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Blockchain Crowdfunding: What, How, Why, and Why Not

a sheet and calculator to represent a crowdfunding business - blockchain crowdfunding

Crowdfunding has become an essential way to raise funds for projects. It has been used to fund many commercial and social entrepreneurship opportunities. The funding model for most crowdfunding projects involves one primary individual or leader developing an idea and activating a community around that idea to “crowd” in funding to support that particular project.

Though there are a lot of problems with crowdfunding and blockchain crowdfunding could solve some of them. We explore that in this article.

What Is Blockchain?

Blockchain is the technology behind bitcoin and other virtual currencies. It is a decentralized register that keeps track of all transactions using that cryptocurrency, such as purchasing bitcoins or buying goods and services with bitcoins. 

Each transaction is stored as a block of data on the blockchain and can never be erased or tampered with once verified by the network. This creates a permanent record of all transactions and prevents fraud or double spending (using the same coin twice).

Problems With Regular Crowdfunding Platforms

For a business model that has been around for over a decade, there are still significant issues that crowdfunding platforms are facing. Here are some of the main problems with crowdfunding:

Censorship

Censorship is one of the biggest problems with crowdfunding platforms. Most popular crowdfunding platforms have strict rules that projects must adhere to in order to be listed. If a project violates any single rule, the project can be banned from the website. This means those projects will not get funded, even if people want to back them.

The creators of “Raspberry Shake” were recently banned from Kickstarter for violating a rule about selling hardware on the website. However, Raspberry Shake was selling a seismograph, so they believed they didn’t violate any rules. Nevertheless, their project was removed from Kickstarter, and they were unable to raise funds through the platform.

Lack of Transparency

Many crowdfunding platforms lack transparency. They don’t make it easy to find out what is going on behind the scenes. Many platforms hide a lot of information from backers. For instance, they may not tell you how many people have backed a particular project to create a “scarcity” effect and encourage people to invest before it’s too late.

That said, there are some ways to get around this issue. By checking where else the creator is advertising their campaign, you can get an idea of how successful it is. If there’s no link or posts about it on social media or forums, for example, then it’s safe to assume that the project hasn’t been very successful.

Scams

Yet another obvious problem of crowdfunding is that it can be a scam. The internet is full of people looking to take advantage of others.

Crowdfunding sites have their own measures in place to try to prevent scams, but they’re not always successful. For instance, GoFundMe guarantees that if you don’t get your money back from a fraudulent campaign or one that never delivered on the donor’s expectations, you should reach out, and they will refund your contributions. 

But even with these protections in place, there will always be some people who slip through the cracks and make off with other people’s money.

Funding Fees

Many crowdfunding platforms charge very high fees. These fees are usually a flat fee per transaction, but they can also be a percentage of the money raised. This can make it difficult for creators to raise enough money to get their projects off the ground without being left in the red.

They usually charge large fees for both creators and backers, which can deter people from using them for crowdfunding purposes. For example, Kickstarter takes 5% of the funds raised, plus 3-5% for processing fees. Indiegogo charges 5% total fees plus 3-5% processing fees. These costs can add up quickly over time, especially if you run multiple funding campaigns or invest in multiple projects.

Intellectual Property Risk

One of the biggest risks associated with crowdfunding is intellectual property risk. Many startups have their own proprietary technologies and other intellectual property that they hope to leverage to create a successful company. If a startup chooses to use a crowdfunding platform, it runs the risk that someone else may take the idea and run with it.

If the startup has not secured appropriate intellectual property rights before beginning its crowdfunding campaign, it could be too late. As soon as the idea is publicly disclosed, the startup loses its ability to secure patent protection. Although there are still ways to protect trade secrets and copyrights, these protections are not as strong as patent protection.

To avoid this problem, start-ups should work with an attorney before launching their crowdfunding campaign to identify their key intellectual property assets and determine how best to protect them.

