Role of Blockchain Technology in Crowdfunding

Innovations are changing everything around us, and blockchain technology is not an exception. About 0.5% of the world’s population is using blockchain technology nowadays, and that’s about 40 million people.

Role of Blockchain Technology in Crowdfunding 1920x1080 1

Since this technology is secure, fast, and transparent, it can be used to enhance businesses. And since it’s widely used in crowdfunding app development, blockchain is officially trending in this domain. Even Kickstarter recently announced that they’re moving to decentralized technology.

If you wish to take examples from the strongest ones, read along! In this article, OpenGeeksLab gathered all of our expertise so you could figure out how blockchain-based crowdfunding might be your best business idea yet.

Blockchain-Based Crowdfunding: Explaining The Terms

Before explaining how blockchain technology might improve crowdfunding in general, let’s break down the terms. Crowdfunding is a niche domain, and blockchain can sometimes be confusing, so let’s ensure we’re on the same page.

Crowdfunding is a platform aimed at startups fundraising. They can vary by type, but the most popular among them are peer-to-peer, rewards, donations, and equity.

  • Peer-to-peer is often called debt crowdfunding. It ensures that investors will profit from a startup they invest in within a strict deadline.
  • The rewards crowdfunding usually profits investors instantly by giving them some kind of reward for the money they put in the idea. Rewards might vary from the donation size, which motivates people to donate more significant sums.
  • Crowdfunding apps based on donations allow investors to support someone’s startup financially without waiting for something in return.
  • The equity funding type is based on assets. Each investor gets an asset and becomes a co-owner of a startup they invest in. It is the most suitable type of fundraising for crowdfunding apps with blockchain.

There are four main types of crowdfunding models: donation, reward, equity, and peer-to-peer. All of them may be improved by blockchain.

Crowdfunding types might differ, but the idea doesn’t change: gather enough funds for the production or launch of services.

However, in terms of blockchain-based crowdfunding, there is one more term that we need to break down. Blockchain technology, as we’ve said above, can sometimes be confusing. Here we’ll explain it shortly, but you can read our article about blockchain development for a more detailed explanation.

So, blockchain is a public ledger that tracks assets and transactions made in cryptocurrency. Its decentralized nature makes blockchain is secure and transparent, which helps this technology work faster so it became a substitute for third parties in financial transactions.

Being this valuable, blockchain technology has become trendy and made most of the business domains it’s implemented more financially beneficial. The total amount of blockchain transactions as of February of 2021 was more than $620 million. Currently, the global crypto market cap is $1.65 trillion, and it grows every day.

And it’s worth mentioning that in 2021 56% of respondents of a survey by Deloitte considered using equity tokens in their business, which may reflect on crowdfunding directly.

Equity tokens reflect directly on equity crowdfunding, and their rise can be a sign of innovation.

Source: Deloitte

As you can see, this technology has only prosperity in its future. That’s why market giants are adopting blockchain nowadays.

So, without further ado, let’s find out why blockchain-based crowdfunding is a fundraising evolution.

How Can Blockchain Make Crowdfunding Platforms More Efficient?

Blockchain technology is one way to improve the customer experience from crowdfunding initiatives significantly. As an ultimate improvement for any project that requires financial transactions, this tech makes its workflow more transparent, simple, and fast.

Blockchain and crowdfunding can be aligned perfectly to change fundraising for so many creators.

Downsides In Crowdfunding

To understand how blockchain technology may improve crowdfunding app development take a look at its flaws. Innovations definitely can solve our life-long problems, but if you’re going to implement them in your software, you need to know what issues can be resolved by your project.

Crowdfunding Platform Face The High Risks Of Fraud

Usually, crowdfunding apps have limited security measures, so investors risk their money by supporting startups. Fraudulent actions may include false claims about reached milestones or even released products, and in some cases, lead to substantial monetary losses. As soon as a startup gets needed financing, it can disappear from the platform with all its creators’ funds.

Here’s this famous crowdfunding scam case that happened in Florida. Property Income Investors LLC and Larry B. Brodman raised money to buy property in this sunny state. They aimed at renting and selling houses, but in reality, about $2.3 million were transferred to private accounts. Fortunately, Brodman and associates are required to pay civil penalties.

Security breaches are a significant downside in crowdfunding app development that can bring your business in this domain to the edge of existence. But problematic security endangers young startups as much as investors, so it has to be seen (and fixed) from both sides.

Intellectual Property Isn’t Protected On Crowdfunding Platforms

Crowdfunding apps don’t protect intellectual property at a necessary level. It’s possible that a bigger company notices an idea of a small startup and, using its own resources, can implement it faster and even in better quality. It puts creators in a rush, forcing them to either spend more money to patent their idea or to be the first one who brings it to life.

In a rush, a product’s quality can be lower than expected, and people won’t buy it even if a startup did well on a marketing campaign. This is a stumbling rock of crowdfunding apps that worries a lot of creators as much as not having enough funding for marketing needs. Some think that a crowdfunding campaign is good enough marketing itself. However, this is far from being true.

