The Importance of Blockchain Technology for Crowdfunding

The Importance of Blockchain Technology for Crowdfunding


Large economies around the world have embraced capitalism as the best way to ensure prosperity, “Blockchain”. One obvious aspect of a capitalist system is that it makes it possible for any company or individual to obtain a loan and launch their venture in a timely fashion.

Commercial loaning, which can take the form of methods such as crowdsourcing, has emerged as a result of the rise of capitalism. Since the blockchain affects the whole of the financial system, this means that blockchain proponents have taken the core concept of traditional crowdfunding and applied it to a far larger scale.

How can you define crowdsourcing?

Having a decent amount of money available is a great aid while operating a business. However, many companies and entrepreneurs lack both the idea and the expertise to succeed, and the funding to support their ideas. To gauge the viability of their venture and secure financial backing, companies can hold a crowdfunding event and invite investors from relevant industries.

Crowdfunding proceeds are essentially a loan to the firm, and the enterprise has a moral and legal obligation to repay the investors who provided them with capital, plus interest and a cut of future profits.

Crowdfunding Comes in Five Varieties

Contrary to first impressions, crowdfunding is not a straightforward means of acquiring funds. Participants in crowdfunding should be aware that they are subject to various legal requirements that are enforced by regional financial regulators. Crowdfunding campaigns can be broken down into a number of subcategories, each catering to a specific business model or group of investors. Below is a list of some of the most popular forms of crowdfunding:


Funding for a business idea or a new venture can take the form of a contribution or a “reward crowdfunding” campaign. This means that they will not get their original investment back, but they may be eligible for other prizes offered by the beneficiaries. Donors are sometimes offered positions of influence within the organization or even just the opportunity to attend all of the organization’s future events at no cost. In some circumstances, incentives may be offered in the form of a free trial of the company’s wares. In other situations, people are rewarded solely through positive feelings and public acknowledgment.


For charitable purposes, one sort of crowdsourcing campaign is the donation drive. Events like these can be organized by a wide variety of NGOs to help them raise funds for important humanitarian initiatives. Donations made at these types of gatherings can be substantial, and the wealthy can occasionally use them as a tax deduction. Crowdfunding backers in this situation typically do not stand to gain anything from their participation.


When a business seeks a loan from the general public or other businesses, it participates in debt, one of the first kinds of lending that has evolved into the crowdfunding phenomenon. Here, backers have a right to a return of their funds from the company after a certain length of time.

Further, the companies offer contributors a return in the form of interest on their investments. When participating in a Debt Crowdfunding campaign, investors wager that the company they back will provide a return on their money. As a result, before to making a financial commitment, the investors here perform extensive due diligence on the company in question.


Investors in crowdfunding campaigns do not receive any form of ownership interest in exchange for their money. Some companies, however, provide such ownership stacks after filing the required legal paperwork. As a result of their participation in the crowdfunding campaign, the investors would receive a proportional share of the startup’s net earnings. Donors and backers of crowdfunding campaigns may be issued a claim on the project’s assets in exchange for their contributions.


Internet connectivity has permeated every facet of modern society. It has had a similar effect on crowdfunding campaigns. Several pioneers have established the groundwork for crowdsourcing on the internet since the dot com boom. Alex Trew began the trend in 2005 when he launched The Million Dollar Homepage to fund his college expenses. There are now a plethora of popular and specialized crowdfunding platforms, such as GoFundMe, Kickstarter, LeadingClub, and Indiegogo.

Explain the concept of “blockchain-based crowdfunding.”

Blockchains are distributed ledgers that record financial transactions and can be used to create new digital currencies. DeFi, or decentralized finance, has emerged as a result of the blockchain and is a reflection of conventional financial practices augmented by blockchain technologies.

Companies in the blockchain industry have taken the crowdfunding concept and taken it to the next level, enabling users from all around the world to engage as investors and generate profits. The concept behind a blockchain crowdfunding event, also known as DeFi, is not unlike from that of a more conventional fundraiser. In contrast, this form of crowdfunding is conducted entirely on the blockchain, and it is aimed squarely at tech startups and established businesses alike that are engaged in blockchain or DeFi-related projects.

Blockchain-based crowdfunding terms and conditions

At first look, it may appear that anyone who has a business concept can go ahead and try to convince investors to finance their ideas. To get funding from investors who want a return is not a simple undertaking. There are a lot of professional investors actively seeking out new opportunities.

