It's been used to launch some of the most innovative products, help homeless people escape from poverty and bring brilliant ideas to life. A quote from Goldman Sachs Research, The Future of Finance (2015):
“Crowdfunding ... is potentially the most disruptive of all of the new models in finance… We estimate crowdfunding could address a $1.2 trillion opportunity over time.”
So, what's wrong with current crowdfunding platforms?
Current crowdfunding platforms have two major flaws:
a. They lack backer protection
Many platforms such as Kickstarter, Indiegogo explicitly take no responsibility on how the creators of their platform use funds raised. We have countless examples of crowdfunding scams:
The "crowdfunded phone of the future" was a multimillion-dollar scam [www.theverge.com/2019/8/13/20758599/idealfuture-dragonfly-futurefon-indiegogo-crowdfunding-phone-scam-fraud-case]
The "GoFundMe homeless good Samaritan" scam led to a $400,000 haul [https://www.nbcnews.com/news/us-news/arrests-gofundme-homeless-good-samaritan-scam-show-perils-crowdfunding-n936941]
b. They come with excessive transaction fees
Kickstarter, as an example, charges a 5% 'success' fee on top of a 3% transaction fee. That's 8% of the funds raised from every successful Kickstart campaign not going to the creators.
We propose that a decentralized system via the use of blockchain technology can solve these issues.
a. We propose to use blockchain technology to protect backers from scams and increase their confidence in backing the projects they like.
The old crowfunding model: A creator posts a project they'd like to get funding for. Backers pledge money to a project. If the project reaches the goal amount within a specified time frame, the creator receives the funds pledged by backers. The trouble is that backers have little power to see whether their funds have actually been used for the purpose the creators have stated. A creator could simply take the funds and disappear.
We propose to fix this with a new model: Instead of an "all of nothing approach", creators receive funds in a batched, milestone themed fashion. If a creator reaches their goal amount in the designated time frame, the creator then has to reach pre-determined milestones to receive funds. Creators show evidence of the completing of milestone, and backers collectively vote on whether they actually have. Here's where the blockchain comes in: voters would be tracked based on their 'addresses' used in the smart contract when pledging money to the project. If a 50% majority votes that the creator is successful, then the creator receives their funds.
b. Blockchain also reduces transaction fees, allowing creators to receive more of what they raise:
Cryptocurrencies built on blockchain allow us to reduce transaction fees by skipping payment processing companies like Paypal and Stripe.