Projects:2017s1-167a Applications of Blockchain to Equity Fund Raising
Contents
Project Members
- Ayden Aba
- Jackson Virgo
Project Supervisor
Dr Matthew Sorell
Introduction
Bitcoin’s underlying technology, the blockchain, or the distributed consensus ledger, has allowed mutually distrustful parties to securely transact virtual currency stored on a decentralised database with minimal time expense and financial friction, effectively eliminating the need for a trusted intermediary. The realisation that this technology can be more broadly applied to other digital assets led to the advent of smart contracts; an agreement whose execution is both automated and enforced by the cryptographic consensus of the distributed ledger.
This revelation bares significant ramifications for the financial services industry. In particular, blockchain technology presents an opportunity for emerging companies to undercut the large industry incumbents who have enormous amounts of capital tied up in traditional methods of transacting and storing financial information.
However, before blockchain can be integrated into existing businesses, the risks of the technology need to be explored and further understood. For instance, the recent security breach of an Ethereum blockchain application, “The DAO”, in July 2016 saw the equivalent of USD$50 million in cryptocurrency at stake, highlighting the pertinence of research into blockchain.
This case reminded investors that, whilst theoretically sound, exploits in the underlying technology are still possible, and a single such security vulnerability can expose all the users of an entire blockchain network. Considering cryptocurrencies and blockchain applications are expect to become the new fabric of trade and commerce, this uncertainty is alarming.
Through our research into applications of blockchain within crowdfunding, we hope to further understanding of how the technology may be realistically and securely integrated into existing businesses, and society more broadly.
Objectives
The overarching objective of our research team is to distil a more accurate picture of blockchain’s utility from the noisy aggrandizement that has characterised a lot of discussion around its potential. By investigating the application of blockchain technology within the Australian unlisted securities market, we aim to examine various cyber security issues, and societal acceptance issues, to be faced during the transition toward crypto-asset based economies.
Background
Approach
The Existing Solution
Solution Map
The Ideal Solution
Solution Map
Solution Architecture
Price Stability
Identity Verification
Future Work
Conclusions
The goal of this work was to discover if blockchain technology could realistically be applied to equity crowdfunding, and further explore its usage within the financial services sector whilst examining potential usability issues.
Blockchain technology presents an opportunity within the equity crowfunding industry to improve transaction friction and transparency. As a result, innovating small businesses have the capacity to attain expansion capital faster and cheaper than previously possible. With a higher level of innovation overall, economies are stimulated by small business growth.
The research goals were approached through a system design and review process.
Firstly a set of functional requirements was defined and categorised. Following this, an Ideal Blockchain Solution was designed which met all functional requirements, making assumptions to do so where necessary.
By then applying more realistic conditions, a discussion around the value transfer mechanism and price stability of cryptocurrencies was constructed.
The two big accomplishments as part of this research were (1) the creation of a core set of System Functional Requirements for equity crowdfunding infrastructure, and (2) the development of an Ideal Blockchain Solution architecture.
Further to this, with respect to the Ideal Blockchain Solution which relied on cryptocurrencies to represent value in the System - a viable solution to the price volatility of cryptocurrencies problem was presented.
The set of System Functional Requirements, enables further work to be done in determining the effectiveness of equity crowdfunding solutions, whether they be conventional digital, blockchain or simply analogue. The Ideal Blockchain Solution (along with the price volatility workaround) shows that blockchain may have a place in improving equity crowdfunding, shown by how it elegantly meets System Functional Requirments. Furthermore, the Ideal Blockchain Solution acts as a starting point for a prototype System to be built.
Although this work shows that blockchain powered equity crowdfunding is technically possible and outlines the foundations to built it, it was found that numerous issues still exist in applying blockchain technology to equity crowdfunding from usability and investor protection perspectives. The end conclusion is that blockchain technology alone has limited usefulness in the equity crowdfunding space, and if it were to be applied today would still rely on more conventional digital infrastructure to be realistically feasible.
