Crowdfunding has existed for centuries as an alternative form of traditional finance. In the old days, it was used as war bonds or to finance books through subscription models, where the authors would only write a book if a certain number of people subscribed to read it. However, the term crowdfunding only gained popularity at the turn of the century through the use of the internet. Firstly, financing projects in the music and art industries and then gaining momentum when the first ever online crowdfunding platforms started to emerge. Platforms like Kickstarter and Kiva continued to grow and were partly responsible for the estimated $34 billion dollars that were raised in 2015. However, it seems that blockchain and smart contract technology are the future of crowdfunding, especially if we talk about ICOs and how they revolutionized equity-based crowdfunding.
The first Initial Coin Offering (ICO) was Mastercoin, now know as Omni, and took place in 2013. After bitcoin’s success, blockchain and distributed ledger technologies started being used as more than just digital currencies (Crypto 2.0). Issuing digital tokens and using cryptocurrencies to fund startups started to become popular and, after receiving the necessary funding for the project in 2014 (over $18 million), the Ethereum blockchain was born in mid 2015. Introducing smart contract technology, Ethereum paved the way for a new type of organization, Decentralized Autonomous Organizations (DAO) is a new type of organization that is ruled by computer code instead of people. Ethereum is the current leading blockchain platform for ICOs, having more than 50% of the market, and is greatly responsible for a large part of the exponential growth of the ICO market, a market that grew from an estimated $106 million in 2016 to more than $1.13 billion in just the first half of this year.
Although it has been a nice ride for the majority of investors, it has also been a bumpy one. Mistakes, scams, and hacks are still a living reality in the ICO scene. In 2016, the Ethereum blockchain suffered a hard fork, dividing the currency into two, after the biggest hack of ICO history. The DAO project, designed to be the first decentralized venture capital fund, received an astounding $150 million in funding and hackers were able to get away with one third of the DAO’s funds after exploiting a vulnerability in the code. Another, more recent problem, has been legislation. China released a recent statement banning ICOs and the US Securities and Exchange Commission (SEC).have stated their plans to start regulating ICOs as securities. As we observe the market mature from this initial stage and continue to expand we can expect to see a few more bumps on the way on the way to the moon.