names on the Ethereum blockchain. The ENS DAO is a decentralized organization that governs the ENS and uses decentralized crowdfunding to raise funds for its operations.
Gitcoin Grants is a decentralized crowdfunding platform that supports the development of open-source software. The platform uses quadratic voting, which gives more voting power to smaller donors, to ensure that funds are distributed fairly.
SushiSwap is a decentralized exchange (DEX) that allows users to trade cryptocurrency without having to go through a centralized exchange. SushiSwap uses decentralized crowdfunding to raise funds for its own development.
This new Web3-based UK crowdfunding platform enables UK-based investors to back vetted tech startups in emerging economies through cross-border tokenized investments. It also offers KPI reporting, a secondary market that improves liquidity for investors through early exit opportunities, and a virtual deal room that gives larger investors access to premium deals.
MetaverseDAO is a decentralized autonomous organization (DAO) that invests in metaverse projects. The DAO uses decentralized crowdfunding to raise funds for its investments.
Aave is a decentralized lending platform that allows users to borrow and lend cryptocurrency. Aave uses decentralized crowdfunding to raise funds for its development.
In addition to these examples, there are many other decentralized crowdfunding projects in development. As DeFi continues to grow, we can expect to see even more innovative crowdfunding platforms that are changing the way people raise capital.
Crypto and Tokenization Remains Volatile
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative. The benefits of crypto and blockchain tokens for crowdfunding cannot prevent volatile swings in the value of any particular digital asset, whether a cryptocurrency such as Bitcoin and Ethereum, or an in-house IDO or ICO.
There are multiple circumstances in which an investment could be at risk. For example, a business may reach its target, and then find a slide in the value of the digital currency that has been used means the digital funding it has raised is no longer enough to achieve its plans in the cash-based real world. Other people may prefer to speculate that it could rise to become more valuable.
Decentralized crowdfunding is a powerful new tool that is changing the game of fundraising. DeFi crowdfunding platforms are making crowdfunding more transparent, efficient, and accessible. They are opening up investment opportunities to new people.
They are also enabling new types of crowdfunding and democratizing access to capital. If you are looking to raise capital for a new project, I encourage you to consider using a decentralized crowdfunding platform, though this blog does not constitute a recommendation to use one.
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