Crowdfunding Meets Blockchain
12 Pages Posted: 5 Oct 2017
Date Written: June 24, 2017
Blockchain, the technology behind Bitcoin, promises to be nothing less than Internet 2.0. The financial services industry, in particular, is preparing for the disruption blockchain/distributed ledger technology promises to cause. In the current business environment, the majority of startups and small businesses have to look for alternative sources of funding given that ‘going public’ is increasingly expensive. The crowdfunding space has seen tremendous growth as an alternative way to raise capital by businesses. However, these crowdfunded shares cannot be traded for 7-10 years on average on any given platform in the U.S. currently.
To build a trading platform on the blockchain which is completely P2P, immutable, fully transparent and low cost presents some key design issues. In particular, the issue of liquidity - and price discovery - on the blockchain continues to be a puzzle. At the same time, the proposition of removing middlemen from equities trading is a very attractive one, streamlining the process of capital formation with higher market efficiency.
The current paper addresses the following key questions: How can a DLT trading platform ensure adequate liquidity? What would be the process of price discovery? While some recent studies hail blockchain technology as a boom for market liquidity, it is not immediately clear what the impact of P2P trading would be on the prices of various stocks. There are no ‘solutions’ just yet. At the same time, the lack of regulation around trading on the blockchain creates an environment of uncertainty for all players.
In particular, the implementation of such a platform can revolutionize capital formation and build robust markets in both developing and developed countries where crowdfunding has proven to be a successful model. While my research is targeted at solving a very specific pain point for both researchers and companies working on distributed ledger technology, ultimately, it would be a significant step forward towards onboarding underserved communities across the world who don’t have access to financial services.
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