How Blockchain Can Make Crowdfunding More Secure
Today, the crowdfunding industry represents a $1 billion dollar industry that is expected to grow to $1.55 billion dollars by the year 2022 (source). Each year, the largest crowdfunding platforms host thousands of campaigns and see hundreds of millions of dollars exchange hands.
Crowdfunding has undoubtedly provided broadened access to capital and provided a viable alternative to loans and venture capital. With that being said, there are also a number of shortcomings to the conventional crowdfunding model.
In this post, we are going to explore problems around crowdfunding security and potential solutions to these problems.
At its core, crowdfunding relies on trust: A new company or product is being launched and the backers must put their faith in the founding team to be good stewards of their capital. Platforms try to do their best to vet teams but there they have little incentive to fix this system, as it works well for them.
There are a rising number of Kickstarter scams — and there is a less talked about problem as well. Some well-intentioned teams raise funds, start developing (or manufacturing) their product, and run into problems.
Those familiar with crowdfunding will know what happens next: delays, fewer and fewer updates to backers, and eventually an apologetic letter saying that the product can’t be provided.
Wait. So where did all of my money go?
Enter Blockchain Technology
The current crowdfunding ecosystem relies on a standard set of tools: a website, credit card payments, and email. The current system works but was not designed, from the ground up, to handle crowdfunding projects.
When things go well, there appears to be little need to improve. But when things go poorly, it becomes obvious where the current crowdfunding system is deficit. One can reimagine the crowdfunding industry leveraging the benefits of a blockchain-based solution.
Blockchain technology provides the underpinnings of popular cryptocurrencies like Bitcoin and Ether (the currency on the Ethereum network). The blockchain also provides a robust, decentralized way for information to be stored in immutable blocks — great for crowdfunding.
The ledger in a blockchain system would allow for accurate record keeping of all campaign activity: before the campaign starts, during the donation period, and after the campaign is funded. This level of visibility into a project helps all parties involved, including the creators, backers, and platform administrators.
By having an immutable receipt, you can have proof of your contribution and the reward that is due to you. This is something that cannot be guaranteed by the current system.
Furthermore, using blockchain technology allows for a more seamless payment experience. Instead of requiring a credit card or debit card, a blockchain-based crowdfunding platform could support fiat payments as well as any number of cryptocurrencies. This opens crowdfunding up to any person with a digital wallet and access to the internet.
A blockchain payment infrastructure is also inherently more secure, because you are not entering your sensitive financial information into a browser. The blockchain also opens up a new world of features that are not possible today.
For instance, we can use advanced identity verification that leverages the blockchain — to ensure people are who they are they are. Blockchain identity is well-documented and provides a level of security and trust that’s not possible with today’s technology.
These features include the ability to reward helpful community members. Today, there are a niche group of “superbackers” who have backed dozens, if not hundreds, of individual projects. Superbackers are known for providing helpful comments, sharing projects within their network, and more.
A blockchain crowdfunding ecosystem could reward these superbackers by providing special rewards or micropayments. Similarly, one could build a reputation system that is secured with a blockchain — reducing the chance that both creators and backers fall prey to scam.
At Pledgecamp, we’re working hard to develop a new type of crowdfunding platform. We are building a platform where users can pay in crypto, but our team wants to go well beyond that. A key feature of Pledgecamp is Backer Insurance, a smart contract that holds the project funds in escrow until conditions are met.
Smart contracts are important because funds can be provided to campaign creators slowly, as certain predetermined milestones are met. These contracts can also be written to allow community members to be a “check” on projects. Community members themselves become a point of governance and control — again, something not possible today.
Backer Insurance builds trust between creators and backers, while also carefully tracking how funds are used, a breakthrough in the crowdfunding world. We look forward to sharing more about our platform as we get closer to our launch date.
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