As well as not being fueled enough to promote their idea, creators also may encounter limitations set by apps in the crowdfunding industry.

Limitations In Crowdfunding Platforms

Formally, any project can launch a successful crowdfunding campaign. But in reality, some startups are more inclined to have bigger funding from this type of fundraising. Since everything on a crowdfunding platform depends on how many people know and support your project, it’s easier for projects with good visibility in social media to get funded.

This way, the crowdfunding sector is much more friendly to B2C startups than B2B ideas. Take a look at the list of successful crowdfunding campaigns, and you’ll see lots of independent creators working on services designated for customers. And it is a significant downside for some. For example, most successful crowdfunding campaigns on Kickstarter are mostly games or technology products.

Crowdfunding Platforms Are Often Loaded With Fees

Fees are one more thing that makes a crowdfunding landscape a little less inviting for young creators. It can be seen as an inconvenience since most crowdfunding platforms take a part of funds that startups raise during their campaign. For example, Kickstarter, as one of the most famous platforms in the crowdfunding industry, takes about 5% as a standard fee and payment processing fee between 3% to 5%. As you can see in the picture below, this is applicable only for US-based creators.

Kickstarter takes 5% of fees of all funds raised and about 3% for payment processing.

Source: Kickstarter

The standard fee doesn’t alter, but processing fees may change depending on a startup’s location.

Another popular platform for individual creators and charity, GoFundMe, doesn’t have standard fees but takes about 2.2%-2.9% + $0.30 per donation as a transaction fee.

So, every app in the crowdfunding sector takes processing or transaction fees. However, blockchain technology can fix this and other crowdfunding landscape downsides.

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How Blockchain Helps Crowdfunding Fix Its Downsides

The impact of blockchain technology on the crowdfunding landscape is vast, and its potential is truly endless. So, let’s look at the benefits that blockchain implementation could bring to crowdfunding app development.

Decentralization

The main specialty of blockchain is its decentralized nature. It could influence crowdfunding initiatives by cutting down the processing fees. Blockchain doesn’t need to engage intermediaries or third parties in financial transactions, so it can make crowdfunding much more affordable for creators.

There’s also a possibility that crowdfunding won’t have as many limitations with a decentralized network like blockchain. To launch a campaign now, a startup needs to have an audience before fundraising starts. Blockchain-based crowdfunding models could enable creators to start raising funds not on one but on many platforms creating profitable combinations. With blockchain implementation, B2B companies or those who produce services instead of products will have a big chance for visibility.

Tokenization

Tokenization can make the equity type of crowdfunding much better. With tokens, investors can have an equity share of the project they are financing. It has several benefits for crowdfunding app development, so let’s take a closer look at them.

1. Better visibility for more successful projects. Since investors will have assets of a startup they choose to fund, this will indicate the majority’s opinion on its perspective. This, in turn, will motivate other investors to take a look at the most successful project of blockchain-based crowdfunders.

2. More costs to spend on hiring. Startups often experience a lack of costs and sometimes can’t afford to form a marketing department which puts them in an uncomfortable situation. Fundraising can be rough without proper marketing, but blockchain-based crowdfunding app development might turn startups into employee-owned companies. If tokens are assets and can be turned into the internal currency for startups to hire, they can form a decent community without major cost losses.

3. Transparency and security. Blockchain technology is known for being transparent and extra secured. In crowdfunding, this would be especially important considering this industry’s problems. Smart contracts can transfer funds to a startup only for a designated milestone, so there’s no room for fraud in this type of fundraising. In addition, investors are provided with tokens after funding a startup which gives them a form of ownership so that the fraudulent creator won’t get away easily.

Cost-efficiency and security are vital benefits, but blockchain technology can do more. Let’s take a look at how smart contracts can improve crowdfunding.

Smart contracts

First of all, smart contracts will enable people to identify both sides of the transaction, so there is a lesser probability of fraud. Smart contracts are also much faster than usual fund transfers since they don’t require intermediaries. Speed improvement can help in times when deadlines are close. The technology will build more transparent communication between investors and startups, so blockchain-enabled crowdfunding projects have higher efficiency thanks to smart contracts.

Blockchain technology provides more opportunities to enable greater security for intellectual property. Smart contracts won’t allow third-party to get any unauthorized info about the idea, project’s budget, or any plans on its execution.

Blockchain-Based Crowdfunding Development: How To Make It Better

There’s a possibility to improve how blockchain is changing crowdfunding just by enhancing the software’s functionality. Read on since we gathered the most interesting features you can add to your blockchain development. But before we get into it, let’s take a look at the types of blockchain models of crowdfunding.

Types Of Crypto Crowdfunding

We’ve already written an article about one of them, so let’s take a quick glance at the main differences between the most popular crypto crowdfunding types.

1. ICO

Initial coin offering is a popular fundraising method that allows users to support projects by buying tokens for cryptocurrency. To support a selected project, investors have to wait for the token sales.