How Blockchain Crowdfunding Can Addressing The Issues with Regular Crowdfunding

Let’s explore how blockchain development can help and why its implementation is needed in crowdfunding.

Decentralization

Decentralized blockchain-based crowdfunding platforms can solve problems with censorship and high transaction/funding fees. There is no need for an overseer to approve or reject crowdfunding campaigns, and the decentralized nature of blockchain makes operations cheaper.

Speed-up Transactions

The blockchain eliminates the need for a central authority or bank to validate transactions between two parties because each computer on the network has access to all previous transactions and can track any progress made. This means that transactions on a blockchain can be verified within seconds because they aren’t reliant on one centralized entity making decisions about each individual transaction made.

In addition, by making the transactions faster, more transactions can be made at no extra costs. It will also reduce the risk of fraud as blockchain allows for an immutable ledger that cannot be tampered with.

Transparency

Another key benefit of blockchain technology is transparency. Blockchain is a distributed ledger that allows every user to view, on a public record, all transactions that have occurred as part of the blockchain. This means that there is no need for an intermediary to verify transactions because the same task can be performed by anyone who has access to the blockchain.

The transparency of blockchain not only makes it easier to track crowdfunding transactions but also creates greater trust between users and their financial institutions, as well as between lenders and borrowers. This increased trust can lead to more willingness to participate in crowdfunding endeavors.

However, note that your blockchain address is not tied to your real identity with decentralized finance, so you could still be anonymous.

Efficiency

With blockchain, transactions are processed in real-time, which means that funding can be delivered to projects in seconds or minutes instead of days or weeks. This speed means that crowdfunding platforms can deliver funds to project managers faster than ever, taking the concept of “crowdfunding” from something that happens over a few weeks or months to something that happens in real-time.

Cost-effectiveness

Blockchain-based crowdfunding can also bring down transaction costs. As of now, most crowd funders charge between 4 and 5 percent in transaction fees. This figure can rise or fall depending on the platform, but it’s often taken out of the funds raised.

Blockchain technology would not only lower these fees but would also eliminate them entirely from crowdfunding transactions. This seems like a small detail, but it could make a huge difference to the success of many campaigns.

The elimination of transaction fees could significantly increase the amount of money startups receive.

Increased Liquidity

Crowdfunding through a traditional platform locks up capital until the project ends or reaches its goal. One study showed that only 24% of projects reach their fundraising target, which means three-quarters of investors remain locked into an investment that may never produce a return. 

Blockchain crowdfunding offers greater liquidity for both investors and entrepreneurs. As soon as an investor pledges money to an idea, that money is released to the entrepreneur with no contractual obligation for either party.

Automatic Transactions

One of the biggest selling points of blockchain technology is that transactions are automatic and trustless. The blockchain inherently makes it difficult to tamper with data because each block of data is encrypted and linked to the previous one. 

For example, if someone wants to change a transaction that happened in an earlier block, they would need to change the data in that particular block and all the blocks that come after it.

Downsides of Blockchain Crowdfunding

One downside of blockchain crowdfunding is the somewhat not so clear regulations. Because blockchain technology is so new, there are not yet many regulations governing how it can be used. This means that there is a greater risk for fraud and scams.

Another downside is the lack of customer protection. If something goes wrong with a project or if the project manager does not deliver on their promises, investors have no legal recourse.

Conclusion

While blockchain technology was invented to secure and enable cryptocurrency, the underlying code is a game-changer for industries. One of the most promising applications? Crowdfunding.

It is a technology for decentralized, transparent, and secure data storage which provides security and privacy to all users involved. The blockchain eliminates the need for third parties and removes trust issues in crowdfunding platforms by ensuring that all transactions are immutable, transparent, and visible to everyone. This can eliminate the possibility of fraud and provide maximum transparency while maintaining low costs.

A crowdfunding campaign built on blockchain comprises two parts: a smart contract that sets out the terms and conditions and a token that backers can buy to support the project. If the funding goal is met, those who contributed will be rewarded with something tangible, usually a token or product.

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