Digital Fundraising with Smart Contracts

Smart contracts are used in crowdfunding and similar financing projects to raise funds . Thanks to the features such as self-execution and immutability of smart contracts, it is possible to automate the fundraising process and to manage the processes between the investor and the project owners more quickly and efficiently. In addition, smart contracts enable the fundraising process to be carried out in a peer-to-peer and transparent manner , without the need for intermediaries.

What is an ICO? The technology that is revolutionising corporate finance

First, let’s talk about crowdfunding, which is a funding source with different models. Crowdfunding is a method of obtaining financing that supports creativity, innovation, and entrepreneurship. Crowdfunding, which aims to provide financial resources to entrepreneurs with business ideas for the production of technological products and services with high added value and competitive power, has gained even more importance with the rapid development of technology. This investment system allows entrepreneurs to find financial resources from all over the world. In addition, while shortening the investor search time, it also offers the opportunity to test the potential of the project in the market before going live and to develop the business model if necessary. The first crowdfunding application in Turkey was realised in 2010 with the platform called Crowdfunding, still in development.

Decentralised Finance: What is its role on the road to financial liberation?

ICO (Initial Coin Offering) and STO (Security Token Offering) processes, which enable fundraising with smart contracts on the blockchain, are also compared to crowdfunding. However, it should be noted that they have some features that are different from crowdfunding projects.

How to Perform Initial Coin Offering?

ICOs realised through smart contracts after the Ethereum blockchain were used to fund blockchain-based projects. Especially between 2015-2018, ICOs became the most preferred method for financing blockchain-based projects.

ICO is a crowdfunding method using crypto assets (cryptocurrency and tokens) and blockchain technology. Especially start-up companies can meet their funding needs without the need for intermediaries for a project, business model or business idea.

Here’s how the system works: First, an entrepreneurial whitepaperIt prepares a prospectus, describes the project in detail, mentions its purpose, determines the amount of funds needed, sets out the duration of the campaign, and includes explanations regarding the nature of the tokens to be issued. The project owner also sets an address for where the funds will be collected. When an investor sends crypto assets to the entrepreneur, the smart contract automatically issues tokens to investors’ crypto wallets in exchange for their investments in crypto assets. These tokens are usually utility tokens , and in this context they usually represent a share in a company, a right to access a service, a real-world asset, a right to use a product or service.

If the value of the token held by the investors increases with the realisation of the products and services envisaged in the funded project, the investor will profit from it. If the required financing is not obtained within the time specified in the whitepaper, the investors are refunded their contributions.

Faster, more efficient and without banks: ICOs as decentralised corporate finance?

Risks of ICOs for Investors

Although it was quite easy to start the process when ICOs started to become widespread, there were uncertainties all over the world in terms of regulation. There have been ICO projects that have been very successful and have made huge profits. However, some irregularities and scams have occurred, such as promising projects that will not be implemented, by misleading investors.

There was a similar environment in Europe. In 2018, the Capital Markets Board (CMB) issued an announcement and warned investors, stating that ICO practices fall outside the CMB’s regulation and oversight area. In this announcement, it was also mentioned that ICOs are very high risk and speculative investments. It was also pointed out that there may be excessive volatility in the values ​​of the tokens purchased by the investors and that the financing collected by the project owners may not be used for the stated purposes. The CMB also highlighted the risk that projects will fail and all investments will be lost, as the majority of projects funded through ICOs are early-stage projects.

The spread of ICOs has led to grievances all over the world and has created some legal problems. The necessity of researching the project and its developers well has been demonstrated. In the face of difficulties in controlling ICOs by regulatory authorities, STOs (Security Token Offering), which are safer for both investors and the market, have started to become widespread.


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