Trust This: Web3 Will Deliver on the True Promise of Crowdfunding

Web2's Missed Opportunities are About to Be Remedied

By: Spencer Graham Loading...

Trust This: Web3 Will Deliver on the True Promise of Crowdfunding

Web3 promises to advance crowdfunding far beyond what Web2 is capable of. To fulfill this promise, we must fully embrace the trust-minimization ethos of Web3 as well as its technology.

With Web2 platforms like Kickstarter, GoFundMe, and WeFunder, individuals, non-profits, and startups can call upon donations and even venture funding from their communities. It’s a powerful innovation. But as we all know, there are problems with these Web2 platforms.

Marginalized Groups

The first problem is access, which limits the amount of funding available to projects and worsens inequality. Many would-be funders are blocked from accessing these platforms, including marginalized groups like sex workers, residents of countries with sanctioned and/or authoritarian governments, and large portions of the world that lack financial payment infrastructure.

The second problem with Web2-based crowdfunding is power and accountability. The Web2 crowdfunding platforms are large, centrally controlled companies. Their size grants them market power to extract outsized fees, and their centralized nature creates vectors for governments or executives to block access to many would-be funders.

More subtly, yet perhaps more problematically, the projects that crowdfund on these platforms are mostly centralized organizations themselves. Funders are forced to trust them to follow through on their promises. Kickstarter projects are infamous for their tendency to fall short of delivery expectations, and even well-established charitable organizations are not immune.

Low-friction Nature

Built on globally-available crypto rails, Web3 crowdfunding platforms do away with access limitations and other frictions inherent to Web2 platforms. Their global and low-friction nature has been one of the key drivers of the recent Web3 crowdfunding boom, most famously with Constitution DAO.

How do they work? Typical Web3 crowdfunding — exemplified by the Juicebox and Mirror platforms — accepts ETH from funders and returns a token as a receipt. Tokens, fueled by the beauty of Web3 composability, can be used for many different purposes. Some crowdfunding projects use their token simply as a marker of the funders’ contributions, while others use it as a governance token. Common to all these use cases is that tokens are fun! People love getting and owning tokens, even if the token doesn’t actually confer any rights.

In other words, Web3 platforms directly address the access problem and the problem with platform power and accountability.

Juicebox and Mirror both follow the ‘ETH in, project token out’ model, but each focuses on different aspects of the process. Juicebox offers projects multiple options for customizing how funding (in ETH) is received and how project tokens are distributed. The platform also includes an option to reward early funders with a portion of funds contributed after the original goal has been met. All of these configurations are encoded into the Juicebox smart contracts, so funders can be confident that the rules will be followed.

In contrast, Mirror crowdfunding has limited customization. Instead, it offers projects a platform from which to publish information about the project. Embedding crowdfunding tools directly into a published article is a powerful way to attract potential funders to your crowdfund, and is a big reason why so many projects have used Mirror in this way.

Crowdfunding platforms like Juicebox and Mirror leverage Web3 technologies to enable projects to raise funds from anybody in the world with minimal friction, relatively low fees, without fear that the platform will change the rules on them. In other words, they directly address the access problem and the problem with platform power and accountability.

However, as currently structured, they don’t yet address the project power and accountability problem. The majority of crowdfunding projects receive ETH in a multisig controlled by a handful of project founders.

Funders – who now have project tokens – can in some cases signal their preferences for how funds are deployed – such as via Snapshot votes – but they must still trust the project founders to follow that signal. Before anybody decides to fund one of these projects, they must decide if they can trust the founders.

Trustless Web3 Crowdfunding

Trust is not always a bad thing. Many projects are started by highly trustworthy founders, and those projects are typically able to progress more efficiently because the wheels are greased by the trust others are able to place in them.

It’s easy to assume that trustworthy founders are a prerequisite for any new project. After all, other than a few notorious exceptions, there aren’t many examples of untrusted founders starting a new project!

However, we won’t see the cost of trust by looking only at the projects that are started. Instead, see the cost in the absence of all the valuable would-be projects that never got a chance in the first place only because the right people weren’t able to trust the founders enough to help fund their efforts.

These are the missing projects that would have been founded by anons, people from marginalized communities or in autocratic regimes that are afraid to reveal their identities, people without expensive university pedigrees or family connections, young people, or career-switchers who have yet to build a reputation in their new field.

Many of these people have world-improving ideas and the skills to bring them to life – in fact, it stands to reason that these are just the people who would bring a unique perspective to some of the most important problems that need solving – but they’ve rarely been given a chance because their circumstances make it difficult for anybody to trust them.

Funneling ETH

Web3 gives us the tools to unlock those people’s potential by minimizing the requirement that people trust them – if we’re willing to use them.

How could that work? Crowdfunding platforms like Juicebox and Mirror are in an excellent position to help projects minimize trust requirements. Rather than funneling ETH into a multisig controlled by the founders and out of reach of the funders, these platforms could give funders tools that allow them to withdraw (exit) from a project at any time up until the funds are deployed. This would significantly reduce the risk that even anon founders could abscond with the funds, thereby reducing the need for funders to trust them.

At DAOhaus, this is exactly the approach we have taken when designing our Yeeter crowdfunding platform. In a Yeeter project, funds raised go into a DAO treasury and funders receive non-voting shares in the DAO that allow them to withdraw (“ragequit”) the funds at any time if they are not happy with the direction the project is taking.

When funders can hold the project team accountable without having to trust them, the founders’ reputation doesn’t matter; only their capabilities and actions do. That is the true promise of Web3.

Towards a Trustless Future

DAOs and Web3 can change the world for the better. But we’ll give them the best chance to do so by leaning into what makes them different from traditional organizations and Web2: trustlessness. By creating mechanisms for crowdfunding and coordination that remove the need for trust, we can empower an entirely new set of people to create and build projects that improve all of our lives.

You can play a part in that change. Support projects founded by people who can’t rely on their reputation. And choose crowdfunding tools that actively reduce the need for trust.

Spencer Graham is a Core Contributor at DAOhaus, an Ethereum-based community.