Blockchain Crowdfunding: How to use Bitcoin & More to Crowdfund Anything
Latest posts by Dean (see all)
- Why commodity-backed cryptocurrencies may be the best investment - August 21, 2019
- FCA held the meeting on increasing control of cryptocurrencies in the UK supervisory authority - August 14, 2019
- What you need to know about Bitcoins - August 14, 2019
Crowdfunding is a powerful tool that anyone can use to raise money for literally anything: a business start up, making a film or other creative project, developing a new product or piece of software, a political or charitable cause, or even just for reaching a personal goal.
But that doesn’t mean that it is easy to raise the money that you need. In order to reach your target you need to take advantage of anything and everything that you can use to help push you forward. Blockchain crowdfunding and the use of digital currencies like Bitcoin have had a huge impact on this sector in the last year or two and have already been involved in some of the most successful funding drives ever, despite the fact that this is relatively new technology. As such, it is something that any would-be fundraiser should consider using.
In this article I will guide you through the the use of blockchain for this purpose, the advantages that it can offer, and how it can be used. I will also introduce you to some of the best websites, services, technologies and resources to help you run a successful campaign.
Before You Get Started
Before you even start to think about how to get started with blockchain crowdfunding, you need to make sure that you are clear in your own mind about what you want to get out of it and what you are willing and able to offer in return. These things will have a big impact on which method would prove to be the best route for you.
To start off with, money is not the only thing that you could possibly stand to gain from this. For example, offering exclusive extras or branded rewards can help you to turn interested customers into true fans, whilst giving your backers a share in any future financial success you have can turn early adopters into the ideal evangelists for your product. Successful campaigns can also draw a lot of publicity and the kind of brand / product name recognition that will come in useful later.
You will also need to be clear about why somebody would want to back you. In general, there are three types of people who may choose to back you: donators, early adopters and investors. A donator will give money just because they want to see your project happen. This can include political causes or charity, but it can also involve appealing to a committed fan group who really want to see a creative project completed. Early adopters love to be amongst the first to try out new things, and will be highly motivated by ‘pre-sales’ giving them early access to a product, or exclusive upgrades or mods which give them something nobody else has. The final group are clearly looking to make a profit. Of course you can appeal to more than one of these groups, but it pays to be clear about who you are targeting and exactly what you are offering to each of your potential backers.
How Blockchain Technology Can be Used for Crowdfunding
In this section we will start to look at the nuts and bolts, learning more about what the blockchain is capable of doing for you. Not too many specifics yet, just a general introduction to what is possible.
The easiest and most obvious example is the use of a digital currency like Bitcoin to take payments from your funders. Bitcoin has been the preferred payment method in many of the most successful campaigns of recent years, with several projects that have generated funds well into the millions of dollars. Of course this works especially well for projects that either involve digital currency or have some kind special appeal to the kind of people who use digital currency, but it can also work well for more general campaigns. The next but one section will go into more detail about the main advantages of doing this.
Also, Bitcoin users often see themselves as ‘investing’ in the technology when they buy coins, and there are quite a few who have become ‘Bitcoin rich’ thanks to an increase in price from the early day, so by accepting BTC you are tapping into a community with many investors and asubstantial amount of wealth to invest.
In exactly the same way that a blockchain can be used to create coins, track their ownership without the need for a central authority, and transfer them between users, it can also be used to create any other type of digital asset. This can be used in crowdfunding to issue tokens to every person who makes a contribution, often in proportion to how much money the give. The value of this token can be anything you choose: it could be a simple thank you with no value beyond being a limited edition collectible, it could grant access to an event or members only area, it could be accepted as payment for a product or service in the future, or literally anything else you can think of. Of course one of the things that people often think of is using it to represent an investment in a product or company and to serve as a vehicle for receiving profits from it…
Crypto-Equity refers to the use of a token, issued and tracked via a blockchain, as an investment vehicle and alternative to traditional legal equity. There are really two different types of cryptoequity, although the exact definition of the term itself is still largely undecided so they may be categorized differently in the future.
It is possible for a company to issue legal equity in their company, but to use blockchain as an ‘alternative trading system‘ in place of a traditional stock exchange. In this case the investment vehicle itself, whether that is shares representing part ownership of the company, a corporate bond or anything else, is exactly the same as it would be if more traditional methods were used. The same set of legal rights, privileges and protections will be associated with it and the company itself will be subject to the same laws and regulations (see the next section for more on this).
Another possibility is to create a token which does not represent any kind of legal contract, and therefore cannot be considered an equity or bond, but whose value nevertheless tracks the value / success of the company in question or which makes its owner eligible to receive payments from the company’s profits. There are many different ways to do this (look out for a future article about how to issue a crypto-equity!) but the most popular are ‘app tokens’ like ones used by the GetGems messenger app or automated payments from ‘smart contracts’ like the ones used by Augur. It is also possible to make rewards payments to token holders from the company’s profits, which may look and act like dividends but which are not legally guaranteed – be careful though, as this is very much a legal grey area in terms of regulation.
Legal Compliance for Blockchain Crowdfunding
If you are just asking for donations (even if there are some small rewards to encourage people) or you are clearly pre-selling a product, then you should not have to worry about complying with additional laws and regulations. If, however, you are soliciting an investment in your company or business from prospective funders, you will almost certainly have to comply with your country’s regulations for selling securities; this usually means that you will have to register your business with the applicable authority as well as complying with the relevant laws.
