Crowdfunding is probably the most popular method of raising capital for a project through a large group of people, usually, a large number of people with significantly small amounts is the norm.
It typically occurs through various Internet platforms and is commonly embraced for creative project financing, social entrepreneurship, indigent medical expenses, and start-ups.
Blockchain-related startups use cryptocurrency crowdfunding by requesting some quantity of a cryptocurrency and sells new tokens to investors in return for legal bidding or other, more liquid cryptocurrencies.
The most popular crowdfunding cryptocurrency for a long time has been Bitcoin crowdfunding, but currently, most ICOs are on the blockchain of the Ethereum. The reason is obvious, it enables the smart contract privilege.
Crowdfunding is an old concept that has been around for many years in different forms. However, with the Internet, the contemporary variant of crowdfunding was conceived.
A look at Kickstarter, Patreon, and Gofundme, these are all traditional crowdfunding platforms that have worked to give a good starting ground to its evolution.
Today’s crowdfunding needs three distinct parties – a project initiator, a group of people financially supporting the project, and a mediator who hosts information of the project on a website and matches project donations.
Over the years, crowdfunding has financed superb projects of all kinds, but fraud and deception have also marred crowdfunding. This has lead to innovative development and the evolution of the sector.
How Things Have Evolved
ICOs – Initial Coin Offering
It all started here with virtual currencies. Most virtual currency projects made very good use of it before scammers started exploiting the system.
ICOs, the next evolutionary step in the crowdfunding process became possible via blockchain invention. It heralded the beginning of a new era in raising funds for innovative ideas and inventions.
By 2014, crowd sale financed the creation of Ethereum by raising 3700 Bitcoins after the presale.
Indeed ICOs are considered to be an evolutionary step forward in company financing as it eliminated the need for a transaction mediator. In the earlier days of 2017 and 2018 when ICOs hit their peaks, businesses raised millions of dollars with only a white paper explaining the invention, project or the company’s approach and the prospects of making good returns.
Blockchain opened up the opportunity for businesses to generate and issue their tokens. The tokens were linked to a smart contract that eradicated any need for a centralized platform for Internet-based crowdfunding, it remains very valuable.
In theory, at least, this meant it would be cheaper to promote the project you are planning for. Besides, if an ICO was successful, a cryptocurrency exchange that allows the tokens to be exchanged in a secondary market could accept the tokens.
Unfortunately, ICOs also had their proportion of frauds and scammers entering the ecosystem. Lack of adequate regulations from relevant authorities is one of the major reasons for this exploitation.
Criminally minded individuals without any intent to solve a problem use the medium to defraud unsuspecting investors. Of course, there have also been incredible success stories, but one can attribute the likely cause of the collapse of the avenue to investors losing their guide by gambling instead of making good investments owing to the Bitcoin bubble and even the open market trading contributed to some extent in this failure.
IEOs— Initial Exchange Offerings
One of the core issues with ICOs is that inventors were very difficult to evaluate before allowed into the crowdfunding platform. Platforms for crowdfunding attempted to assist investors by eliminating fraud.
Although errors are still there, having a project correctly vetted by company experts before cash can flow into it should be a good one.
It appears strange to hear of exchanges managing the crowdfunding process, true, but the good thing is, it is giving out the needed result.
IEOs are, in one scenario, a step backward and, in another, an evolutionary step forward. IEOs give back what blockchain pundits don’t want near them ‘ centralization.’
Involving cryptocurrency exchanges implies that tokens on the sponsoring crypto-exchange are now guaranteed to be tradable in a secondary market. This implies that vetting projects should be better because the exchange has its reputation on the line to approve of this.
Another positive of the IEOs is that it will make it easier for regulators to monitor compliance with KYC and anti-money laundering regulations. Again, blockchain purists may hate this, but if we expect the masses to embrace this technology, regulation will mostly be on their favor, they’ll love it.
Investor protection in combination with a guaranteed secondary token exchange market is a favorable evolutionary step forward in financing great ideas.
STOS – Security Token Offerings
One of the ICO bull-bear cycle’s side effects was deepening economic regulatory scrutiny globally. What regulators tried teaching was that even though calling your ICO a utility token, if your token was unable to pass the Howey test, it would not be exempt from securities laws.
Like crowdfunding before it, if your ICO offered a business ‘ future profit or token ownership, then it wasn’t really a token of utility, it was security, meaning that an issuer had to follow all the rules and regulations that an IPO regular had to deal with.
STOs will be the next evolutionary phase in the financial world. STOs, also based on blockchain technology, will allow anyone to tokenize any company or asset and offer it to investors around the globe in a fractional manner.
STOs will come with more regulation and hence higher costs. The advantages are the strong point, it will be staggering for investors.
Imagine owning a proportion of a Tokyo company building by buying a safety token. By using smart contracts linked to the safety token on your phone, benefits from renting the company building could be automatically transferred to your hot wallet without ever seeing the building and having never met any of the other token holders.
