Disrupting and democratizing: blockchain deployment in equity crowdfunding. Notes from a Master Dissertation on the technology shaping the 4th industrial revolution.
The writer of this article is the author of the Master Dissertation – The Evolution of Equity Crowdfunding Through Blockchain Technology: The Bloomio case – for the Master’s Degree Program at the University ‘Ca Foscari of Venice. For additional info, click here.
The evolution of our society naturally led to the creation of centralized structures for power and information. Databases, however, are a clear example of how this centralized system creates vulnerability. By centralizing information, we actually are creating a singular point of failure, while also limiting the democratization of processes.
In a society where information and data is power, databases have allowed data holders to become extremely influential and dominant, limiting the power of those from whom information comes: the user population.
There is also a countertrend occurring in technology that is simultaneously evolving the very concept of a database, with the promise of decentralizing activities and information. This trend is called Blockchain. Blockchain technology has been mostly associated with the cryptocurrency Bitcoin, but its potential goes far beyond the simple support of a digital currency.
In my thesis, I decided to study the Blockchain phenomenon and its applications — not only to understand the economic consequences of its use, but also to analyze its social, democratic, and user-empowering effects. I decided to focus mainly on one of the possible applications of the technology, in the rapidly growing industry of equity crowdfunding.
I had the privilege to work with the innovative company Bloomio in my mission of understanding the structure of the ecosystem and its dynamics. Thanks to them, I was able to construct my thesis and draw valuable conclusions on the benefits, as well as the drawbacks of working in such an environment.
My work analyzed the state of the art traditional equity crowdfunding internet platforms, together with the emerging phenomenon of Initial Coin Offerings (ICOs,) and the related legal and economic definition of “tokens.” My study brought to light the two systems’ main characteristics and inefficiencies.
Traditional equity crowdfunding platforms are primarily characterized by the presence of multiple intermediaries, between which there is an asymmetry of information; this means that data is not shared with all the people involved. Rather, only few key players hold critical information. This creates an imbalance of power that may lead to issues like principle-agent problems, adverse selection, and moral hazard. Moreover, there are no investors’ rights enforcement mechanisms, nor is there a secondary market for investments, which may lead to a liquidity risk.
ICOs on the other hand brought a wave of innovation in the funding environment. The first new tool is the introduction of Blockchain technology that decentralizes information storage, making the system more secure, transparent, and democratic. Together with Blockchain, ICOs use the “smart contract” concept, which codifies the legal relationship between funder and fundraiser.
ICOs also use “tokens” and their integrated right enforcement mechanisms, thus protecting a holder’s property and interests. Finally, ICOs potentially allow the creation of a digital secondary market for investments, where funders can interact and exchange their investment tokens. These characteristics allow ICOs to create a safer investment environment — significantly reducing the number of intermediaries and introducing a higher level of investment protection for investors, before and after the financial transactions.
This is not to say that this environment does not have its own intrinsic inefficiencies. For example, there is a lack of guidance for investors — specifically, those unable to perform a decent and thorough due diligence — and exposes them to a high risk of fraud. Furthermore, the simplicity and the speed with which transactions go through can lead to a volatile market for tokens, creating a rather unstable investment environment.
Through my thesis, I theoretically demonstrated how the creation of a hybrid structure that puts together the strengths of the two aforementioned systems has the capability of compensating for the reciprocal inefficiencies. I argue that by using the two systems to complement each other, it is possible to create a Blockchain-based crowdfunding environment that has the potential to disrupt not only the financial and funding scene as we know it, but also the concept of database, privacy, and democratization of information and business activities.
To support my thesis, I analyzed Bloomio, which is an excellent example of an equity crowdfunding environment, that uses blockchain technology to create a safer, easier and more transparent structure.
The system combines the advantages of ICOs, but also introduces one single intermediary who plays the role of guarantor for all the projects published on its platform. The platform gives the necessary guidance to the actors involved and performs a deep due diligence of the investment projects before presenting them to the public. This system also allows for the exchange of investment tokens on a (for now, closed) internal market.
The risk of fraud is heavily reduced, making actors feel more at ease in using such a platform. Furthermore, all transactions, bank accounts, relationships, contracts, and activities are all stored on the Blockchain.
Given the different characteristics of Bloomio that have been outlined, the case study has proven possible the combination of the two environments of equity crowdfunding and Blockchain-based tokenization of equity and ICOs.
Blockchain does not necessarily mean Bitcoins. The application of the technology has the potential to change many industries.
The new cryptocurrencies we see emerging every day should also be looked at beyond their application as currencies as they might have bigger projects behind them; that is to say, the value of those tokens may go beyond their price.
Blockchain technology is one of the most interesting technologies in this fourth industrial revolution
and it might be the one that makes databases obsolete. The tokenization of equity and rights is slowly revolutionizing the financial and the financing industries; but even more so, it is aiming at creating a more balanced environment where transparency and security rule
The tokenization of equity and rights is slowly revolutionizing the financial and the financing industries; but even more so, it is aiming at creating a more balanced environment where transparency and security rule.