Seventeen billion, two hundred million dollars, according to Statista. That’s the amount raised through crowdfunding campaigns in the U.S. alone in 2017.

In Asia, the figure is not as high, but still a significant US$10.54 billion that year – second only to the U.S.  This year, there are around 432,000 projects on Kickstarter alone, toward which US$4 billion are already pledged.

Crowdfunding has been successful enough in raising money that a similar model has been explored by technology companies – especially ones that use Blockchain tech as the foundation for their business. In 2018, initial coin offerings or ICOs reached US$6.3 billion, according to Coindesk (different sources report different figures, depending on their data).

Concerns about the ICO model have prompted businesses to utilize other alternative models, as well, including initial exchange offering (IEO) or securities token offering (STO). Whatever the tokenization or crowdfunding model, the basic concept is the same: contributors send money — or buy tokens — in advance to support development of a product or service.

Unfortunately, not all those products become successful.

In total, at least US$500 billion of crowdfunded money has gone to failed projects – and that’s just on Kickstarter. Such a concern has actually led to crowdfunding fatigue – Kickstarter itself reports that of its 15.7 million users, only one-third have supported a second project.

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Many of these are “cool” projects, literally and figuratively.

Kickstarter’s top project, the “Coolest Cooler”, raked in US$13 million in funding, but only a third of its products were delivered. The company requested additional backing in order to complete orders. The Ouya gaming console, meanwhile, raised US$8.5 million, but was delayed by more than three months. In fact, the company was able to ship to Amazon buyers earlier than delivering to Kickstarter backers.

Lack of trust and accountability

There are three main problems that need to be addressed with current crowdfunding solutions. These are lack of accountability, lack of transparency, and too much focus on centralized control.

The first two concerns stem mostly from the fact that crowdfunding projects rarely promise any guarantees. This means a high level of risk for crowdfunding backers who stand to lose their entire contribution or investment without getting their product or returns on time or, worse, not getting anything back at all.

For crowdfunding platforms, there is an incentive to maximize the number of projects they support, simply because the likes of Kickstarter, Indiegogo, etc., earn a commission from each contribution. This means that any project can raise funds regardless of quality or chance of success.

It is perhaps one reason why marketing is hailed as the most important aspect of crowdfunding. Even if you had a dubious product, it can still raise contributions as long as it is marketed very well.

This is not so good for backers, or for other startups, that may have better but less-marketed ideas.

The blockchain solution

Three basic concepts blockchain tech can fix are smart contracts, decentralization, and immutability.

Blockchain itself is defined as an immutable ledger running through a decentralised consensus mechanism. This means transactions can be made on the blockchain with full accountability. Smart contracts can enforce an output- or milestone-based payment, meaning crowdfunding backers can sleep safe knowing their money can be returned if no actual product milestones are met.

Here, platforms like Pledgecamp will play a big part in solving the biggest problems the crowdfunding industry is facing.

The company is founded by successful crowdfunders and counts Randi Zuckerberg, the former Facebook spokesperson and the Founder of Zuckerberg Media among its advisors.

In gist, here are some of the benefits and advantage that blockchain tech adds to crowdfunding:

Backer insurance. Smart contracts allow for traunched release of funds, based on accomplishment of milestones. This keeps funds in escrow while a founder team works on building and releasing the product.

Since blockchain is decentralized, this enables backers to make a vote on whether milestones have been met, meaning there is no centralized control over the release of funds. Such a system incentivizes creators to actually complete their project and not leave backers hanging in the air.

Better transparency through security deposits. Platforms like Kickstarter and Indiegogo offer a low barrier to entry, which means that low-quality projects or teams can easily get listed. Raising the bar with a security deposit can filter out spam and prospectively bad projects.

This can also improve transparency, as in the case of Pledgecamp, which asks for a security deposit, but refunds the money once creators upload KYC documents, code, proof of intellectual property, contracts, and the like.

Crowd-based governance through tokenization. A token-based approach to staking and voting enables users to establish democratized governance over the platform itself.

A marketplace for projects and workers. The community and tokenized approach to crowdfunding makes it accessible for creators to find good talent, particularly on the Pledgecamp Market Network.

The future of crowdfunding

Crowdfunding’s appeal comes mainly from its ability to bring together resources from the users who are interested in supporting or buying products. For many startups and creators, this means not having to court investors or borrowing money from banks just to fund their projects.

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However, the existing model has been prone to abuse, or perhaps some creators have become too risky for their own good, which leads to an unhealthy environment wherein expectations are not met.

A blockchain approach, with focus on community and in rewarding actual accomplishments, can help revitalize this industry and even lead to building better products and services driven by the crowd.

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Photo by Michael Drexler on Unsplash

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