How does Blockchain Help in Crowdfunding?
Crowdfunding is an innovative method for funding various kinds of individuals and groups to help them meet their financial needs. During the 1962 Sino-Indian war, the then Prime Minister of India appealed to the citizens of India to contribute to the defense fund as they wished. This historic crowdfunding project was said to have collected $2,20,000. In today’s era of digitization, technology plays a key role in shaping crowdfunding projects. But how does blockchain help in crowdfunding?
Blockchain is emerging as one of the most effective tools to improve the crowdfunding sector. Blockchain is an independent and transparent tool that keeps data of the parties involved in a project and transactions among them secure and authentic. The foundation of any crowdfunding project is trust between the investors and the stakeholders. With the help of blockchain, crowdfunding projects increase their credibility and security. Hence, blockchain can bring about the much-needed revolution in the crowdfunding sector by connecting donors and donees more effectively to make a project successful.
Current Crowdfunding Landscape
Crowdfunding is one of the most popular and effective financial tools in today’s world. Around $34 billion has been raised for various purposes around the globe with the help of crowdfunding. Crowdfunding grew its popularity when people in developed countries started to use this method to collect funds to resolve financial problems. However, with time, crowdfunding has shown the potential to stimulate innovation and create jobs in the developing world as well. 40% of the total crowdfunding projects are focused on businesses and entrepreneurship. Developing economies are driving growth by bypassing the traditional capital market structures and financial regulatory regimes through the use of crowdfunding. For instance, in April 2020, over ₹100 crores were raised by various crowdfunding platforms in India to help the people in need during the pandemic.
With the number of internet users around the world reaching the milestone of a whopping 4.95 billion, crowdfunding is an easily accessible financial tool. The social media platforms serve as a free platform to promote crowdfunding projects. As the reach of social media has spread to each corner of the globe, crowdfunding projects promoted through such platforms have the potential to reach a global audience. With the help of social media platforms, active crowdfunding campaigns are expected to fuel the growth of the crowdfunding market in the coming years. The reason behind the increasing popularity of crowdfunding can be said as follows:
- Increased demand for alternative ways to manage finances due to improved socio-economic status
- A significant rise in internet and social media users
- Complexity and hassle to manage finances in the traditional ways
- Lack of collateral assets to gain credit from traditional financial institutions
- Increased technological awareness
- Increased financial awareness
Limitations of Current Crowdfunding Landscape
Even though crowdfunding is gaining popularity across the globe, this tool has its own limitations. There is uncertainty about the success of a crowdfunding project for various reasons.
- The crowdfunding project might fail to deliver the promised result due to a lack of investments. If failed to collect the required budget, crowdfunding platforms automatically remove the crowdfunding project from its platform.
- Most people lack basic knowledge regarding the function and dynamics of how crowdfunding works.
- Fraudsters might set up fake crowdfunding projects to attract funds. There’s currently no framework to track down fraudsters on crowdfunding platforms.
- Crowdfunding is primarily aimed at unaccredited, nonprofessional investors who may be less qualified to make informed and right decisions regarding any project.
- People may fail to choose a reliable crowdfunding platform. An unreliable crowdfunding platform possesses the chances of going bankrupt or facing any other legal issues which will harm both the crowdfunding project initiators and the investors.
- The crowdfunding initiators might fail to set up a realistic budget for the fulfillment of a project as they often ignore additional costs to wrap up a project like production, shipping, taxes, etc.
- The success of crowdfunding projects relies heavily on technology. Therefore, technical failures may drown even a promising crowdfunding project.
A New Era of Crowdfunding
Despite possessing the above-mentioned limitations, crowdfunding is a promising financial tool to meet the financial needs of people. The emergence of digital technologies like blockchain can help to bring the much-awaited revolution in the process of crowdfunding bg eliminating its limitations. Blockchain technology offers the following key benefits:
- Blockchain technology is decentralized. Therefore, it can maintain a database in a more efficient and low-cost way than centralized technology.
- The public ledger of blockchain is shared by internet users around the world. It ensures data security, transparency, and integrity. The data on a blockchain cannot be tampered with or forged.
- As blockchain technology is programmable, it can contribute flexibility and reliability to any project.
# Low-Cost Registration Process of Shareholders
Currently, the registration process of shareholders of a crowdfunding platform is done in a centralized manner. However, a centralized database does not address the issue of data security because the risks of data loss and tampering persist. A process based on blockchain technology can be a better alternative to the traditional process of registration and confirmation of such shareholders. Blockchain ensures decentralized data management, distributed ledger storage, anti-tampering, and anti-forgery features to make all the data stored in it more secure than traditional databases. Further, blockchain provides a digitized solution that can reduce administrative and human resources management costs while also eliminating the need for an offline shareholder registration process. Further, the authenticity of a crowdfunding project can also be verified as the data encrypted in blockchain can’t be tampered with.
#Implementation of Smart Contracts
By incorporating smart contracts into the crowdfunding system, a contract can be created that will hold a contributor’s money until a specific goal is met. Smart contracts will help to eliminate the barriers that would prevent funds from being released without verifying the authenticity and legality of a project. Smart contracts will help to prevent cases of fraud by eliminating anyone who tries to run crowdfunding projects with malicious intent. Smart contracts are self-executing, and they can transfer the funds collected through a crowdfunding project for further development by default if all of the criteria laid down in the smart contract for the project are met.
#Initial Coin Offerings (ICOs)
Initial Coin Offerings or ICOs are a popular concept among startups. ICOs in crowdfunding include the issuance of tokens that can act as a company’s share on the platform without the exchange of equity. With the help of blockchain, crowdfunding projects can be governed by smart contracts and offer token sales or Initial Coin Offerings. These smart contracts would lay down the terms and conditions for the sale of tokens. Token sale participants contribute through crypto-assets or fiat currencies via smart contracts. These smart contracts automatically allocate the tokens on sale to the token participants. Therefore, through ICOs, a crowdfunding project can collect contributions from crypto investors. This way, the project can collect funds without facing the hurdles of traditional crowdfunding methods.
In this digitized world, everyone wants to keep track of a crowdfunding project they are investing in. Instead of involving in passive contributions, today, everyone wants to keep a record of how a crowdfunding project is functioning, whether it is achieving its goals or not. To run a crowdfunding project effectively and attract potential contributors, the project requires transparency, reliability, and security. Blockchain solves this issue. Blockchain can solve the issues related to the current crowdfunding structure by reducing uncertainty between parties who are exchanging the values. Crowdfunding, being an independent and transparent model, can bring about much-needed improvements to increase the chances of a crowdfunding project being successful.