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As blockchain continues to be implemented by numerous organizations, both in the financial services space and across other industry verticals, most of the focus has remained on the large projects launched by multinational corporations. That makes sense when viewed through the amounts of financial and human capital that have been invested into these projects, but there is an area that holds significant potential for blockchain implementation.
Crowdfunding and fundraising have long been a mainstay for entrepreneurs and startups seeking to raise capital, producing new business and economic empowerment — blockchain brings potential solutions to the pain points that can hold back the best of projects.
An under the radar use case
Returning briefly to a core value proposition makes sense when viewing blockchain through the lens of crowdfunding and economic empowerment. Technical definitions and analyses of blockchain as it connects to financial services exist in many places, but from a crowdfunding and economic standpoint, two attributes of blockchain appear especially appropriate.
The traceability of information and funds between different network members, through a combination of time and date stamps, hash ID, or other embedded characteristics is a component of blockchain whose importance cannot be overstated. Linked to this traceability, the transparency of information that is available to network members — and recipients — enables real time tracking and monitoring of where data is located, and which members have access to this data.
As records are updated, and confirmed by network members, these records are communicated on a nearly real time basis to network members.
Pain points that have often been associated with fundraising, charitable giving, and crowdfunding new and innovative products are the costs associated with these efforts, as well as the lack of transparency between donors/contributors, recipients of these funds, and the goals of the program. A blockchain-based network, however, does seem to represent a few potential opportunities to address some of these pain points, lack of transparency, and potential diversion of capital away from the intended goals and objectives of the program.
Additionally, and building on the market appetite and interest in crowdfunding platforms, including but not limited to Kickstarter also seems to open a potential doorway for blockchain to potentially assist aspiring entrepreneurs. Economic empowerment, and the powering of an entrepreneurial economy may not seem like the traditional use case that blockchain is most often associated with, but there are definitive obstacles in this space that blockchain seems to be able to help.
Tackling issues in the crowdfunding space
A common pain point for entrepreneurs and small business owners, especially from traditionally disenfranchised groups or aspiring entrepreneurs in developing economies, is that many of the incumbent sources of capital are controlled and monitored by a relatively small group of individuals or institutions. Blockchain, at the very core of the idea, is a decentralized and distributed way to store and share information between different network members, including the allocation of information and capital connected to potential business projects and initiatives. In addition to the potential lack of access to capital for many aspiring entrepreneurs and small business owners, the cost of raising capital and starting a new enterprise can be prohibitive when pursued through traditional factors.
An additional pain point, and a place where projects can face headwinds or fail, is the opacity that can often be connected between the deployment of funds, project objectives, and the goals of the entrepreneurs. As mentioned above, the lack of viable options for entrepreneurs can also amplify the potential external influence providers of the capital can have over the funds. In other words, if external financiers have more information than project founders or leaders, this can lead to a situation where the entrepreneur or project leader loses control of the project.
At the core of the idea, the automation and decentralization of blockchain technology can assist in returning the authority and decision-making power connected to the project to the entrepreneur instead of delegating those to the capital providers.
Key considerations for implementation
Revisiting the concepts of traceability and transparency, the ability of entrepreneurs and institutions to the effectively and efficiently raise capital strike to the core of how fund raising and crowdfunding functions in the marketplace.
Looking forward to the future of blockchain, be it connected to cryptoassets or not, it seems that there is a path forward to leverage the transparency and traceability inherent to the blockchain model to deliver value to the crowdfunding model. While every institution and entrepreneur will be different, and will need to assess the needs, goals, and objective of the specific project in question, there do appear to be a few common factors that should be considered.
Without purporting to be an all-inclusive or exhaustive list of factors to consider, the answers to the following questions can form the basis of a more comprehensive conversation:
1. What blockchain model should be utilized as the basis for the crowdfunding model?
Permissionless blockchains, in most cases, even the Bitcoin blockchain, do not seem to be the most viable option for enterprise adoptions and use cases. Permissioned blockchains or a consortium blockchain model both represent more viable alternatives, but it is important to recognize which organization or group of organizations manage or run the blockchain in question.
Permissioned and consortium blockchain iterations offer greater control and scalability important for entrepreneur financiers, which can also lead to greater transparency due to the increased trust embedded in these iterations.
2. How is the blockchain network maintained and/or updated?
Especially as projects are seeking to empower and support aspiring entrepreneurs, the security and integrity over the financial and operational data that is being transmitted via these networks is paramount. Even more so if the blockchain-based project is for traditionally underserved entrepreneurs, or to take place in developing markets, ensuring that the projects and associated information are kept secure is a an important to add to the conversation.
3. Are there governance procedures in place to protect the rights of entrepreneurs and investors that seek to utilize this system?
Linking back to the first two points, the conversation around governance may not be a conversation that many budding entrepreneurs are having on a day-to-day basis. Product development, competitive advantages, market research, pricing, and customer acquisition occupy mindshare for entrepreneurs, and that makes perfect sense. That said, and especially with an emerging technology like blockchain, understanding the connection between the technology and the business use case is of paramount importance.
4. How can next stage blockchain tools, like decentralized applications and smart contracts, be utilized to help execute the goals of the project?
For example, smart contracts can help connect the funding sources, goals of the organization, and the outcomes of individual projects to the release of capital, reporting of information, and assist with improving transparency and accountability throughout the process. While much of the attention in the cryptoassets space has been connected to products such as exchange-traded funds (ETFs) and futures, smart contracts are a viable blockchain application that has a proven track record of functioning.
5. Do cryptoassets, such as stablecoins, have a place in the blockchain fundraising conversation?
Clearly the selection of the specific stablecoins or cryptoasset that will be a part of the network represents a separate and unique conversation, but this is something to consider. Especially if the blockchain project is launched or affiliated with an emerging market, or an economy with uncertainty connected to the existing fiat currency, a stablecoin may have a prominent role to play in the functioning of this network.
It is, however, important to recognize the fact that a fundraising-oriented blockchain network need not utilize any sort of cryptocurrency. Any information, be it operational or financial, can be stored and transmitted via such a network, but this is a consideration that should be part of the conversation.
Blockchain, in whatever form or iteration it manifests itself within, clearly seems to be cementing a hold in the enterprise business landscape. While most headlines may be affiliated with cryptocurrencies or largescale enterprise adoptions, it is also important to recognize that there are other applications that have yet to be researched and developed as thoroughly. Decentralizing and distributing access to capital, be it in developed or developing markets, is just one of the many future use cases of blockchain that business leaders should be aware of moving forward.
Crowdfunding, with the decentralized nature of founders, projects, and financiers, offers a unique opportunity for blockchain to deliver benefits to a broad set of users. Although not traditionally an area discussed in blockchain development circles, the opportunities connected to blockchain use in crowdfunding, including helping entrepreneurs maintaining control over projects, and increasing transparency connecting funds to project outcomes, are significant and certainly worth further analysis.
From time to time, we invite industry thought leaders, academic experts and partners, to share their opinions and insights on current trends in blockchain to the Blockchain Pulse blog. While the opinions in these blog posts are their own, and do not necessarily reflect the views of IBM, this blog strives to welcome all points of view to the conversation.