The investors are cautious because they do not want their money to go to waste, so they investigate the crowdfunding platforms and their business strategies in depth. Some of the most fundamental norms and conditions for participation in crowdfunding are as follows:

  • The blockchain initiative ought to have a well-documented and well-presented technical foundation.
  • The blockchain’s original developers should be capable of taking the reins of a complex initiative and managing all the network’s technical details.
  • An original and compelling business plan developed by a competent founder or team of founders is essential for a firm seeking funding.
  • The blockchain company needs to have all the necessary paperwork and legal protections in place, like patents and government approvals.
  • A realistic prediction of key variables including risk management, expansion, business development, and a market study is another requirement of the investors.
  • The investors are exclusively interested in blockchain projects that have working products ready for mainnet deployment.
  • They need the blockchain to have a voting model for governance that is both practical and transparent, so they can keep tabs on who else is investing in the project.
  • Smart contracts programmed to distribute predetermined profit shares to investors and other stakeholders in accordance with the blockchain governance model are also required.
  • The only way crowdfunding projects built on the blockchain can be successful, at least in the near term, is if each milestone is clearly defined and represented in the governance structure.
  • To further motivate participants, blockchain crowdfunding campaigns can distribute funds in increments according to specific goals.
  • Depending on its backers, blockchain crowdfunding campaigns can potentially take in the form of donations in addition to equity investments.
  • Crowdfunding on the blockchain can also host multiple events simultaneously, the exact number of which is determined by the number of decentralized applications (dApps) using the platform.
  • Crowdfunding on the blockchain typically includes an escrow wallet that will only release further funds if the investors approve.
  • Blockchain crowdfunding allows investors to support projects without sharing any personal information about themselves or their network.
  • If a DeFi platform is interested in becoming an investor, it can look into the other DeFi protocols running on the same blockchain or parachain to see who else would be interested in investing in them.

Crowdfunding on the Blockchain: Different Models

Since the groundwork for blockchain crowdfunding has been laid, it is time to educate the reader on the numerous categories and subcategories that exist within the broader field. Crowdfunding on the blockchain can be broken down into two primary categories at the moment. But the developers are hard at work on introducing novel blockchain-based lending mechanisms to the market.

A Definition of ICOs (Initial Coin Offerings)

A popular kind of crowdfunding, initial coin offerings (ICOs) are when the creators of a brand new DeFi project issue their own cryptocurrency to backers. With this method of financing at its disposal, the DeFi initiative can reach out to possible backers from all around the world.

Investors in a cryptocurrency project may be eligible to receive a reward in the form of a fixed number of tokens of the same cryptocurrency as payment for their contributions. But investors in the DeFi firm do not get any ownership rights through the issuance of ICO tokens.

In either cryptocurrency or fiat currency, investors can withdraw their funds. To incentivize participation in initial coin offerings, smart contracts often distribute cryptocurrency to backers in direct proportion to their financial contributions. Investors in ICOs put their money down with the hope of making a profit once the digital currencies given through them become popular and their prices rise. As investors are effectively paying to acquire a new token, the distribution of cryptocurrencies during ICOs against funds is also known as token sales.

Exchange Offerings at the Beginning

One major spinoff of a blockchain is cryptocurrency. Digital investors can now buy, sell, lend, borrow, and trade a wide variety of cryptocurrencies on cryptocurrency exchanges, another innovation born of blockchain technology. Similarly to ICOs, Initial Exchange Offerings (IEOs) are gaining appeal among cryptocurrency investors due to improved security. Investors are wary of ICOs due to the prevalence of frauds and the extreme volatility of cryptocurrency prices.

However, IEOs make it possible for cryptocurrency traders to buy and sell a brand new token on the exchange itself. That means IEOs are on the hook for doing due diligence on a blockchain company or DeFi on behalf of individual investors with fewer means.

The bitcoin trading platform must also perform AML/ KYC checks on its customers. In compared to initial coin offerings (ICOs), investing in a cryptocurrency project listed on a regulated exchange provides more protection for investors due to the exchange’s stringent cyber security standards, financial auditing, legal screening, and regulatory compliance check.

