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By Constantin-Claudiu Minea, Co-Founder and CEO of SeedOn
When Bitcoin launched back in 2008 right at the onset of the Great Recession, the idea behind the world’s first cryptocurrency was to provide an avenue to bypass banks and challenge the centralized control of money. Then bitcoin’s price began to steadily rise, followed by Ethereum’s launch enabling developers to create their own projects, and just like that, a new industry centered around blockchain technology and decentralized finance (DeFi) sprang up.
Retail investors began discovering the potential of blockchain-based assets and protocols, and new projects flooded the market with tokens to meet the demand. However, as the industry matured and went from bear, to bull, and back to bear cycles, institutional investors started to fundamentally alter the concept of DeFi, and therefore the crypto landscape. On the one hand, they’re wildly desirable investors for crypto projects because they have plenty of readily available cash. On the other hand, they are accustomed to operating in a more centralized way—the antithesis of the DeFi and crypto movement.
Sure, institutional investors with their powerful firms and connections to traditional financial institutions don’t have the same emotional or ideological attachment to decentralized principles. But because of their deep pockets, aren’t they a necessary evil that, in the long run, will help push the industry further into the mainstream?
The whale in the DeFi room
Institutional investors of all shapes and colors may have different motivations for entering the DeFi space. Still, a lack of alignment with decentralized principles shouldn’t automatically disqualify their participation in DeFi and crypto. But a pressing concern demanding attention in the industry is the growing role of and influence this group has.
Troubling signs are already apparent.
Institutional investors, or whales, are able to drastically out-spend the average crypto users and, as a result, gain outsize influence over the governance of DeFi projects. This could even lead to the whales maneuvering control away from project founders, and dictating its direction. Furthermore, these traditional investing firms have engaged in over-leveraged crypto trading, which many speculate has been a driving factor behind the recent bear cycle, a similar phenomenon to the dot-com bubble burst of the late 90s and early 2000s.
The fact is decentralized autonomous organizations (DAOs) and other decentralized organizations are vulnerable to outside takeovers, such as a 51 percent attack, where an individual or group gains control of more than 50 percent of a blockchain’s hashing power. When this happens, there is little a DAO can do to defend itself because of the way their governance is typically structured.
DeFi crowdfunding
For a young blockchain-based startup, the desire to fundraise rapidly and start developing leads many to depend on the whales just to be able to make their business a reality. Naturally, the limited alternatives push project creators into the whales’ corner. There is, however, an alternative for crypto or DeFi startups to secure the funding they need without the fear of potentially losing control. This is through crowdfunding campaigns.
Digital crowdfunding campaigns have become a popular tool for both individuals and startups to quickly raise funds in a time of need. In 2020, the global crowdfunding market was calculated at $17.2 billion in North America alone, and that is expected to hit $34.6 billion by 2026.
Crowdfunding can play a crucial role in helping young startups launch and enjoy a little bit of stability as they cross off milestones along their road map. Crowdfunding platforms that leverage blockchain technology and DeFi crowdfunding can be even more effective because they can attract a wide variety of crypto enthusiasts looking to invest in something that they believe in. This method of fundraising favors retail investors who are more aligned with decentralization over the whales.
Additionally, as opposed to traditional crowdfunding platforms, decentralized ones built on the blockchain are managed by a network of distributed computers, making it nearly impossible for hackers to disrupt or mutate the data and record keeping.
Blockchain startup owners can leverage DeFi crowdfunding platforms to raise capital in a secure and transparent way without having to relinquish creative control over their project. This is a win-win for young startups because it matches them with eager retail investors who likely share a similar vision and are looking to invest in a project that they view as having value.
As the DeFi industry weathers the current bear market, leaving only the projects and companies with the best and strongest potential, turning to crowdfunding will become the preferred way of fundraising because of its convenience and accessibility for both startups and average retail investors. The industry is waking up to the reality that there is only so much room in the DeFi ocean for whales, and curbing their influence is crucial for the industry’s long-term stability.
For DeFi to ultimately succeed, thrive, and continue to spawn innovation, it needs to remain decentralized and free from outside influencers playing an oversized role.
About the author:
With a background of over six years as a software engineer, Claudiu Minea has simultaneously embarked on the journey of a serial entrepreneur. As the co-founder and project coordinator for SeedOn, Claudiu has put all his effort, passion, and dreams into building software solutions. Through everything he does, he makes sure that everything he builds will ultimately offer value to the market. Having gathered years of experience, he built HungryBytes, a software development company building complex and innovative digital products for well-known companies across Europe. Claudiu also offers consulting services to companies, with his recommendations being tailored to the client’s and end customer’s needs, ensuring more efficient business processes.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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