Wherever you live, you could share revenue, vote on significant estate choices, and give your token for sale on a token exchange if you ever chose to re-allocate the cash elsewhere.
Indeed blockchain crowdfunding has changed and improved for the better.
What Are Your Choices for Investment Now?
Crowdfunding, ICO’s and IEO’s are all options, but at the moment, STOs are still in their infancy owing to the absence of standardization for trading purposes and the absence of comprehension from the investing public.
STOs are developing rapidly, however, and are likely to become popular shortly as a financing approach and as an investment.
It should be crowdfunding If you are looking for an early model of a product before it is available to the general public. Or a good choice if you are looking for a discount on a future product or if you would like a T-shirt as a thank you for providing your cash to complete a project. If you would like to promote a YouTube channel, this choice may be ideal for you.
Crowdfunding tends to be restricted to first-world citizens, and legal rights seem to revolve around the concept of investors reaching some sort of agreement in the event of the legal disorder.
It should be ICOs and IEOs If you are looking for an’ electronic coupon’ that will provide you with access to unique products or access to tokens where you can only buy products with a utility token, or if you would like to make a monetary contribution to a medical or technological issue this could be an alternative for you.
The advantage with ICOs and IEOs is that if the project is successful, you sell your tokens on a secondary market, or you can choose to use the token for the token holder’s special rights.
ICOs and IEOs are usually accessible globally for purchase, but regulations are rapidly evolving, especially in the United States. If an ICO is a disadvantage, you may be out of luck.
I believe that coordinating investors to take legal action would be much harder and the anonymity of such initiatives can make it harder to locate project insiders. On the other hand, IEOs should enhance the quality of token issued and the smart contract attached to your token should render rights and responsibilities unchangeable if projects go well.
STOs to the majority of experts is crowdfunding future. STOs will provide investors with access to venture capital projects, part ownership of iconic houses, art collections, companies of all types, and possibly even part ownership of sports teams, with every owner’s rights permanently guaranteed on the blockchain. Security tokens will be tradable on a token exchange in a secondary market, similar to ICOs and IEOs.
Of course, when investing in STOs, there will be severe extra regulatory problems to be addressed, but those laws will also confer privileges on token holders, possibly eventually creating unparalleled legal security for token holders through the automatic execution of the smart contract attached.
How Blockchain Changes the Game of Crowdfunding?
So where is blockchain coming in? The natural benefits of blockchain technology will enhance crowdfunding. The key characteristics of the system give these possibilities:
Fully decentralized is the blockchain. This implies that it will not depend on any platform or platform combination to allow inventors to raise resources. For the crowdfunding community, this will have numerous beneficial impacts.
To begin with, you will no longer be bound by the rules, regulations, and whims of the Internet’s most popular crowdfunding platforms. Any project can be visible and financed. It also eliminates the fee issue.
While it costs a lot of cash to maintain the blockchain, you will drastically cut transaction fees. For creators and investors, this makes crowdfunding less costly.
Instead of crowdfunding to allow preorders of future products, blockchain could depend on asset tokenization to provide equity or some comparable idea of property to investors.
For example, an inventor planning to create multiple new products with incoming funds can grant every new investor with a small stake in the company in proportion to the amount they are contributing.
Investors will thus view achievement in proportion to the company’s ultimate achievement. This could open up entirely new investment opportunities.
Any project that uses a crowdfunding model based on the blockchain can be financed. The strength of the Internet gives it global coverage. Anyone with an Internet connection can contribute to these initiatives.
There could be some demand for platforms for particular locations and accessibility, but today’s way of crowdfunding projects has no basic restriction. You can be a part of the crowdfunding process anywhere in the world.
Crowdfunders based on blockchain wouldn’t have to worry about the “empty commitments” that threatened modern-day crowdfunding projects. Instead of contributing cash and waiting for weeks or months to receive their promised item, contributors will obtain their token of business or product ownership instantly.
Using the blockchain as asset tokenization provides more freedom for creators and entrepreneurs. By issuing more new shares in their business, they can generate more funds and use those resources to grow. However, these shares can also be leveraged directly.
For instance, by partly compensating them in part ownership of the company, they could save cash on employing staff, turning it into an employee-owned business. In this model, asset tokens become their currency type, allowing organizations to do more like hiring experts such as marketers and advertisers.
The blockchain is built around peer-to-peer transactions. This advantage comes to play in the crowdfunding process.
Just like today’s cryptocurrency, crowdfunded company or product stakes can be exchanged peer-to-peer. This offers more liquidity for their investments and to contributors. It could serve as a means to create greater interest in the general project. This shift could eventually lead to a new form of the marketplace being created.
This does not, of course, eliminate every issue. Problems with copyright may still stay. However, the vast majority of them are eliminated or improved.
There is no gainsaying that the cryptocurrency and blockchain crowdfunding has evolved over the years to the different options that are now available to us. It leaves investors with making choices on what fits their businesses the most.
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