Crowdfunding and the Blockchain: Some Difficulties

Blockchain crowdfunding has resulted in numerous innovative tools for the IT and Defi industries. Although this does not mean that the crowdfunding model built on the blockchain is without flaws. Contrarily, blockchain crowdfunding events may encounter a wide variety of novel difficulties that need for careful thought and inventive approaches to their resolution. Investors in cryptocurrencies who are interested in making money off of a blockchain crowdfunding event should familiarize themselves with the difficulties they may face. Because gaining awareness of the issue is the first step toward finding a solution. Some of the most frequent problems encountered by blockchain-based crowdfunding projects include:

False claims about cryptocurrency

Scams involving cryptocurrency at DeFi crowdfunding events are common. Scams posing as initial coin offerings (ICOs) have been used in some of the most catastrophic instances of bitcoin theft. The Satis Group claims that somewhere in the neighborhood of 80% of all ICOs involving cryptocurrencies were found to be fraudulent.

Pincoin, iFan, Plexcoin, Bitcard, Benebit, Bitconnect, and others are among the most prominent examples of fraudulent initial coin offerings. According to Fortune Jack’s calculations, investors have lost a total of $687.4 million due to ICOs. Investors and authorities alike have been wary of blockchain crowdfunding initiatives due to the prevalence of initial coin offerings (ICOs) that turn out to be fraudulent.

Qualifications of a Company

Token creation by anyone with basic computer skills is a major drawback of blockchain crowdfunding. The creator of a new token need not be a computer programmer or an expert in the stock market. This means that anyone with ill intent can create the appearance of a successful DeFi firm by organizing an ICO and promising false profits.

Scammers can use the internet to steal money and vanish without a trace. Despite not knowing the true name of a new DeFi project, many investors nevertheless choose to put money into it. With blockchain technology, anyone may start a crowdfunding campaign, regardless of their qualifications or reputation.

Unpredictability of Costs

Protecting investors’ interests in a blockchain-based crowdfunding campaign is challenging even when the organizers are honest and competent. There is a lot of rivalry in the cryptocurrency market, and the price of cryptocurrencies tends to fluctuate a lot. Creating sufficient buzz around a new cryptocurrency project to attract appropriate financial interest takes a lot of time and energy.

Yet, there are elements outside the control of blockchain business founders, such as the unparalleled price volatility of cryptocurrencies. A minor setback in the cryptocurrency market might cause investors to lose faith in the project and cause it to fail within a matter of hours because of its reliance on market speculation.

Supplemental Controls

There is currently no government agency that either supports or regulates Blockchain crowdfunding events like there is for more conventional businesses. As a result, in the event of a fraud, investors may lack sufficient grounds upon which to file suit or conduct further research into the matter.

Those who contribute to a business’s DeFi fund can remain anonymous, and the businesses themselves can protect their identity if they so choose. Therefore, investors have no way of knowing who received their money in the event of a scam, hack, market crash, or poor management.

Digital Robbery

Since most ICOs start off with insufficient funds, they are easy targets for hacking attempts. A blockchain company may not be able to afford a professional technical audit of their project or a full staff of cyber security experts to ensure the safety of their DeFi endeavor if they do not have sufficient financial backing. That the cryptocurrency project in issue still has a sizeable number of investment commitments makes it an easy target for threat actors who are looking to profit from hacking. Therefore, the cyber security protocol should be taken into account by the investors before to purchasing the product.

Due to a Deficit in Education

Due to their lack of knowledge, many cryptocurrency investors fall prey to frauds and incompetent blockchain crowdfunding events. Blockchain has existed for over a decade, but it is still not taught in public schools or other academic institutions.

As a result, there is a severe deficiency in both the technical and financial understanding of blockchain and ICOs. An someone with little to no familiarity with cryptocurrency cannot accurately predict the financial viability of a DeFi startup or spot a possible scam.


Crowdfunding on the blockchain provides investors with equal access to the world’s most ambitious cryptocurrency and DeFi initiatives. Before putting money into the DeFi business, however, investors need to get informed. Blockchain crowdfunding has the potential to be a more transparent and accessible financial platform, and developers and programmers are working on solutions like initial coin offerings (IEOs).

Orizu Augustine
Orizu Augustine is an experienced crypto writer working for Alltechcraft. Having passion for writing, he covers news articles from blockchain to cryptocurrency and iPhone and Samsung related articles.