Crowdfunding has become an extremely useful alternative to venture capital, and has also allowed non-traditional projects, such as those started by in-need families or hopeful creatives, a new audience to pitch their cause. To date, $34 billion has been raised through crowdfunding initiatives, adding roughly $65 billion to the global economy. Kickstarter alone was responsible for over $600 million raised in 2017, a bounce back that falls in line with projections that show a possible $90 billion valuation for all crowdfunding sources by 2019, surpassing venture capital funding in the process.
However, as recently illustrated by a homeless veteran being swindled out of $400,000 in crowdfunded assets, the system is not perfect. Those who gave to what they thought was Johnny Bobbitt Jr.’s GoFundMe campaign were actually giving the money directly to Kate McClure and Mark D’Amico who, though they’ve since had their home raided by the local police department, apparently have already blown most of the money.
Blockchain technology, among all its benefits, can be best put to use by providing provable milestones as contingencies for giving, with smart contracts releasing funds only once milestones establish that the money is being used the way that it is said to be. By providing greater oversight into individual campaigns and reducing the amount of trust required to donate in good conscience, crowdfunding can become an even more legitimate means of funding a vast spectrum of projects and causes.
Extending Wealth Creation to Remote Parts of the World
More than 3 billion people, equivalent to roughly half of the world’s population, survive on less than $2.50 a day. More than 1.3 billion live on less than $1.25 per day, an existence that is categorized as “extreme poverty.” The rise in living standards worldwide — the global poverty rate was cut in half between 1990 and 2015 — makes these conditions even more difficult to accept as unalterable. Sub-Saharan Africa is the epicenter of extreme poverty, as the region showed an increase in extreme poor of 9 million in 2015 alone, and current trends forecast that 9 out of every 10 people living in extreme poverty will reside in Sub-Saharan Africa by 2030.
While lending to the poor must be done responsibly, most of the world’s most impoverished citizens currently don’t have access to credit at all, and therefore have little recourse to better their life prospects. Women in developing nations are particularly at risk, as they are 9% less likely than their male counterparts to have a bank account. The connection between household access to finance and poverty alleviation is clear. What is less clear is how to increase financial access on a global level, especially in remote areas of the world.
Through cryptocurrencies — the most well-known creation of the blockchain — the barriers to crowdfunding the needy in impoverished and war-torn corners of the world where financial assistance is most needed could potentially be pared down. By installing systems of communication in those regions, such as the internet, translators, and crypto-to-fiat conversion systems, the stories of the needy detailing why they deserve crowdfunding could be effectively told and passed along to those eager and able to support humanitarian causes.
Companies Trying to Solve This Problem
Lowering Transaction/Taxation Fees
Indiegogo charges a 5% fee on all funds raised, but that’s not the end of the story. Indiegogo’s credit card processing service, Stripe, charges a processing fee of 3% + 0.30 per each transaction. And they inform users on their site that they may face additional charges for a wire transfer of the funds into their bank account. Kickstarter charges the same 5% fee, and their card processing partner also charges a 3% cut and tacks on an additional 20 cents per pledge. So, if one were to raise $100,000 in funds from 1,000 donors, they will ultimately fork over $8,000 of that total to third parties. Experiment, the most egregious of the platforms in terms of fees, charges an 8% initial fee, and fundraisers ultimately see a whopping 10.9% + $.30 per donation extracted from their funds. These fees are the cost to keep the companies profitable, and they are also the direct result of having human intermediaries between donors and fundraisers.
Companies that are able to leverage smart contracts to lower their own costs, and pass those savings along to the recipients of crowdfunding by decreasing transactional fees, could find themselves at a significant competitive advantage. Utilizing smart contracts to pay out funds once the target goal is reached is just one way that blockchain tech will assist in lowering costs for all parties, and in doing so will boost the odds that more potentially industry-changing projects receive the funding they require to succeed.
Smart Contracts to Enforce Funding Terms
There’s no shortage of examples of crowdfunding gone wrong. In 2015 alone, entrepreneurs pushing a project called the iBackPack raised over $720,000 across both Indiegogo and Kickstarter. Over two years later, investors/donors have yet to receive the product, though some have reported receiving accessories such as cables and batteries, and even those are considered to be beta versions.
A similar case occurred in 2015, when Erik Chevalier collected roughly $122,000 from a Kickstarter campaign that would purportedly allow donors to contribute to an original board game of their own making. Instead, Chevalier “used most of the funds on himself,” according to the FTC. Chevalier strung donors along for 14 months with faux updates and promises, until eventually announcing the cancellation of the project, saying he would refund the money. Needless to say, he didn’t refund the money, but was forced to settle with the FTC for roughly $112,000, which was suspended because Chevalier could not pay it.
And we all likely know of the story of Johnny Bobbitt, who was swindled by a Pennsylvania couple who apparently spent the majority of $400,000 raised for Bobbitt on themselves.
There are several ways in which blockchain-enabled smart contracts could provide greater accountability in crowdfunding. Primarily, these contracts would provide built-in milestones that would prevent funds from being released without provenance as to a project or campaign’s legitimacy. This would prevent large sums of money from being squandered by those who are either ill-intended or not qualified to be running a crowdfunding campaign in the first place.
Less Money to Middlemen, More for the Campaigns
Under the current structure, the ultimate amount raised for a crowdfunding campaign is almost never the actual amount raised. That’s because middlemen clogg the funding pipeline, giving rise to the phenomenon of a middleman’s middleman. Platforms such as Agency 2.0 and Crowdfund Mafia make their mark by helping crowdfunding campaigners pick which platform will be best for them, naturally taking a cut of the donations in exchange for their services. The rate and scope of failures across the many crowdfunding platforms illustrate that there truly is not room for unnecessary intermediaries to take further cuts out of what is, at the end of the day, a revolutionary form of philanthropy.
