Smart Contracts: Crafting a New Age of Accountability in Crowdfunding
Crowdfunding is one of the most efficient ways for investors to participate directly in early-stage startups, even with as little capital as $100 in some instances. According to the latest statistics, the global crowdfunding market was valued at $1.41 billion in 2023; projections show it could more than double by 2030.
That said, crowdfunding has its pitfalls for both investors and startups. In this article, we will focus on the former and introduce the concept of smart contracts and how they can help alleviate some of the challenges investors face. But before diving into the nitty-gritty, it’s worth defining what crowdfunding is and the different types that exist.
As the name suggests, crowdfunding is the pooling of funds from many investors to support a new business venture. What sets this funding model apart from the rest is the accessibility it gives to small-time investors. One does not have to be an accredited investor as is the case with the VC and private equity markets.
Instead, crowdfunding platforms leverage modern-day networks, including social media and websites to bridge the gap between startups looking for funding and potential investors. There are four main types of crowdfunding: equity-based crowdfunding, reward-based crowdfunding, loan-based crowdfunding, and donation-based crowdfunding.
While crowdfunding might not be as mainstream as other types of funding, the past decade has seen crowdfunded startups, such as Oculus VR, grow into significant ventures. This company launched its crowdfunding campaign on Kickstarter, one of the most popular crowdfunding platforms, and attracted $2.4 million in funding (10x their initial goal of $250K).
On the other hand, GoFundMe has emerged as the world’s leading social fundraising platform, allowing people to raise funds for charity, celebrations, graduations, and other social events. As of 2020, this crowdfunding platform had over 70 million donors with more than $9 billion raised, much of which provided a lifeline during the COVID pandemic.
Challenges of Crowdfunding for Investors
Although a lucrative way to gain exposure to startups that could potentially become unicorns, crowdfunding has its set of challenges for investors.
● Startups’ Failure to Deliver
It is not always guaranteed that crowdfunded startups will deliver the end product. There have been cases, such as Pebble Technology, which launched its campaign on Kickstarter but never delivered due to technical challenges. Inexperience and poor financial management are also factors that have hindered crowdfunded startups from achieving their goals in the past.
● Misuse of Funds
Another challenge crowdfunding investors face is the misuse of funds by teams due to a lack of proper accountability systems and transparent architecture. For instance, iBackPack, a startup that promised a backpack featuring a range of tech features, was charged by the US Federal Trade Commission (FTC) after it emerged they had used a significant portion of the $800K raised in their crowdfunding campaign.
● Limited Recourse for Investors
Crowdfunding platforms also have limited avenues for investors to pursue their funds if teams fail to deliver or abscond with the money. This was the case with Ossic X, which raised a cumulative $3.2 million through Indiegogo and Kickstarter, but the company eventually shut down without delivering the 3D audio headphones. Given the limited legal recourse, most backers never received refunds or the promised product.
Smart Contracts: Bridging the Trust Gap Crowdfunding
On the bright side, the rise of smart contract technology offers crowdfunding ecosystems a way to introduce transparency, verifiability, and, most importantly, automate the fund allocation process through pre-coded conditions.
For context, a smart contract is a self-executing contract built on decentralized blockchain networks like Ethereum. In crowdfunding, smart contracts can be used to structure the entire process, from setting up the campaign and allocating funds to evaluating milestones and addressing potential issues such as dispute resolution and flexible adjustments.
Unlike centralized crowdfunding platforms, funding ecosystems built on smart contracts make it easier for investors to track how teams use the funds via a public blockchain. Additionally, it becomes possible to verify whether goals have been achieved through automated infrastructures supported by external data feeds (oracles) or community voting.
Most importantly, smart contracts provide investors greater control over their funds and present opportunities such as participating in a crowdfunding ecosystem using one’s skills rather than solely capital in the form of money.
MetaMovie: The Future of Production
As far as smart contract crowdfunding goes, several projects have emerged in this niche. One of them is MetaMovie, a product of the Metatime blockchain ecosystem. With MetaMovie, creators no longer need to rely on centralized funding from media companies to realize their ideas.
This blockchain-based crowdfunding platform employs a concept known as tokenization. It allows directors to present their ideas, budget, and target milestones, after which anyone in the MetaMovie decentralized community can directly invest a portion into the production by owning a token. In return, investors receive proceeds from the movie based on its performance, and the equity share their token represents.
This decentralized crowdfunding model introduces a new paradigm in the entertainment industry, bridging the gap between creators and audiences while democratizing the investment process.
Technological advancements have ushered in significant changes in existing industries. While blockchain may have initially gained popularity through cryptocurrencies, it’s evident that its influence is expanding. As highlighted in this article, crowdfunding is one of the areas that could greatly benefit from decentralized technologies. The shift is already underway, and soon we might see more projects seeking funding through decentralized crowdfunding platforms.