A blockchain-based replacement for traditional crowdfunding

The cryp­to space wit­nessed phe­nom­e­nal growth in 2021. Buzz­words like non­fun­gi­ble tokens (NFTs), decen­tral­ized finance (DeFi) and the Meta­verse broke through to the main­stream and cul­mi­nat­ed in the cryp­to mar­ket peak­ing at over $3 tril­lion in Novem­ber of 2021. 

NFTs rede­fined arts and how they are acquired. DeFi rev­o­lu­tion­ized how we lend and bor­row. The Meta­verse birthed an alter­nate uni­verse that we could all live and work in vir­tu­al­ly. Play-to-earn (P2E) games paid gamers to do what they love. 

Decen­tral­ized autonomous orga­ni­za­tions, or DAOs, also had their moment to shine. 

One of the most out-of-the-blue cryp­to head­lines of 2021 is prob­a­bly Con­sti­tu­tion­DAO. A hur­ried­ly assem­bled group of Unit­ed States con­sti­tu­tion-lov­ing cryp­to believ­ers. The group raised more than $47 mil­lion in Ether (ETH) to pur­chase an orig­i­nal copy of the Unit­ed States con­sti­tu­tion at auc­tion. The group ulti­mate­ly fell short in its bid but the audac­i­ty of that endeav­or brought DAOs pow­er to crowd­fund to main­stream attention.

The inge­nu­ity of that move and what it near­ly accom­plished pro­vides a tem­plate for how tra­di­tion­al crowd­fund­ing could be bet­ter man­aged. Con­sti­tu­tion­DAO got tens of thou­sands of address­es to donate $47 mil­lion with­out a mar­ket­ing team or a ded­i­cat­ed growth director.

Beat that GoFundMe.

DAOs cur­rent­ly have over $10.5 bil­lion locked in dif­fer­ent trea­suries with over 1.7 mil­lion token hold­ers, accord­ing to data from Deep­DAO. But, what exact­ly are they?

DAOs are a sys­tem of hard-cod­ed rules that define which actions a decen­tral­ized orga­ni­za­tion will take. They are lead­er­less mem­ber-owned com­mu­ni­ties. A DAO is essen­tial­ly a co-op that gov­erns itself using votes tal­lied through blockchain tech­nol­o­gy. Smart con­tracts run the entire group. A native token is usu­al­ly devel­oped for a DAO and used by mem­bers to vote on proposals.

DAOs are next on the ladder of modern crowdfunding

Dig­i­tal crowd­fund­ing plat­forms like GoFundMe, Patre­on and Kick­starter have enjoyed mas­sive patron­age over the past 10 years. This growth can be attrib­uted pri­mar­i­ly to the nature of crowd­fund­ing which is set up with min­i­mal risk. This risk is spread across all con­trib­u­tors of a par­tic­u­lar idea or startup. 

Start-ups with finan­cial needs will find that get­ting fund­ing from tra­di­tion­al insti­tu­tions is no easy feat. These insti­tu­tions take on quite a lot of the risk involved in financ­ing busi­ness ideas that could end bad­ly. With a glob­al econ­o­my still reel­ing from the pan­dem­ic, the acces­si­bil­i­ty and much less bureau­crat­ic nature of DAOs as a tool for crowd­fund­ing have been a pri­mal fac­tor in its growth.

Dig­i­tal­ized crowd­fund­ing in the form of DAOs has elim­i­nat­ed some tra­di­tion­al lim­its of the financ­ing form. The sim­plic­i­ty makes it a dis­rup­tive force to tra­di­tion­al crowd­fund­ing methods.

Emmet Halm dropped out of Har­vard to found DAOHQ. DAOHQ bills itself as the first mar­ket­place for DAOs where users can find infor­ma­tion about any DAO. The start­up recent­ly secured over $1 mil­lion in fund­ing to devel­op the project. 

Halm told Coin­tele­graph that the cen­tral­iza­tion of tra­di­tion­al crowd­fund­ing sites like Gofundme will make DAOs a bet­ter alter­na­tive for investors. “I don’t think DAOs are going to replace crowd­fund­ing sites, I think they have replaced them already,” he said, adding, “If you look at the kind of polit­i­cal pres­sure that sites like GoFundMe get for cer­tain types of fundrais­ers, it makes them less attrac­tive for rais­ing funds.” 

Recent: Blockchain and cryp­to can be a boon for track­ing finan­cial crimes

Blockchain technology allows for more reach

One perk of blockchain tech­nol­o­gy is that it is cen­sor­ship-proof. This makes all appli­ca­tions built on blockchains cen­sor­ship-proof as well. This removes restric­tions that tra­di­tion­al crowd­fund­ing sites might oth­er­wise impose on indi­vid­u­als or busi­ness­es. In the Unit­ed States, busi­ness­es are not allowed to raise more than $5 mil­lion in a year from crowd­fund­ing websites. 