A video game based off of a popular YouTube channel, Yogventures, went belly-up when deadlines were missed, work was subpar, and designers quit, ultimately resulting in $567,000 of donors’ money being flushed down the drain. Whether due to fraud, underestimation of costs, or exorbitant fees from middlemen, rarely do campaigners have a full grasp of how much time and money it will take to successfully see their project through. For these reasons, it’s important to maximize the amount of funding that goes to the campaign itself, versus third-party “services” and the platform.
Blockchain technology’s automated processes, from smart contracts to security features and more, do not call for additional fees, nor does the technology distinguish between these services. Ultimately, this provides the opportunity for the technology to be a cheaper, one-stop platform that could replace most, if not all, of the intermediaries siphoning money from crowdfunding campaigns under the current structures.
Companies Trying to Solve This Problem
- Cryptstart – Providing resources outside the traditional V.C. model.
Decentralized Crowdfunding Platforms
According to experts, there are five key benefits of crowdfunding platforms: efficiency, reach, easier presentation, built-in PR and marketing, and near-immediate validation of concept. The combination of these benefits helps explain why Kickstarter alone has facilitated the pledging of $3.9 billion to date. Indiegogo has raised less, but the $1.3 billion raised as of January 2018 is nevertheless a testament to how widely crowdfunding platforms have been adopted. With each platform taking 3–5% of donations to support the platform’s growth, and credit card processing services taking an additional 3–5%, the efficiency pillar of the five crowdfunding benefits isn’t built on as solid a platform as one might wish.
Decentralized crowdfunding platforms will carry the benefit of fewer fees and intermediaries, while also providing a slew of other perks. These benefits also include less censorship over projects that may be considered by some to be controversial, the ability to exchange donor shares on blockchain-linked marketplaces, and more.
Companies Trying to Solve This Problem
- WeiFund – Blockchain powered, decentralized blockchain crowdfunding network.
- StartEngine – Crowdfunding platform accepting Bitcoin investments.
Crypto Equity Trading
The term crypto equity encompasses several different iterations of cryptographic ledger offerings. These include product pre-sales, which can come in the form of a future tangible good, service, or subscription/membership. Pre-sale tokens may also give a purchaser the right to utilize some sort of intellectual property, or tokens may represent a share in an entity that may fluctuate in value and serve as an investment. Many crowdfunding campaigns, ICOs in particular, are predicated on these exchanges of funding now for some reward later.
However, many of these ICOs and crypto equity issuances do not provide much liquidity for the investor, who typically has to wait on the issuer to deliver the promised future reward. Novel forms of blockchain-enabled trading platforms, OpenLedger among them, aim to provide greater liquidity. Collected funds are held in escrow, allowing fundraisers to access them as needed, but also allowing donors to trade their shares back in exchange for fiat currency if they need it. This represents a more equitable blueprint than many current crowdfunding exchanges where the fundraiser holds the funds and the donor/investor is ultimately at their mercy once the money is handed over.
Companies Trying to Solve This Problem
- CapchainX – Ethereum Based Crypto Equity trading.
- Robinhood – Stock trading app, now allowing crypto trading.
Exchanges Offering to List ICO Tokens
Those who are willing to take the chance on ICOs they believe in can see healthy returns. For example, those who bought into Decentralized Prediction Platform Augur’s ICO could purchase tokens for only 60 cents a pop, but now, just over three years later, those tokens are worth over $13 each. Lisk, a startup that helps others establish white label sidechains, opened its ICO with tokens going for about 7 cents. Their tokens are now worth $3.40.
Like any investment, a heavy wager on these coins would have produced massive wealth, and these tokens’ stats pale in comparison to the overall ICO landscape. To date, $20,805,085,858 has been raised across 832 ICOs, including over $755 million in October 2018. These figures make the ICO form of crowdfunding a bona fide contender with the likes of Kickstarter and Indiegogo. However, not everyone is comfortable using the current ICO structure, namely more traditionally-minded investors.
For exchanges that list ICO tokens, which are in and of themselves a tool to facilitate crowdfunding, those issuing the ICOs would have a much further reach — essentially, to those who prefer purchasing and exchanging coins on established exchanges, such as Coinbase. In return, exchanges would have the incentive of garnering fees from the transactions that arise from the purchase of new ICO tokens.
Crypto Bounties/Contracts to Fulfill Various Business Needs
There are plenty of entrepreneurs and startups whose primary source of wealth is tied up in cryptocurrencies. Liquifying these digital assets is distasteful, because of the fear of missing out on potential gains. So contractors and part-time employees willing to accept payment in the form of cryptocurrencies for a specific task — call it a bounty — may find themselves in an advantageous position for winning a bid. Bug hunters have accumulated more than $417,000 from the owners of the EOS blockchain in 2018 alone, with a single benevolent hacker claiming a $120,000 fine for solving a particularly pesky flaw.
Generally, bounties incentivize participation by the general public with a specific cause or ICO, granting various rewards for performing specific tasks. Whether a startup’s ICO fundraising goal is over $51 million, like marketing automation platform Momentum, or just under $4 million, like decentralized conversation platform Jarvis+, they all offer various bounties to willing participants.
Certain companies are using this premise to debug their sites and operations by rewarding those who find flaws in their system with Ethereum. Video production, translation, and research are just a few of the many ways that startups are utilizing crypto-bounties to fulfill various needs.