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Blockchain as a chance for startups

26 September 2017 21:00, UTC
Margareth Nail

Experts in the field of blockchain technologies are sure that distributed registers will give impetus to development of crowdfunding and crowdinvesting. ICO (initial coin offering) as one of the variants of crowdinvesting has already given the right to live for many projects. Their development without ICO would be difficult, and in some cases impossible.

Use of blockchain technology in the process of raising funds for the implementation of projects and the emergence of ICO made a splash in the investment market. Start-ups began to get financial support in a matter of minutes. For example, the Brave project attracted $35 million for a record 24 seconds, the Aragon project managed to raise $25 million in 15 minutes, the TokenCard project collected $16.7 million for half an hour.

It should be mentioned that the size of the funds raised through ICO exceeded the amount of venture investments several times. So, the latter by the results of 2016 amounted only to $165.2 million (according to the report of PwC and RVC), whereas $1.6 billion were attracted in just a few months of 2017 (according to Chainalysis service).

"We believe that the investment market faces a real revolution today," says Eduard Lanchev, CEO and founder of FUNDERY. "ICO, ITO – initial coin or token offering, this is in fact crowdfunding measured in cryptocurrency. No matter how hard the regulators of the financial markets try to control these processes by creating some protective rules, the main changes have already occurred. The market has relatively inexpensive tools to attract investments. And it is here to stay."

Some experts believe that blockchain will help crowdfunding to restore its reputation. Alexander Borodich, the creator of the Universa platform, a business angel and a serial entrepreneur, noted that crowdfunding, as a method of attracting investments, has recently tarnished its reputation a bit. Firstly, because of the numerous failures, when people invested their money in the development and production of some unique commodity, and as a result were left without receiving neither the product nor their funds back. Secondly, some large companies tend to use crowdfunding platforms as a tool of carrying out their marketing programs.

"Blockchain has the same tool as a smart contract does," the expert notes. “In fact, this is a contract between two parties, only electronic and very well protected by blockchain technologies (it's impossible to fake, for example). If you include this tool in crowdfunding, as it is now done with a another type of fundraising – Initial Coin Offering, then the service is either provided, or not, and if not, investors will get back their invested money. You should agree that it is much more profitable to invest when there are guarantees."

However, blockchain technology alone is not enough for development, a number of important issues are still to be solved. First, it is necessary to improve the processes of interaction between the participants of the platform.

"The evolution of blockchain technologies can well contribute to the development of crowdfunding. However, as in other tasks, direct contracts (when a regulator, for example, Kickstarter, does not participate in crowdfunding campaign) require careful development of feedback – from the real external world to blockchain (whether a contract is executed or not, agreements are implemented, etc.)," said Alexander Azarov, Senior Vice President of Engineering in WaveAccess.

In addition, it is necessary to develop the legal side of the interaction between the parties. For this purpose, changes in legislation, recognition of ICO, crypto-currencies, etc. are important.

Secondly, fraud is one of the deterrents to the development of ICO. According to the American company Chainalysis, because of scammers investors lost $225 million when buying tokens, which is 10% of the volume placed within the ICO.

Despite the positive views of blockchain-based projects developers, the representatives of the crowdfunding sphere are more skeptical. For example, Julian Lazovsky, deputy chairman at the board of directors of the mutual lending platform "City of Money", believes that development of blockchain alone is unlikely to help crowdfunding, since it will have little effect on the existing mechanisms.

"Thanks to blockchain, potentially there can be only a secondary market of crowdinvesting liabilities. However it may take a lot of time, since it is necessary not only to develop blockchain decisions but what is more important – a significant update of the legal system that will give such cryptotokens a legal status. At the same time, it is clear that the beneficiaries of the existing exchange systems of liabilities are exchanges, brokers and financial market regulators who will struggle with the blockchain alternative till the very end," the expert said.

With the development of blockchain technology, as well as the adoption of new mechanisms for interaction of economic agents at the public and state level, the ICO can take its niche as a tool to raise funds for projects that can not count on other support. In addition, use of blockchain in crowdfunding can improve charity activities. Thanks to new technologies, funds, for example, aimed at the treatment of sick children, will be collected within minutes, that would save many lives. In addition, distributed data will help prevent fraud in the sphere of charity.