By Luis Otavio Ribeiro from Catarse, largest crowdfunding platform in Brazil. Original piece in Portuguese
Since we launched Catarse in 2011, I have pondered a question: what will be the next innovation in crowdfunding?
Clearly, crowdfunding or a collective piggybank, if you prefer, always existed and always will exist; but some innovations have been fundamental to the expansion of the model as we know it today, and that’s what I would like to explore.
The first innovation was the creation of rewards. This mechanism – that today is central to our engagement on live crowdfunding campaigns – was the turning point for going beyond philanthropic and personal-use only campaigns, and made crowdfunding viable for many different facets of civil society.
The all-or-nothing model, in which the money is only passed to project creators when the project reaches its established funding goal, was developed by Kickstarter and is considered the second innovation in crowdfunding. This model allowed projects to reach goals that far exceeded expectations, precisely because it generates a sense of urgency and creates a mechanism that communicates to supporters that the project may not come to fruition if they don’t get involved. This enhances the incentive for sharing on social media and creates a sense of mobilization around the project, which in turn creates a better ability to capture resources.
The third innovation was crowd investment in exchange for equity shares, known globally as equity crowdfunding. This mechanism opens the doors for early-stage businesses that have difficulty accessing capital through traditional methods, giving them access to networks of investors who are interested in diversifying their portfolios and being participants in the early growth of the business; this provides the required capital for entrepreneurs to prove the viability of their business.
Today, we are seeing the fourth innovation in issuance and sale of (crowd) tokens. This model of crowdfunding creates an incredible potential for funding big, global projects. Projects launched as tokens have exploded since 2016, topping the list of the most funded crowdfunding campaigns in the world. This mechanism opens the doors for a new way of incubating and launching ideas.
But … what are tokens?
The first step is to define what tokens are:
The original token was Bitcoin – a p2p transaction protocol – that can transfer value between two people in a decentralized manner, serving as a method of payment for products/services and opening the doors to the issuance of new coins as a reward for miners. It is important to note that all of this is registered in a public database, distributed and immutable, the blockchain.
Since the inception of Bitcoin, several other tokens have arrived. The majority of these early-stage tokens (ie. altcoins) were the product of small modifications to the bitcoin blockchain (ie. forks) and the creation of their own blockchains: Dash, Litecoin and Dogecoin, are a few examples. These alternative tokens maintain their utility in the same way as bitcoin, being used for transactions between users, and the issuance of new tokens for community members who secure or enhance the network.
In 2014, a project called Ethererum arrived and changed the game. Essentially, it issued its own native tokens Ether (ETH). They raised more than 30,000 bitcoin, which at the time was more than $18mn dollars US, becoming the biggest crowdfunding campaign at the time.
With this money in hand, they created their own turing-complete blockchain, creating entirely new opportunities for developing new apps (ie. Dapps or decentralized apps) and the creation of a global computer or ‘the world computer.’
Ethereum enables the creation of a new economy via its computational power. The power to verify transactions is one of the network’s principal assets, permitting anyone to create and launch applications in their database as long as they pay a quantity in their native token in order to avoid the indiscriminate use of the virtual machine.
With Ethereum, the issuance and sale of tokens to finance initiatives in an ecosystem became common practice in the blockchain world, enabling projects to raise money from their own users and interested investors around the world.
How Does the Issuance and Sale of Tokens Work?
This new method to capture funds, via the issuance and sale of tokens, is known as a crowdsale or ICO – Initial Coin Offering.
This model functions similarly to a crowdfunding campaign on platforms like Catarse or Kickstarter, as part of the tokens are reserved for the founding team and other involved parties, and the rest is open for anyone who contributes, receiving tokens in return.
With these tokens in hand, supporters can use them, exchange them or equally sell them, as they are transferable assets that can be used for exchange of products or services in the future.
It’s easy to imagine tokens that represent: loyalty points, items in online games, event tickets, insurance contracts, cloud storage space and even promises to receive physical rewards from crowdfunding campaigns.