Fortunately, in the United States the law has recently been reformed to make equity crowdfunding more accessible, so it is easier than it has ever been to accept investment in your company through this route. For example, it used to be the case that only accredited investors could purchase equity, but now this has been opened up to regular people (as long as certain rules are followed). A good beginner’s introduction to how these new rules may impact you can be found here.
But the power of the blockchain to issue tokens which may appear to be like equity does still introduce a new grey area which you must be very careful about. Finding out whether your token qualifies as a security and is therefore subject to regulation is not always an easy thing to do (see: token sales and the US impressionistic securities laws). If there is any possibility for misunderstanding, it is important that you require any potential buyer of your token to read a disclaimer or terms & conditions document which makes it very clear what they are and what they are not.
The Advantages of Using Blockchain Technology for Crowdfunding
Low Fees: Simply using digital currency as a payment processor for accepting contributions will save you money on fees, as they are much cheaper to accept than things like credit cards. But you can also use a blockchain-based protocol to manage and even help you to publicize your campaign, as an alternative to the popular websites which most people use; doing that will save you a lot of money on fees as these systems range from being very cheap to actually free to use.
Easy to Issue Tradeable Tokens: We have already touched on issuing tokens in previous sections, but it is well worth noting here that one of the major advantages of this technology is that it is so much quicker, easier and cheaper to issue tokens to your backers in return for their contribution. Users can also transfer these tokens to other people or trade them against other tokens or digital currencies quite easily, which is a distinct advantage compared to using any kind of proprietary system.
Transparent Rules & Accounting: This one may not be so obvious from the start, but it can be the most important. When your backers make a payment using digital currency that payment is permanently stored in an immutable public record. This public record cannot be manipulated or changed, and cannot be lost due to technical problems. What happens to those funds afterwards is also stored in the same transparent public record which anybody can access. This already offers them an extra level of security compared to traditional payment methods and enhances trust through accountability, but that is only the start of it. If payments are made to a ‘multi-sig’ address with an escrow, then backers can be offered a guarantee that funds will only be released if and when you reach certain milestones, which can make it easier for them to trust that you are ‘the real deal’. Similarly ‘smart contracts’ can be used to offer an unbreakable guarantee that if you do not reach the full goal needed to make your vision a reality then the funds will be automatically paid back to your backers – all without using a third party website and having to pay their fees. London mayoral candidate George Galloway is even campaigning for blockchain to be used for public accountability of government funds.
Technology & Resources
This is not a complete list of all the relevant resources you may find useful, but I will make every effort to include the best and most popular examples. If you know about another resources which you think should be included here then please do feel free to share your insight in the comments section!
Crowdfunding Community Websites
These website provide a central platform where you can create a listing a seek funding from the crowd, and others can browse through listings to find things that they are interested in. They charge fees for this service, often taken as a percentage of what you raise is you are successful. Basically they are ‘kickstarter alternatives’ which accept bitcoin or other digital currencies for payments. They do not use the blockchain in any other way. If you think your project may appeal to the users of these websites then they can be a great way to get your pitch in front of a lot of people, but you do have to pay fees so if you don’t need the extra exposure you should consider going DIY with the ‘platforms and protocols’ listed below.
- BnkToTheFuture: An equity crowdfunding platform for seeking Bitcoin investments from ‘the crowd’.
- Startjoin: Created by media personality Max Keiser, this platform enables projects to seek funding in return for various rewards associated with different levels of contribution. Users can contribute with either paypal or the assoicated cryptocurrency ‘Startcoin’.
- Swarm: Perhaps the most ideologically driven of the bunch, Swarm specialized in helping people develop and fund ‘distributed collaborative organisations’.
Platforms and Protocols
These are protocols that you can use to set up your own crowdfunding initiative using blockchain technology and to issue secure tradeable tokens to your backers.
- Lighthouse – This is a protocol for using the Bitcoin blockchain to set up and manage crowdfunding drives. It was originally developed to organize funding for the development of Bitcoin itself, but can be used just as well for anything else. Best of all – its totally free to use.
- NXT – This ‘alt coin’ includes a protocol for issuing both ‘assets’ and ‘coins’ built into its blockchain. The ‘monetary system’ for issuing coins has features specifically developed for crowdfunding, such as ‘reserveable coins’ which are only created and issued once the target level of funding has been reached, otherwise the pledged amounts are returned automatically by the blockchain itself. This is similar to how Kickstarter works, but is much cheaper to use.
- Counterparty – This protocol can be used to issue assets over the Bitcoin blockchain and includes features such as the ability to pay a dividend that is distributed proportionally amongst all asset holders. Assets can be traded for Bitcoin, XCP and other assets via the built-in asset exchange.
- Bitshares – Another altcoin with asset exchange and the ability to create your own assets. Interesting features which may be relevant include a bond market and the ability to create assets whose value is pegged to an external asset (such as the stock price of a publicly traded company, to give one example).
- BTC Funding – A range of management services to help you set up your own public initiative or ‘private group funding’ campaign, including design services to help you set up a slick pitch page.
- Symbiont – Billing itself as the ‘first platform for the issuance and trading of smart securities on the blockchain’, this is the place to go if you are interested in exploring the possibility of issuing a legal security rather than just a casual reward token.