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Before blockchain was introduced, crowdfunding has been one of the most prominent fundraising concepts. Crowdfunding has grown steadily being a widely accepted option when venturing to capital funding. Through blockchain disruption, crowdsourcing is set to revolutionize and unlock new cases while enabling global reach.
Blockchain is a revolutionary technology that could have a huge impact on raising funds and in helping to manage and distribute funds in a secure and transparent way. But what exactly is it and why does it matter in today’s world?
BLOCKCHAIN TECHNOLOGY AND DECENTRALIZATION
Blockchain is the underlying technology behind the success of cryptocurrencies. It is essentially a ledger of transaction data that is owned and maintained by all users of the system. Random actors in the market act as ‘nodes’ to verify and make sure that transactions added to the ‘blockchain’ are real. These transactions are then encrypted and added to the public ledger which made them completely traceable, immutable, and reliable. Nothing can be altered once it’s in the ledger and it guarantees security against any kind of data manipulation.
The open-source code which was released in 2009 for creating blockchains gave birth to cryptocurrencies like Bitcoin. Because of this level of security, blockchain is being used for many new applications. Government institutions and major businesses are already using blockchain innovation in wide-ranging use cases. One of these is business funding. Traditionally, business funding is very difficult to acquire.
TRADITIONAL CROWDFUNDING IS STILL NOT EFFICIENT
Crowdfunding gives businesses with great products and service ideas a huge opportunity to raise funds from regular people in small investment amounts. It is a popular way to democratize fundraising for startup projects and charities, a miracle of the modern internet age. It can really give businesses a big boost once crowdfunding works.
One major drawback, however, is that this model is still extremely inefficient. It is centralized just like venture capital firms, with a central authority controlling the platform. Consequently, about 78% of campaigns end up failing short of their funding goals and only 1.2% of crowdfunding campaigns go to developing countries which actually starve of start-up funding.
This brings us to how blockchain is changing the crowdfunding landscape.
TRADITIONAL BUSINESS FUNDING IS DIFFICULT TO GET
Most traditional business funding can either be self-funding which is incredibly limited or bank funding which requires having an existing business with good revenues and cash flow or venture capital funding which requires a product or service that has mass appeal. Either of these three makes traditional funding very limited and difficult to get for startups especially SMEs (Small and Medium Enterprises).
GAINING TRUST AND CONFIDENCE TO THE MASS PUBLIC
Today, cryptocurrencies have gradually gained public trust. Companies are now seeking opportunities to engage the market space through fundraising with blockchain technology. The benefits of cryptocurrency as the foundation of these fundraising platforms include the ability to track and trace funds with complete transparency, thus improving trust with funders.
Digital fundraising enables to accept funds from anywhere in the world without the need to pay foreign exchange fees or any third-party institutions, thus can help to maximize the success of a project.
FUNDRAISING THROUGH BLOCKCHAIN COULD BE DISRUPTIVE & INNOVATIVE
Companies are creating their own tokens that act a lot like company stocks. This is similar to the way other crowdfunding platforms work where creators of the project post what they’re doing and then ask for funds from a group of people who are interested in backing them.
Start-ups raise funds through token sales. The tokens are sent to a suitable exchange making them available to individual funders. The price and condition for the sale of the tokens are subject to an agreement which includes the number of tokens set aside for the development team, the percentage of tokens the platform will hold off from the sale, and the token price.
Investors or funders are buying such tokens that represent shares in the project, much like how the stock market works. The shares have the potential to increase in value over time if the business or company will do well. Investors purchase the tokens, instead of shares, using either cryptocurrencies or fiat currencies such as USD.
A new era in fundraising is on the horizon. Blockchain Technology is facilitating the decentralization of capital for startup companies. Despite some minor setbacks, blockchain-based start-up financing takes on more responsibility in ensuring only authentic projects are allowed into the market thus, investors can be more confident that their investments go into worthwhile projects.
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Impacts of Blockchain Technology to Fundraising Arena was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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