Cryptocurrency: Fundraising Evolved
If you read my previous articles about energy companies in the crypto space and a bank-free investment company, you might have noticed a growing trend. Most of the energy companies were using cryptocurrency to enhance fundraising efforts, and I also talked about crowdfunding. Although Bitcoin was inarguably designed to revolutionize currency, its initial appeal was largely as an investment, and cryptocurrency developers continue to focus on new fundraising applications.
The ability to raise money on a massive scale was actually one of mankind’s most important inventions. Before the development of financial systems, the most efficient way to finish monumental projects was by forced labor, either as the result of capture or misdeed, or regular service required by many or all members of society. While ancient wonders have been built this way, it was at great expense, and humans didn’t undertake large projects regularly until the invention of financial systems. Paid work forces are better motivated and trained, but the money was stolen, either as conquests of war, or as taxes from their own people. Seldom was it allocated appropriately.
Ethical musings aside, the main problem was that they couldn’t get as much money as they needed: whether levied at a flat rate or as a percentage of a subject’s wealth, taxation leaves massive amounts of potential funding untouched. Peasants and members of the lower class would starve if their remaining income were taken, and skilled craftsmen or merchants might hide it or flee. Those with money to spare needed to be convinced to part with it willingly, in return for something other than religious reward or nationalism.
Investment itself is at least as old as Hammurabi of Babylon, invented when the first farmer accepted seeds with the promise to repay in crops. It wasn’t until around the time of the Renaissance that merchants started doing this in a large and organized fashion. Eventually, competing monarchs began to encourage these enterprises as sources of tax revenue, and in 1602, the first stock exchange was born. The first public companies sailed the high seas, exploring and colonizing the globe for profit, and then paved the way for the Industrial Revolution.
Stock markets still rule the investment world, and were necessary for all of the technology and infrastructure we have, today. They’ve come a long way from men shouting on the exchange floor, but while automated trading is now a reality, it still has its limitations. Due to the continued reliance on human traders and bureaucrats, we often can’t trade on weekends, and fees are unnecessarily high. Moving funding onto and off of an exchange should be an equally trivial affair. The stock market was revolutionary because it made investment more fluid, inclusive and open, but at the cost of the centralization of the investment business.
Cryptocurrency will bring about the next evolution of fundraising. Bitcoin is already alleviating many of the aforementioned problems, by promoting 24/7 exchanges with speedy and nearly free deposit and withdrawal. Notable exchanges like CAVirtEx have been lowering their fiat trading fees as competition rises, and trading Bitcoin for another cryptocurrency is negligibly cheap, with less inherent restrictions. Better still, Bitcoin has been eroding the monopoly on large-scale charitable projects, previously held by governments and international organizations. Crowdfunding on platforms like Indiegogo has already begun to change this, but Bitcoin will make that easier with low transaction fees, as well as instantaneous donations that can be made on a whim. Pseudo-anonymity also makes it easier to support causes without suffering political repercussions, and Bitcoin-centric crowdfunding websites have emerged left and right.
The upcoming Satoshi Vote is a demonstrable example of such a platform. It has all the bonuses of any other Bitcoin crowdfunding site, with relative anonymity, negligible payment fees and overhead, and the ease of clicking a button. Extreme utilization of Bitcoin’s low transaction fees has enabled a new way to support projects: rather than making a one-time donation, it relies on small ongoing donations over time. Charities that do this already rely on a few donors willing to contribute a significant amount per month, but phrase it as a daily donation. Due to Bitcoin’s revolution of microtransactions, however, it is now possible to send pennies a day, or pennies a month if a large enough crowd of people are ready to contribute. As a bonus, you can cease contributing if and when the charity or project becomes undesirable.
Despite all of these improvements, Bitcoin alone doesn’t solve the larger issue, which is that the fundraising platforms are still centralized. Even if we trust a Bitcoin-based investment vehicle or exchange, they are still in control. Some emerging cryptocurrencies like NoirShares hope to cut out the middleman by going straight to the consumer: NRS is redeemable for equity in the decentralized autonomous projects they’re working on, in addition to being transferable as a normal cryptocurrency. It’s notable for it’s hybrid PW/PoS mining system, in which proof of work is gradually phased out as the network gains strength to conserve energy. As NoirGroup develops more and more profitable decentralized autonomous software, NoirShares becomes more useful.
Developers have also designed coins for non-profit fundraising. CharityCoin gives 10% of all mined coins to democratically-selected charities, which benefit more as the coins increase in value. SwarmCoin lies somewhere in-between, being intended for decentralized crowdfunding in general–holders of swarm coins vote upon which projects to launch on the SwarmCoin network, and Swarm enables those project managers or organizations to launch a coin of their own with no programming knowledge. SwarmCoin holders receive the transaction fees applied to these coins in the form of more SWARM, and can directly exchange those coins for project-specific coins. This would cause a project’s coin to go up in value, making them analogous to stocks or equity, and SwarmCoin not unlike a stock exchange communally owned by those with swarm coins.
These coins effectively represent equity in their associated projects–if more people want them than the issuer and others are selling, the price goes up, along with the value of the issuer’s remaining stash. This leaves one final problem: where do we buy NoirShares or SWARM, or any of the aforementioned cryptocurrency? What if we want to exchange between them? Swarm itself is hosted by another protocol calledCounterparty, a next-generation addition to the Bitcoin blockchain that allows a variety of new functions. In addition to the ability to create new coins on the Bitcoin network, Counterparty allows the virtual representation of any currency, asset or equity, and a decentralized way to exchange them with no central authority involved, all on the blockchain. Traditional stock and currency exchanges are now obsolete.
Counterparty’s intermediary currency, XCP, can be directly acquired with Bitcoin, using a process known as “proof of burn.” One might think this could lead to a Bitcoin/XCP monopoly, but Counterparty is only one of many next-generation blockchain applications. Mastercoin is also built on top of the Bitcoin protocol, and also allows for decentralized exchange in addition to virtual property. Ethereum is based on its own blockchain, and promises an even wider variety of features, but it’s hard to know which ones will last in the myriad of emerging platforms. Rest assured that Bitcoin 2.0 is coming, and fundraising will never be the same.
The main image is a modification of ingimage stock art.