GoFundMe does not process pay­ments from Chi­na, Nige­ria, Rus­sia, Lebanon, Iran and a host of oth­er coun­tries. Nige­ria is Africa’s largest econ­o­my while Chi­na is the world’s sec­ond-largest econ­o­my, yet res­i­dents of both economies can’t access the largest crowd­fund­ing plat­form in the world. With blockchain tech­nol­o­gy, investors or donors from these coun­tries can eas­i­ly con­tribute to a DAO.

High flexibility and low regulation

The main goal of crowd­fund­ing, being to raise cap­i­tal to sup­port a cause, can be ham­pered by strin­gent reg­u­la­tions. These reg­u­la­tions seek to ensure that all per­sons involved in a project are indem­ni­fied of the risk involved in fund­ing a start-up. These mea­sures are main­ly coun­ter­pro­duc­tive to star­tups due to the unsta­ble nature of economies world­wide. New busi­ness poli­cies and eco­nom­ic sanc­tions arise every minute that might weigh down heav­i­ly on startups. 

DAOs are high­ly flex­i­ble and so far have min­i­mal reg­u­la­tions from author­i­ties. Every mem­ber that joins the DAO shares the risk among them­selves (depend­ing on their finan­cial con­tri­bu­tions) should the pur­pose of the DAO fail to mate­ri­al­ize. The mem­bers of the afore­men­tioned Con­sti­tu­tion­DAO who request­ed refunds received their mon­ey back, although gas fees were lost.

It’s feeless (mostly) and leaderless

Most crowd­fund­ing plat­forms are prof­it-seek­ing com­pa­nies in their own right. You do not raise funds on their plat­form for free. Using con­ven­tion­al crowd­fund­ing plat­forms expos­es you to fees that vary by plat­form and can be a frac­tion of what­ev­er amount you sub­mit for a project. With a mod­ern ecosys­tem and cryp­tocur­ren­cy pro­to­cols, you can send mon­ey across bor­ders with­out pay­ing neck-break­ing trans­ac­tion fees. 

DAOs also encour­age pub­lic par­tic­i­pa­tion in a project as it leaves all deci­sion-mak­ing process­es to be made by all par­tic­i­pants. This allows par­tic­i­pants to have a sense of note­wor­thi­ness and let them be in charge of mak­ing their own deci­sion based on pop­u­lar sup­port, or vot­ing with the DAO’s token in this.

Fur­ther­more, dif­fer­ent crowd­fund­ing plat­forms have restric­tions on the type of mar­ket­ing you can run to finance your cause. In Feb­ru­ary 2022, GoFundMe froze near­ly $8 mil­lion in an account ded­i­cat­ed to Cana­di­an truck­ers’ protests against COVID-19 vac­cine man­dates. With DAOs, such a restric­tion is vir­tu­al­ly impos­si­ble. No third par­ty sets the rule except the mem­bers of the DAO itself.

More work to be done

Crowd­fund­ing is a tool for soci­etal devel­op­ment, and DAOs are rais­ing the bar, gain­ing legit­i­ma­cy by the day and explor­ing dif­fer­ent pos­si­bil­i­ties and break­ing bound­aries. As cryp­to adop­tion con­tin­ues to grow, investors will look to explore hith­er­to unex­plored nich­es in the indus­try. DAOs are an inno­va­tion whose time has come.

The decen­tral­ized nature of crowd­fund­ing has made DAOs more pop­u­lar over the years. As of April 2022, there were over 6,000 DAOs with a val­u­a­tion of $10 bil­lion in liquidity.

How­ev­er, DAOs are far from per­fect. Deci­sions can often take sev­er­al rounds of dis­cus­sions before they are con­clud­ed. The anonymi­ty of mem­bers of a DAO plat­form also presents secu­ri­ty risks of its own.

Last year, investors poured near­ly $57 mil­lion worth of Ether into the dog-themed Olym­pus­DAO fork, Anu­bis­DAO, only for their funds to be rug-pulled.

Relat­ed: Investors rug-pulled after pour­ing $57M into dog-themed Olym­pus­DAO fork

The afore­men­tioned con­cerns have led some to ask: Are all DAOs going to make it?

With thou­sands of DAOs already in exis­tence and more launch­ing every day, many won­der when/if the DAO bub­ble will burst. For Emmet, the so-called “80–20” rule will come into play:

“I think DAOs are here to stay, but we may have an 80–20 sit­u­a­tion where 20% of the DAOs get 80% of the result, leav­ing the remain­ing 80% to fiz­zle out and maybe die.”