With core elements of the equity model and to some extents the rewards model, there are some clear benefits from raising funds through ICO:
- Utility: the value of the tokens are derived from the utility of the tokens inside that community, a unit of value within the business model. In this way, contrary to equity, the tokens have an intrinsic value to the business and many times these are required just to use platform. As an example, payment of ETHER is required to access the computational power of Ethereum
- Liquitidy: tokens are bought and sold on various exchanges online, as millions of investors analyze the market for opportunities and provide demand for community members/founder who own part of the supply. This is a key benefit to companies who finance on equity crowdfunding platforms and have difficulty finding an exit strategy for investors
- Access to Global Resources: to be in a specific country doesn’t restrict access to capital, since anyone around the world can contribute to the initiative
- Construction of Community and Alignment of Incentives: by issuing tokens for a determined product, the community can engage and become an owner of a given platform or protocol. With this, we see an alignment in interests between the growth and sustainability of the application
- Democratize the Investment: the average investor will find it difficult to invest in Facebook, Airbnb, or Twitter when they are starting out, or similarly, in filmmakers, musicians and artists that are in the initial phases of their career. With new projects issuing tokens, it makes it much easier for anyone to have a small piece of shares in exciting companies, and participate actively in their results
To make the new global token economy more tangible, here are a few examples to illustrate:
In order remunerate users of this browser, as well as reward content creators, they have developed a token that aligns to users actions and provides a fertile environment for monetizing internet attention.
The ICO for BAT broke all records, raising $35mn US in only 24 seconds!
Despite not having done an ICO for their token, this example is relevant simply to show a new path for social media.
Steemit is a forum similar to Reddit, based on its own blockchain, that permits all participants to receive rewards (in the form of tokens) for collaboration in the community, be it through posting, comments, curating content or sharing posts.
These tokens represent a new way for creators of content to get paid, as the money does not stay concentrated as it does on Facebook, Twitter or Reddit, which end up capturing the lion’s share of profit generated on their social platforms.
This is the name of the first film launched as a crowdsale on the Ethereum blockchain.
The film, whose trailer can be viewed below, intends to raise $1.7mn US through token issuance to its supporters.
This token serves almost as a loan to the creators of the film, which will repay the amount raised plus a 15% interest rate. Beyond this, more than 30% of the profits related to the distribution of the film will be distributed to the token-holders.
“What really got me married to the cause was seeing the status quo of Hollywood production studios just holding on to the same stories, holding on to the same formulas because they know it works. Meanwhile, independent filmmakers are struggling to get funds because all they can really use is Indiegogo and Kickstarter but they’re a donation, it’s like charity. I wouldn’t invest into one of those movies because it could go on to make millions [of dollars] and I wouldn’t see a return.
I’m a woman. Most directors are men. There’s like seven or nine percent of directors out there who are female. We are raising money in this new, obscure way. The story [of our film] is unusual, it’s diverse and it’s controversial. It’s like we are the ultimate underdogs but we’re doing it.” – Mitzi Peirone is the writer/director of Braid, interview on Huff Post
This Latin expression sums it up: buyer beware!
Caution is extremely necessary right now, we are living in a market still experimentation mode, one that opens numerous possibilities for fraud and scams.
It is fundamental, as supporters of these projects and organizations, that we do our homework and understand in-depth what each business issuing tokens is doing. In addition to understanding how the tokens function in the operations of the business, we need to see how the token creates value as the surrounding community itself thrives.
Furthermore, the focus today should be investing in specialized technologies that are well-documented, ones that have a strong community of developers and a base community of users/clients that are passionate in seeing the initiative evolve.
In terms of regulation, we are still in a grey zone, but there are legal frameworks (SAFT, Howey Test for tokens, CODE) for these new assets, reinforcing the speculative nature of the current environment and the joint construction of the ecosystem between creators and investors.