Crowdfunding : Blockchain-Based System Proposal

A crowdfunding website based on blockchain can be designed to provide entrepreneurs with an easy-to-use interface to create and publish their ideas on this platform. These ideas become public, and anyone interested in supporting them can contribute. All these processes are carried out interactively.

In the current system, companies charge heavy fees to donors, and users need help. Lack of transparency in financial records, the inability to track communication between investors and project developers, and the absence of donor protection policies raise trust issues in existing crowdfunding companies.

-        Lack of Transparency

-        High Fees

-        Lack of Donor Protection Policy

-        Inability to Track Records

Figure 1 : Blockchain-Based Crowdfunding Framework - Source: Author's own work

In the proposed system, campaign creators submit their projects to the platform, and interested individuals donate funds to the project idea. Unlike traditional crowdfunding, all funds are now in digital currencies like ether. All ethers are recorded and tracked on the blockchain. The blockchain serves as an immutable ledger. Donors have control over the funded share. The donor controls the deposited funds through the approval request module. Only one investor's approval is required to approve the creator's request. Establishing control over the deposited funds builds trust.

-        Trust

-        Control Over Funds

-        No Fees

-        Donor Protection Policy

-        All Transactions Recorded

-        Funds Securely Stored

1.0 System Architecture

All smart contract codes are written in Solidity language to deploy the contract on the blockchain platform. A defined Campaign Factory contains all the source code needed to deploy new campaigns to the network. New campaigns can be created using the Campaign Factory.

Once the campaign factory is deployed, a minimal one-time ether gas fee is required. Initially, when creating a new Campaign, the project idea, Minimum Contribution to the project, and detailed project description are provided. A block is created and added to the blockchain when a new campaign is created.

The proposed system can be implemented using the Solidity programming language. Solc is the Solidity compiler that compiles the Campaign Factory file into the required format. The project manager will create a request-to-request fund to purchase some accessories. This transaction is recorded using the request form and stored on the blockchain. All supporters vote to decide whether the request will be approved. Those who do not want to approve can reject the request. If all supporters vote, the request is completed; it can be required that at least half of the supporters must authorize the request to confirm it. If the requirement is met, the funds are transferred to the supplier. (Benila, 2019)

2.0 Application

Crowdfunding and cryptocurrencies are a trend on the Internet and complement each other perfectly. Blockchain technology can be used as a solution to reduce the problems arising in crowdfunding. The contract is written in a way that all funds are pooled together. All funds will be transferred to the recipient when the request meets the specified condition. Ethereum is an open-source, public, blockchain-based distributed platform with smart contract functionality. It is a modified version of Bitcoin through transaction-based state transitions. Ether is a cryptocurrency produced and used by the Ethereum platform (Wang, 2019).

Figure 2 : Blockchain-Based Crowdfunding Architecture Diagram - Source : Author's own work

• Blockchain

Originally from Bitcoin, unknown individuals invented blockchain, which is a continuously growing list of blocks. Each block is linked to the next, secured using cryptography. Blockchain possesses features like integrity, decentralization, immutability, security, and anonymity. Blockchains can be categorized into three types: 1) Public blockchains (Bitcoin and Ethereum), 2) Consortium blockchains (Hyperledger and Ripple), and 3) Private blockchains. (Yuan, 2018)

• Peer-to-Peer (P2P) System

A crucial component of how blockchain operates is based on the Peer-to-Peer (P2P) system. The entire blockchain network is connected to all nodes. This means that data stored on the blockchain cannot be lost or destroyed. For this to happen, each node in the network would need to be destroyed, which is impossible. (Yuan, 2018)

• Consensus Protocol

The consensus protocol is a vital aspect of blockchain technology. It ensures that all blocks across all nodes are synchronized. The term 'consensus' implies agreement among nodes regarding the state of the blockchain. The consensus protocol allows the blockchain to be updated every minute and ensures the correctness of each block in the chain. Its purpose is to guarantee a single chain that all nodes use and follow. (Yuan, 2018)

• Proof of Work

Proof of Work is a consensus protocol widely used by many cryptocurrencies. This process, known as mining, involves nodes in the network known as miners. Proof of Work is a mathematical problem requiring significant computational effort to solve. The only way to solve the problem is for the node in the network to run the process through trial and error. A miner tests different unique values until an appropriate hash is generated. The miner who solves the problem adds the next block, verifies all transactions, and receives the associated reward. (Yuan, 2018)

• Modules

The modules constituting the proposed model can be listed as follows:

Campaign Creation: Users access the campaign factory through the user interface to create a new campaign. Information such as the campaign title, minimum contribution amount, and campaign description must be provided to create a campaign. A certain amount of ether gas fee is required for each transaction. A new campaign is created along with the ether gas fees. The transaction is completed within seconds, added to a new blockchain, and associated with a contract address. Once the campaign is created, it is displayed on the homepage, where users and supporters can interact. The campaign creation method in the contract is called to create a new campaign. After the campaign is created and added to the blockchain, an E-Wallet or account is required to manage transactions. This is because a certain amount of money must be provided for every change that needs to occur on the blockchain, referred to as the ether gas fee.

Request Creation Module: After creating a new campaign, supporters will donate and contribute to the campaign. Users cannot use the money directly; they must submit a request for usage. If a user wants to purchase something for the project, they must create a request with details for the purchase and the seller's address. This process adds a block to the blockchain. Users cannot use the money directly, as using money directly can lead to fraud, which is prevalent on many crowdfunding platforms.

Approval Module: The campaign creator will submit a request to spend money to make a purchase or for other expenses. Then, all investors are notified that the campaign creator needs to spend money. If an investor wants to approve the request, they must vote to approve it. Each investor can only use one approval vote. Within a specified period, all investors must vote. Approval votes are recorded and stored in a block. After this, investors cannot vote for approval.

Completion Module: After investors vote and all approvals are recorded when approvals exceed a specific condition (for example, more than half or two-thirds), the money is automatically transferred to the seller, to whom the creator must send the funds. All transactions are stored on the blockchain. The manager must specify the supplier to whom the funds need to be transferred and the address to which the transfer will be made. After the money is transferred, campaign details and summary information are displayed.

Figure 3: Blockchain Workflow for Equity Crowdfunding highlighting smart contract and tokenization processes. Source : Author's own work

Below is an example of Solidity code for a Blockchain-based Crowdfunding campaign. In this coding, within the Smart Contract:

• A 30-day duration is set for the campaign from its creation time.

• Contributions can reclaim their contributed ether if the campaign fails to reach its goal within the specified period.

• A refund function allows contributors to request refunds.

• The "claimRefund" function allows contributors to request refunds.

• If the campaign is successful (i.e., if the goal is reached), the owner can withdraw the funds using the "withdrawFunds" function.

3.0 Conclusion

By adapting the above processes to an equity-based crowdfunding platform, the

platform can create a secure and transparent way for investors to automatically apply investment terms through a smart contract when investing in early-stage startups and small businesses. This can reduce fraudulent risks, increase trust among investors, and consequently help attract more investors and issuers to the platform.

Table 1 : Comparative Analysis. Source : Author's own work

Despite the advancements in blockchain technology over the past five years,

the current blockchain application in digital asset management is still in the exploratory stage. There are still many legal and technical issues that need to be addressed.