The word decentralization is thrown around more often than we would like. It is used in everything ranging from cryptocurrencies to any system where the users are empowered over a single entity
However, lately, there has been an increased interest in the crowdfunding sector. Recent implementation of decentralized crowdfunding technology is in the news and how this will be a game changer.
Let’s try to understand just how.
Fixing Crowdfunding with Blockchain
The beauty of decentralized crowdfunding is that when it is built using technologies like blockchain, the system inherits the same parameters of the technology.
As in all decentralized processes, crowdfunding done through this means all investors can interact directly with the project team. In centralized systems, an intermediary is unavoidable. Acting as an escrow, all investments are routed through the platform, where it controls how much is released to the project team. What many investors don’t realize is that there is usually a heavy commission which the platform nets, forwarding peanuts to the entrepreneurs.
With decentralization, there are no intermediaries and therefore, no commissions.
One might wonder that without intermediaries, how do investors keep a check on financial flow to the developers. That is where smart contracts come in. All investments can be routed to a contract where a funds release system can be built, allowing only a certain amount of investments to be released to the project team – subject to them achieving predefined milestones.
This means not only are expenses cut down; the funds are always in control of the investors.
It is just not the safety of funds, but transparency too. With centralized crowdfunding platforms, you never know how much was actually funded. The invested amount and the reported amount can differ, with the platform pocketing the difference and none the wiser.
Using decentralization, there is a public record of all invested amounts. But it goes much beyond that. How much is released, where did it go to, and for what purposes – all of this becomes transparent and viewable by anyone. This level of transparency means that even the funded project team members have to be cautious of how they spend money, making it practically a truly trustless system.
One decentralized crowdfunding news that has captured the minds of the world is tokenization of investments through crypto tokens. All investors can be issued a token connected with the project, with a prescribed ratio (such as 1 token equivalent to $100 investment, for example).
The tokens act as a proof of investment, creating a more solid record and transparency. At the same time, it can do much more. If floated in the open crypto market, this offers liquidity to the investors for their locked up amount. The tokens also can help them recover their investment plus profits at a later stage if the product launch is successful – opening up doors to digitized securities, bonds and other financial aspects of funding for profits.
If you have shown interest in backing startups, we are pretty sure you may have come across something you would’ve really liked to invest in, only to find out that the minimum investment required was way beyond what you could – essentially locking you out. Salt on wounds, you might have found out later through crowdfunding news that the project skyrocketed. Knowing that you could have been a part of it can have many people stressed out.
With decentralized crowdfunding, the sheer efficiency and unnecessary intermediaries removed means projects can accept investments at a far lower value than possible otherwise. Indeed, some decentralized crowdfunding projects in the past have set the minimum value as low as $10.
Is Decentralized Crowdfunding the Ultimate Answer?
While crowdfunding tech news like leveraging decentralization does sound promising, remember that every technology has its limits.
The greatest drawback currently faced is the lack of adoptions. Indeed, there are several projects out there that are harnessing the power of blockchain to offer startups the chance to make it big. But use of decentralized technology is a barrier in itself. Yes, there are millions of users worldwide who understand and can use the technology, but how many are willing out of these to invest in startups?
This effectively means a small niche of technically adept user base, making it at times more difficult to attract investors.
At the same time, if the startup chooses the tokenization method, there may be regulatory and legal requirements to fulfill before you can continue (since many jurisdictions may see the tokens as securities and subject to relevant laws).
Overall, the technology is sound and has proven itself to be a better version than centralized crowdfunding. All it needs is maturity of the system and synchronization with government authorities.