Credit: Igor Samoilik/Shutterstock

As a new model of internet financing, crowdfunding was once considered an effective approach to achieve financial inclusion, unlocking immense space for the imagination of our financial development. The global internet crowdfunding started in 2001 and subsequently enjoyed explosive growth. According to the statistics by Massolution and iResearch Consulting Group, the global internet crowdfunding maintained a growth rate of more than 75% from 2010 to 2016. However, the boom didn't last long. Plagued by the downward performance of the overall financial industry, the crowdfunding industry could not overcome a multitude of its own defects and has experienced a slowdown in recent years.

Crowdfunding platforms with the death rate as high as 70%

According to data supplied by a domestic research institute, in the first half of 2018, 854 crowdfunding platforms in the crowdfunding industry went online in total nationally, among which, 251 are still operating normally while 603 have either gone offline or gone through business transitions, accounting for 70% of the total crowdfunding platforms.

Why on earth did the fortune of the crowdfunding industry nosedive so much, from an industry that aroused great popular expectations to one suffering a whopping 70% failure rate? We need to start from the industry itself.

Centralized management systems mean that crowdfunding platforms usually lack self-verifiability.

According to the 2018 data by the institute, in the first half of 2018, there were 75 rewards-based crowdfunding platforms nationally including JD Crowdfunding, Taobao Crowdfunding, Xiaomi Crowdfunding and Suning Crowdfunding. In the first half of 2018, there were 12,171 crowdfunding projects in total, among which, 7,169 succeeded, a success rate lower than 60%. Even if a project was successful, the final returns for the investors were not necessarily satisfactory. In a research by the world's largest rewards-based crowdfunding website Kickstarter, Prof. Ethan R. Mollick of Wharton found that as many as 85% of all the projects delayed payments (commonly referred to as "bounced checks") and 14% of all the projects didn't deliver what they had promised after their success.

Crowdfunded products are commonly "high and new" tech products, which means the products' design, production and supply chain management are highly uncertain that bounced checks and failures are not small probability events. In fact, supporters usually hold tolerant attitudes towards justifiably bounced checks but are highly intolerant of malicious frauds.

However, malicious frauds have occurred repeatedly. In October 2017, a report by the Beijing Youth Daily's official account 'Caijing' revealed that at least 1,000 projects on JD Crowdfunding platform were suspected of click farm frauds, including many star projects. According to the report, a gang was providing click farm service for more than 1,100 JD crowdfunding businesses. Among these projects, many were star projects. Some of the projects that were involved in the click farm scandal had connections with senior management of JD. Although JD responded, denying the report categorically as a “total fabrication”, investors could not suppress their doubts.

Decentralized crowdfunding platforms

Technologies based on blockchain play two roles in the crowdfunding model.

The first one is disintermediation. Traditional crowdfunding platforms actually play the role of intermediaries who introduce fundraisers to investors. The platforms only act to guarantee the overall project justifiability of the projects initiated by the fundraisers, but do not enforce the fundraisers to fulfill their responsibilities. Needless to say, it is expensive to use these platforms: 10% on average. However, the crowdfunding model based on blockchain technologies will highly compress or even eradicate intermediaries and corresponding channel costs. Operational teams can raise funds through issuing tokens and thus lower the intermediary costs to the minimum.

The second is decentralization. Traditional crowdfunding platforms find it hard to defend themselves when facing accusations of collusion with crowdfunding projects, which is the result of their centralized organizational structures. The crowdfunding projects based on blockchain technologies will open up the rights of verification, voting and decision making all to communities and decisions on projects will be made in the form of voting, consequently significantly increasing transparency and lowering corruption risks in the traditional model.

Pledgecamp has built a decentralized crowdfunding system based on blockchain. Fundraisers using crowdfunding need to demonstrate their route planning and landmarks in the Pledgecamp community when initiating the fundraising projects and the community will vote to decide whether the project will be approved. The verification process is jointly carried out by community users and potential investors. After the crowdfunding projects succeed, the fundraisers will not get all the raised funds directly but have to publish their weekly and monthly reports in the community and unlock the funds raised depending on certain milestones being reached. In this process, all community users are able to initiate voting to stop projects. Funds held in escrow will be locked in smart contracts and will only be released after the projects have made certain progress. As soon as a project is terminated, the remaining fund will be paid to the supporters as crowdfunding insurance.

ChainDD App arranged an exclusive interview of Jae Choi, CEO of the blockchain crowdfunding platform Pledgecamp. He expressed his opinion that transparency brought about by blockchain technologies will be the key to get the crowdfunding model out of its predicament. Pledgecamp is a crowdfunding platform based on blockchain and was established in January 2018 whose investors include many well-known enterprises and capitals, such as Randi Zuckerberg, sister of Mark Zuckerberg.

The crowdfunding model is one of the best approaches for micro and small businesses and even ordinary people with dreams to make their dreams come true. Although it is not yet perfect, it has huge value. Just like what Randi Zucerkberg said in the foreword of the white paper of Pledgecamp, "When I can support a project like Pledgecamp that is going to give millions of entrepreneurs a new opportunity to raise funding in a new way, for me, that is the vision."

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This article was written by the ChainDD team and edited by the TMTPOST team.  

Follow us on Twitter @tmtpostenglish, Medium @TMTPOST and Facebook @TMTPOST.

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