Decentralized Blockchain Tech is Reshaping the Crowdfunding Industry

Published in

Game of Life

7 min readOct 31, 2019

Crowdfunding has become a multi-billion dollar industry. In fact, $17.2 billion is generated yearly through crowdfunding in North America alone. When you add on the fact that the funds raised through crowdfunding grew by 33.7% in 2018 alone, we know that this sector is going to continue to grow exponentially over time. Kickstarter and Indiegogo have grown to be multi-million dollar companies just for providing a platform for crowdfunding projects. However, this space is long overdue for a change. In this article, we are going to show you how decentralization can help this space to evolve itself.

The problems with crowdfunding

Before we go into the issues, let’s reiterate the fact that crowdfunding is a highly affluent space. Consider the following numbers:

As of May 2019, Kickstarter has received more than $4 billion in pledges from 16.3 million backers to fund 445,000 projects.
Indiegogo, as of February 2015, they’ve raised 56.5 million. You can only judge how much more they have raised in the 4 years since.

Creators not held accountable

Projects on these popular sites go through minimal vetting, which results in fraud and scams. Plus, the fact remains that these platforms do little to punish creators for not delivering on their promises. According to a study done by PledgeCamp, more than 80% of projects ship late — and some never ship at all.

There is a severe lack of transparency that is infecting this space. Eg. Backers can’t tell how the creators are using their pledges in the first place. All these issues have resulted in reduced between backers and creators, which has resulted in lesser projects getting the funding they deserve.

Platforms eating up investments

Traditional crowdfunding platforms like Kickstarter and Indiegogo have raised millions of dollars in recent years, but they often take a considerable cut of the profits for themselves. The fee system of both these platforms are as follows:

- Kickstarter charges a 5% listing fee and Stripe credit card processing charges of 3% + $0.20 per transaction.

- Indiegogo charges a 5% listing fee on contributions and Stripe credit card processing charges of 3% + $0.30 per transaction.

In other words, these platforms take up 8% of the investments right off the bat. The problem with the listing fee system is that it just incentivizes the platforms to take in as many projects as possible, regardless of its credibility, to make a profit out of it.

Geographical restrictions

The current crowdfunding platforms also favor western countries. The reasoning behind this is because there is a common assumption that people in western countries have easier access to debit and credit cards.

However, the World Bank estimates that China itself will contribute $50 billion to the global crowdfunding industry by 2025. That’s a staggering 52% of the total global market! What this shows us is that the Asia Pacific region will be critical to the growth of this space.

Disrupting crowdfunding with blockchain and smart contracts

Let’s define blockchain and smart contracts before going ahead.

A blockchain is, in the simplest of terms, a time-stamped series of an immutable record of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e., block) is secured and bound to each other using cryptographic principles (i.e., chain).

The two main properties of the blockchain are:

Decentralization: All the data that is stored inside a blockchain is not owned by one single entity.
Transparency: All the data that is stored inside the blockchain can be seen by everyone who is part of the network.Immutable: All the data that is inside the blockchain cannot be tampered with because of cryptographic hash functions.

One of the most important features of the blockchain is that it allows for the creation of smart contracts.

A smart contract is like a normal legal contract, but it is automated and self-executing. While a typical contract requires the legal system and law enforcement as a last resource to execute the actions triggered by the contract, the smart contract can directly trigger actions on the digital domain, such as making a payment or transferring ownership of a digital asset. The most critical feature of a smart contract is that it allows two parties to directly connect without having to go through an intermediary.

Now that we know what they are let’s look at how both the backers and creators can benefit from their integration.

#1 Backers

By leveraging smart contracts, it will be possible to create an automated escrow contract between the creator and the backer. This contract can have predefined conditions which can do the following:

Lock up a part of the backer’s investment in an escrow.
Release the escrow funds only if the creator completes certain milestones.

This will ensure that the backers’ funds are going to be used ethically. If the creator doesn’t fulfill the milestones, then the escrow funds will be refunded to the backer. Pledgecamp is an example of a decentralized crowdfunding platform that is using this concept to ensure backer protection. They call the funds locked in the escrow “Backer Insurance.”

#2 Creators

There are three significant advantages that creators will be able to get from decentralized crowdfunding platforms:

Firstly, the smart contract system will allow them to directly interact with the backers without having to go through an intermediary. This instantly negates the need to pay extra fees to these intermediaries.
Secondly, since the backers will be able to directly connect with the creators and pay them with native tokens, there is no need to pay any transaction fees.
A decentralized crowdfunding platform can help in the creation of a decentralized marketplace. Creators can hire members of the community to execute various marketing tasks and pay them with the native tokens.

Examples of Decentralized crowdfunding platforms

#1 Lighthouse.cash

Lighthouse was created in January of 2015 by the Bitcoin developer Mike Hearn. He wanted to build a BTC-powered crowdfunding platform but dropped the project when he left due to scaling debate frustrations. It has since been picked up by an anonymous developer.

The app aims for projects which can range from bitcoin development initiatives to charity drives. It has been designed to allow backers to use smart contracts to commit pledges to a particular project.

Regarding the project, Hearn said:

“What I’d like to see, by unbundling these things, … is a competitive market of communities and community builders where people are building these project gallery sites. People can compete on building really awesome sites.”

#2 Pledgecamp

Pledgecamp is a crowdfunding platform that incorporates blockchain technology for security and accountability. They aim to utilize smart contracts to bring positive disruption into the space. Unlike other blockchain-based crowdfunding platforms, Pledgecamp realized that the main component of the crowdfunding ecosystem is the backers. Pledgecamp has been touted as the most promising project in the space, because of the following reasons:

As already mentioned, Pledgecamp wants to give the power back to the backers by introducing “Backer Insurance.”
The members of the Pledgecamp community aka “Smart Crowd,” can choose to become Moderators so that they can remove spammy projects from the platform.
Pledgecamp also uses an internal gig economy, where creators can hire members of the Smart Crowd to take care of the marketing for them.

Conclusion

As you can see, the blockchain technology and crowdfunding are pretty much made for each other. The biggest problems faced by the crowdfunding space can be easily and elegantly mitigated by the integration of blockchain and smart contracts. Projects like Pledgecamp and Lighthouse have already shown us how innovative this combination can be.