A blockchain-based replacement for traditional crowdfunding

The crypto space witnessed phenomenal growth in 2021. Buzzwords like non-fungible tokens (NFTs), decentralized finance (DeFi), and the metaverse broke through to the mainstream, culminating in the crypto market that peaked at over $3 trillion in November 2021.

NFTs have redefined art and how it is acquired. DeFi has revolutionized the way we lend and borrow. The Metaverse spawned an alternate universe in which we could all live and work virtually. Play-to-earn (P2E) games pay players to do what they love.

Decentralized Autonomous Organizations or DAOs also had their chance to shine.

One of the most surprising crypto headlines of 2021 is probably ConstitutionDAO. A hastily assembled group of crypto believers who love the United States Constitution. The group raised more than $47 million in ether (ETH) to buy an original copy of the United States Constitution at auction. The group ultimately fell through with their bid, but the audacity of the venture brought DAO’s crowdfunding power to mainstream attention.

The ingenuity of this move, and what it has nearly achieved, provides a blueprint for how traditional crowdfunding could be better managed. ConstitutionDAO received tens of thousands of addresses to donate $47 million without a marketing team or a dedicated growth director.

Hit the GoFundMe.

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

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

DAOs are next up the ladder of modern day crowdfunding

Digital crowdfunding platforms like GoFundMe, Patreon, and Kickstarter have enjoyed massive patronage over the past 10 years. This growth is largely due to the type of crowdfunding that is set up with minimal risk. This risk is shared among all contributors to a given idea or startup.

Startups in need of funding will find that obtaining funding from traditional institutions is not an easy task. These institutions assume much of the risk associated with funding business ideas that can end badly. With the global economy still suffering from the pandemic, the accessibility and much less bureaucratic nature of DAOs as a crowdfunding tool has been a key factor in their growth.

Digitized crowdfunding in the form of DAOs has removed some traditional funding form limitations. The simplicity makes it a disruptive force for traditional crowdfunding methods.

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

Halm told Cointelegraph that centralizing 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’ve already replaced them,” he said, adding, “If you look at the political pressure that sites like GoFundMe get for certain types of fundraisers, it is it makes them less attractive for fundraising.”

Recently: Blockchain and crypto can be a boon for prosecuting financial crimes

Blockchain technology enables greater reach

An advantage of blockchain technology is that it is censorship-proof. This also makes all blockchain-based applications censorship-proof. This removes limitations that traditional crowdfunding sites might otherwise impose on individuals or businesses. In the United States, companies are not allowed to raise more than $5 million per year through crowdfunding websites.

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

High flexibility and little regulation

Crowdfunding’s primary goal of raising capital to support a good cause can be hampered by strict regulations. These regulations are intended to ensure that all persons involved in a project are exempt from the risk of start-up financing. These measures are mainly counterproductive for startups due to the unstable nature of economies worldwide. New business policies and economic sanctions emerge every minute that could weigh heavily on startups.

DAOs are very flexible and have so far had minimal regulatory requirements. Each member joining the DAO shares the risk among themselves (depending on their financial contributions) in case the purpose of the DAO is missed. The members of the above ConstitutionDAO who requested refunds got their money back, although the gas fees were lost.

The first page of the United States Constitution.

It’s (mostly) toll-free and leaderless

Most crowdfunding platforms are for-profit businesses themselves. They do not collect free funds on their platform. Using traditional crowdfunding platforms exposes you to fees that vary by platform and can be a fraction of the amount you submit to a project. With a modern ecosystem and cryptocurrency protocols, you can send money across borders without paying breakneck transaction fees.

DAOs also encourage public participation in a project, as all decision-making processes are left up to all stakeholders. This gives participants a sense of notability and lets them make their own decision based on popular support or vote with the DAO’s token.

Additionally, various crowdfunding platforms have limitations on the type of marketing you can do to fund 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 practically impossible. Apart from the members of the DAO themselves, no third party sets the rules.

There is still more work to be done

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

The decentralized nature of crowdfunding has made DAOs increasingly 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 discussion before they are finalized. The anonymity of members of a DAO platform also has its own security risks.

Last year, investors poured nearly $57 million worth of ether into the dog-themed OlympusDAO fork, AnubisDAO, only to have their funds dragged onto the carpet.

AnubisDAO was named after the jackal-headed god of the ancient Egyptian pantheon.

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

The above concerns have led some to ask: Will all DAOs make it?

With thousands of DAOs already out there and more coming out every day, many are wondering when/if the DAO bubble will burst. For Emmet, the so-called “80-20” rule comes into play:

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