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A New Way to Fund Ideas: Crowdfunding, Crypto-Assets, and the Future of Decentralized Investments

by: Chris Pardo

A New Way to Fund Ideas: Crowdfunding, Crypto-Assets, and the Future of Decentralized Investments

With the rise of Kickstarter, the average person now has a greater opportunity to raise money for his or her ideas than ever before. The Kickstarter model, in which campaigners solicit donations to support a project that produces something they can share with their funders and others at large, is a new technological take rooted in an old idea. For instance, in1713 Alexander Pope rallied funding to publish English translations of Greek poetry by offering generous donators credits on a page in the finished translated publication, once enough funding was gathered to bring the project to fruition. Thecrowdfunding method was also employed in 1783 by Mozart who developed a campaign to fund the performance of three new concertos he scored by offering funders copies of the manuscripts, in exchange for live performance funding. And finally with the rise of the Internet, Kickstarter democratized the funding of projects even further by allowing unprecedented connectivity to the common person’s creative endeavors—and by leveraging funding frombackers across the world. The site offers streamlined simplicity that empowers thecommon person located in any of 10 countries throughout the world the ability to quickly raise funding to bring their idea to life. From the standpoint of investors, one advantage of Kickstarter’s funding platform is that funding requires that a project is completely funded before the backers are charged for their contribution. In this fashion, backers are not left on the hook for a partially funded project that may not produce the intended results outlined in the campaign. Kickstarter currently takes a5% cut of the total funds raised for a particular campaign, and Kickstarter’s credit card processor, Amazon, levies another3-5% charge on the total funds raised in a campaign. An additionalvalue added tax (VAT) of 1-2% on the total funds raised will also be applied if you happen to run a campaign in the UK. Despite the usual 8-10% charge on the total funds raised in a campaign, the requirement that campaigns need complete funding before backers are charged results in nearly42% of projects being successfully funded. Additionally, the campaign requirement that something must be produced for others to experience adds a tangible deliverable to the campaign. However, it is important to realize backers’ investments are donations in nature that primarily add capital to the store of human knowledge and innovation—as opposed to offering the investor a share in the equity of a project. One recent success story on the Kickstarter crowdfunding platform involved Ladar Levinson’s“Lavabit Dark Mail Initiative” campaign that raised upwards of $200,000 to deliver open-source, PGP strength encrypted email that also hides message metadata. However, for those who want the freedom to fund any idea they may have, thefolks at Kickstarter do place more restrictions on what projects are deemed appropriate for funding, compared to thecampaign restrictions placed on a similar crowdfunding platform, Indiegogo.

Indiegogo also empowers the common person by providing the ability to raise funds for ideas that might otherwise fall on deaf ears from the more traditional capital raising institutions. Indiegogo leverages the ability to draw backers from around the world andaccepts PayPal in addition to credit cards,as opposed to Kickstarter which only accepts donations via credit cards. Furthermore, Kickstarter only allows campaigns located in 10 select few countries, as opposed to Indiegogo that enables even greater access to the common person byallowing campaigns in over 200 countries. Another interesting feature Indiegogo employs is its use of two campaign funding models. One model requires the campaign to reach its funding goal for any funds to be dispersed and the other allows any funds the campaign brings in to be received by the campaign creator–with the latter involving a higher fee paid to Indiegogo to incentivize reaching the initial funding goal. Once again, it’s time to run the numbers. Under theall-or-nothing campaign model, Indiegogo charges 4% on the total funds received and additional credit card or PayPal processing fees ranging from 3-5%. Theflexible funding model, where funds are still released despite the funding goal not being reached, involves an Indiegogo fee of 9% on the total funds raised and credit card or PayPal processing fees ranging from 3-5%. Albeit Kickstarter and Indiegogo do not allow backers a stake in the equity, or ownership, of the finished product of the campaign, they are still powerful tools that allow access to otherwise nonexistent capital that enriches the innovation ecosystem. Overall, Indiegogo offers a compelling comparable crowdfunding option. On the other hand, the future of decentralized crowdfunding and the introduction of crypto-assets beckons on another front.

Swarm is a crowdfunding platform that takes a decentralized approach to the idea of crowdfunding. Simply put, the platform runs on a cryptocurrency known as Swarm Coin that allows campaigns to issue their own separate campaign cryptocurrency tokens that act as shares of equity in crowdfunding campaigns. The Swarm founder envisions the platform will allow vetting of campaign ideas through a decentralized voting process that helps determine which campaigns receive funding on the Swarm platform. A decentralized reputation system will help establish credibility of those who backed successful campaigns in the past and will help guide newer users to decide on what campaign ideas to fund. The campaigns that receive backing by credible members in the Swarm community are in turn given more weight. As for the funding process itself, campaigners generate unique campaign cryptocurrency tokens that are then sold to project backers as assets in the campaign. If a project is successfully funded and the finished product does exceptionally well out in the open market, then the holders of the campaign tokens will share in the wealth of the success via increased valuation of the crypto tokens they purchased. As a result, the added equity incentive in crowdfunding campaigns may help drive the success of future campaigns. Joel Dietz, the founder of Swarm, points to one crowdfunding equity debacle involving theOculus Rift campaign on Kickstarter that successfully raised over $2 million dollars to develop a virtual reality headset and subsequently a little over a year later the Oculus Rift companysold to Facebook for $2 billion—leaving some of the Kickstarter backers wishing they had the option to invest in an equity arrangement instead.

Another admirable contender in the decentralized crowdfunding ecosystem is theNXT currency platform. It is important to realize NXT isnot just another alternative cryptocurrency because it actually makes decentralization possible through a proof-of-stake model, as opposed to the Bitcoin proof-of-work model. On the decentralized NXT platform, anyone can create their own uniqueasset tokens andsell shares that can support a crowdfunding campaign, among other things. Asset tokens can also be used to represent physical assets, a culmination of other assets known as asset bundles, and can be used to represent a whole range of other assets. Currently, it costs 1,000 NXT, or roughly around $30 worth of Bitcoin at the time of this writing, to issue asset tokens for any particular crowdfunding campaign. Furthermore, the NXT platform also touts a decentralized marketplace that allows anyone to sell any kind of digital good. Overall, it appears the future of commerce and investments will come in a decentralized, cryptocurrency form if the recent trends are an indication of anything.

Regardless of which crowdfunding method is employed, we are entering an age of unprecedented innovation—and the age seems to be one focused on individual empowerment.

Thank you!