Anyone who wishes to participate in ICO can read all necessary projects’ information before choosing the one they support. If a minimum of funds wasn’t raised, investors would have all their tokens back. You can take an example from ICO to build a blockchain-based crowdfunding mobile application.

2. IEO

Initial exchange offering is often seen as an evolution of ICO. This is one more blockchain model of crowdfunding that’s suitable for startups. Since it entered the market, it has vastly spread, giving high ROI for every investor.

Average and all-time high ROI of IEO keep impressively record level positions.

Source: CryptoRank

IEO obligates startups to create their own crypto token, and it is much more secure than traditional ways of crowdfunding app development since every project is reviewed and verified by a separate technical team.

3. STO

Security token offering allows the sale of asset-backed security tokens to investors who wish to help startups in fundraising. It is an example of blockchain technology being in its prime; each security token has all ownership information. However, for all of these types, including STO, you’ll need to develop blockchain tokens and carefully check all legal regulations.

4. IDO

It’s a new type of decentralized and permissionless crowdfunding platform that helps a project launch its coins or tokens through decentralized liquidity exchange. It’s even faster than the types mentioned above and despite being really young has lots of successful projects launched from it. For example, the first IDO ever RavenProtocol.

Blockchain and crowdfunding can bring prospects to anyone who decides to build software in this industry. But if you’re going to run an innovative business, you need to have some unique ideas that could spice up blockchain crowdfunding.

Features For Blockchain Crowdfunding

Now, when you know the most popular types of blockchain for crowdfunding, let’s take a look at the list of features to make this technical solution essentially unique.

  • Multisig contracts — contracts that require multiple signatures. It allows users to make decisions collectively. Users can set the needed signs for transactions or other action approval. You might want everyone from your team to sign a contract or request a minimum amount.
  • Capped contracts — you set a minimum amount of funds needed for a project to be viable. If this amount isn’t reached during funding, all funds return to the investors. It’s similar to the IEO workflow; investors won’t lose what they invested in non-profitable projects. Combining crowdfunding and blockchain, you’re making your users more satisfied with the security and warranties blockchain technology provides.
  • Freezing tokens — allows freezing the remaining tokens if a project achieved more than the maximum amount of needed funds. These tokens can be used further on or as a donation for other projects. This way, you’ll create the internal currency for the crowdfunding platform built on the blockchain and motivate users to invest it in projects.
  • Time vault contracts — you can set time limits after which a user won’t be able to withdraw the tokens. If an investor would like to withdraw their funds back, they won’t be able to do it after a certain deadline. This level of security provided to both sides of the deal is how blockchain is changing crowdfunding.

If you’re considering any of those or other interesting features to implement, contact your blockchain app developers. Make sure that they’re on the same page for you, and with unique features, design solutions, and ideas behind the blockchain app development, you’re destined to gain success.

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Successful Examples Of Blockchain-Based Crowdfunding

Crowdfunding app development can change the world not only for startups but for an entrepreneur who decides to start such a project. Blockchain-powered crowdfunding is even more ground shifting since it’s a combination of two technologies capable of turning tables for anyone.

In OpenGeeksLab, our blockchain app developers do everything possible to make sure our projects are turning into our customers’ success stories. All because we believe that in the success of others, you can find a path to your own technical excellence.

As a blockchain app development company, we look for inspiration in others, and StartEngine is a promising example of blockchain app development. Let us share this crowdfunding app development sample with you. We hope that you’ll feel inclined to do something unique and inspiring as well.

StartEngine Example

StartEngine is an excellent example of crowdfunding app development with blockchain implementation. Their first equity crowdfunding campaign was launched in 2015, and since that time, StartEngine has gained the trust of 600K investors. The blockchain model lies in the basis of their workflow, so this platform also allows investors to trade their shares with each other.

Blockchain app development changed the life of many, but in the case of StartEngine, the numbers are high. The sum of all raised funds now is around $500 million; this platform helped more than 500 projects get funding.

They are considered an industry leader in alternative ways of fundraising for startups, the blockchain model of work they chose opened up new horizons before their eyes. Now, investors can support projects of all kinds, from digital art to healthcare.

The service is user-friendly, and anyone can support an idea they find the most interesting. In the picture below, you can see how StartEngine works.

StartEngine is a blockchain crowdfunding platform with a user-friendly workflow.

Source: StartEngine

As a perfect example of blockchain app development, StartEngine got its share of praise. This example inspires people, and we, as a blockchain mobile app development company, hope that there will be more projects like this exquisite correlation of crowdfunding and blockchain technology.

Get Your Blockchain App Development For Crowdfunding

Blockchain development is still considered a niche since it’s an innovative technology. Luckily, OpenGeeksLab has experienced specialists on board, and they know how to develop blockchain-based mobile apps that can disrupt the industry.

If you’re looking for blockchain app development of the highest quality, you should learn all aspects of this process. And if you decide on hiring blockchain app developers, make sure that your technology partner is reliable and experienced enough.

We hope that you found this article interesting, and if you have any thoughts or ideas to share, you’re more than welcome! Just fill out the contact form here!

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