Another article about decentralized web technologies
Today I will be speaking about using digital assets , either via Ethereum contracts or colored coin protocol for equity crowdfunding
What is crowdfunding ?
Investopedia describe the crowdfunding as follows:
“Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.”
Read more: Crowdfunding Definition | Investopedia
Since the begening of this concept, there has been changes in laws in countries , like Us with the job act and Canada and many others.
It has manifested mostly on web platform and used strongly social media as a marketing conduit. You can see example on :
Kickstarter
https://www.kickstarter.com/
Indigogo
https://www.indiegogo.com/
Gotroo(Canada)
https://www.gotroo.com/en/
There are literally hundreds of them.
What is Equity Crowdfunding ?
Investopedia describe Equity Crowdfunding as follows:
“Equity crowdfunding refers to raising money from small public investors (who collectively form the "crowd") primarily through online forums and social media. In exchange for relatively small amounts of cash, investors get a proportionate slice of equity in a business venture. In the past, business owners raised such funds by borrowing from friends and family, applying for a bank loan, appealing to angel investors, or by going to a private equity or venture capital firm.”
Read more: Invest through Equity Crowdfunding: Risks and Rewards (FB) | Investopedia
There is much less equity crowdfunding platform out there. It is a little more complicated. It is more or less a high risk investment. The investor act less for emotions and more to gain a profit.
That changes everything.
In the perspective of a user, investing money implies a reward. A risk also, but the main end goal is not to see Julie’s Store opening and gain valorisation from that fact. It is purely as investor, in a crowd sourced fashion. It is a way to gain direct access to the companies you finance as opposed as to give money into investment funds. It gives a thrill that is different from classical invesments and enable olwer class peoples to invest modest ums of monet thus democratizing the process.
Still the kind of platform that will attract middle and lower class investors needs to have a fairly easy access and user-friendly UX and approach. The regulations make that very difficult.
This is a challenge for all those who are now doing or planniing to do such products.
What is a digital asset again ?
A digital asset is a numeric “dematerialized” asset that represent the ‘proof of stake’ or or in something.
Wikipedia has a good definition:
https://en.wikipedia.org/wiki/Digital_asset
The asset can represent almost anything material, virtual, written , ideas, reputation and any kind of redeemable contract . ( ex: gift cards, loyalty points, free coffee) . It can also be your digital ticket for a show ect..
They have the serious environmental, and logistical advantages over their paper counterpart. Would it be from copyrigths to oil barrels. From free beer in a bar to Air Miles.
Not all digital asset are based on blockchain technologies. As a matter of fact it would be the the exception.
Why use Ethereum ?
Ethereum smart contracts are very different fomr the bitcoin blockchain in the fact that they are ‘Turing Complete”. That means that they can store informations. They got memory.
The Bitcoin protocol and a few other have a small scripting language with which one can do simple things. They elaves instructions that will be compiled in a transaction procedure.
Ethereum blockchain on the other hand, will have theses ‘contracts” which are code that will be complied in a virtual environment (more or less like java virtual machine) . They have developped their own scriptiing language Solidity, and this permit, combined with memory , to handle complex conditional tasks.
This come with a price thougth.
The ethreum contracts “lives” in a virtual world. Completly disconnected from the reality. The only way for a contract to perceive the wolrd is with data.
Data is sent from something. So what is true or what is false data for the contract? It is the data that was linked to it. This gets us to the trust factor. Any data on which rely a contract MUST be trusted.
They are called ‘Oracles”.
An oracle is a security risk. You can trust a source until the day you can’t. I do not doubt that many geniuses are currently trying to design a cleaver way to mitigate the trust factor in data (mostly big data). Thus oracles would not have to rely on specific ‘trusted’ data sets but on a more statistical or predictive approach.
In the case of equity crowdfunding, Ethereum can be a valid choice, because it can handle the complex bussiness logic needed to respect regulations.
Why use colored coins ?
Colored coin is another approach at representing the digital assets. The idea is to use a small portion of a bitcoin, in which there is a small data field which can be written upon a small amount of data. (80 arbitrary bytes) it is called the OP_RETURN field.
Most the of use case for digital assets does not need that much text. Proof of stakes would need a timestamp the transaction signatures fields and a small text snippet describing what the stake is.
And combining this with the multi signatures appraoch, which implies that a transaction migth need to have more than on signatures of a certain types to be valid. (making up for voting system and such)
In the case of equity crowfunding, colored coin are a valid apprach. They are a “proof of stake” type of use case that must follow precise regulations.
Is there an existing platform like that ?
There is no equity crowdfunding (That I could find !) platform that currently uses full digital assets to issues and transfer equities. Regulations makes up for the most challenging part, in Canada anyway.
I am pretty convinced that their will be very soon at least one that will try to benefit from the blockchain technology to integrate transparency and mutual trust in the case of equity. More so with crowdfunding, which involves a lots more ‘investors” than a usual VC/Angel/Public approach.
Well this make it for this chapter. I was terribly busy at work this is why this came so late. I will try to get more time to write !
Sources:
https://bitcoinfoundation.org/core-development-update-5/
https://en.wikipedia.org/wiki/Digital_asset
http://bitcoin.stackexchange.com/questions/29554/explanation-of-what-an-op-return-transaction-looks-like
http://crowdfund.co/digital-currency/