What Is On-Chain Funding and How Is It Used?

On-chain funding occurs on the public blockchain. It is a transparent and secure way to raise capital for startups or digital projects like Web 3.0. On-chain funding is a decentralized method with a governance system. It is also adaptable and open to anyone, making it the future of corporate fundraising.

On-chain transactions and funding occur on the blockchain and are reflected in a public ledger. These methods are entirely transparent, easily adaptable, and controlled by smart contracts. The result is a more intuitive digital funding technique.

All the data and information are public because it is on the blockchain. This is different from off-chain funding, which doesn’t occur on the blockchain and may be carried out through third-party electronic payment systems like PayPal.

How does this type of funding work, and why is it considered the future of funding? How do these operations compare to off-chain? Here is what you need to know.

Table of Contents

On-Chain Governance is Key to Operations

On-Chain Operations and Web 3.0

On-Chain Funding for Startups

Benefits of Operating On-Chain

#1. Transparency

#2. Security

#3. Open Accessibility

#4. Transactions Occur in Real-Time

Disadvantages of Operating On the Blockchain

#1. Cost

#2. Could Be Time-Consuming

#3. Lack of Privacy

#4. Harder to Run Than Off-Chain

On-Chain vs. Off-Chain

Examples of On-Chain Operations Today

#1. CryptoQuant

#2. OnChain Studios

#3. Signum (SIGNA)

Conclusion

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On-Chain Governance is Key to Operations

A crucial concept to note when discussing funding and operations is on-chain governance. On-chain governance is a decentralized system. People use it to manage and implement changes to cryptocurrency blockchains.

Participants obtain voting rights in these processes by owning a native token or coin specific to the network. However, voting powers can be unbalanced because participants with more coins have more votes.

These rules for implementing changes are encoded in the blockchain and proposed by developers. Participants can vote on whether to accept or deny the proposed changes there. This comes into play when new blocks need to be added to the blockchain, which happens whenever a new transaction is conducted.

Before the new block is added, miners (network participants or nodes) have to verify the transaction’s data to ensure accuracy. Once everything is verified, data is shared with the entire network for review. After a consensus is reached, the transaction is cleared, and a new block is added.

On-Chain Operations and Web 3.0

Web 3.0 is an excellent example of an on-chain operation. The reason is that it exists on the blockchain. Thus, it is a public, fully decentralized version of the internet.

While Web 3.0 is still a new and emerging concept, on-chain funding is an alternative to traditional venture capital standards for funding expansions. A venture capitalist is a private equity investor that provides capital to companies with high growth potential. The company offers an equity stake to the venture capitalist in exchange for money.

Decentralized funding is different because smart contracts control it. It’s also completely transparent, adaptable, and intuitive for project fundraising. Web 3.0 is already being developed on-chain, so it only makes sense that funding happens there.

This allows for more equitable, open access to Web 3.0 and its specific projects. Meanwhile, anyone can participate in the blockchain. Private venture capital dealings aren’t as transparent. Transparency is critical in terms of Web 3.0’s long-term use and survival. This is what separates Web 3.0 from the current Web 2.0.

Ensuring that everything from development to funding happens on the chain helps guarantee that Web 3.0 is open and decentralized. It also publicly records everything on the blockchain.

On-Chain Funding for Startups

Like supporting larger projects like Web 3.0, on-chain funding can also support startup ventures. By developing and releasing the details of your startup on the blockchain, you may be more likely to reach a much larger audience. Since the blockchain offers public information to anyone, people could see your startup and gain interest. This could lead to more funding.

Because on-the-chain funding is public, it also allows potential stakeholders to see how your startup operates. They will be able to review every single transaction and determine whether they want to be involved or not.

The transparent nature of the existing blockchain could also attract new stakeholders. Your startup demonstrates value in transparency and openness. This is wildly different from how most traditional companies operate.

Benefits of Operating On-Chain

On-chain funding and operations are valuable practices, especially when funding startups or projects like Web 3.0. As crypto and the blockchain continue to garner popularity each year, OC funding and operations may be the future of both fundraising and digital development.

There are several benefits to funding and operating this way instead of off-chain. Some of those benefits include:

  • Transparency
  • Security
  • Open accessibility
  • Transactions occur in real-time

#1. Transparency

On-chain transactions are documented and shared with other network participants via a public ledger on the blockchain. Everyone in the network can see all transactions at any time. In comparison, most traditional businesses that aren’t operating on the blockchain keep all their funding and transactions private.

#2. Security

With every on-chain transaction, network participants and miners must verify it and provide a valid signature for the transaction to go through. Blockchain transactions are also unchangeable. This helps to protect against potential hacks where transaction details could be changed.

Due to the transparency of these transactions, a transaction is shared with the entire network. That means all participants will be familiar with its details. This makes it harder for anyone to commit fraud and attempt to make changes without another participant noticing.

However, while transparency is key to the security of on-chain transactions, it could potentially reduce the anonymity of on-chain operations. The blockchain typically operates anonymously. However, it may become easier to link transactions to the participant’s identity if someone studies transaction patterns coming from the same address.

#3. Open Accessibility

The blockchain is a public platform that anyone can access. For example, you could launch your project or startup in Illinois and have participants join from as far away as Alaska. There is also no barrier to entry based on socioeconomic status or education, or gender, making it a fully accessible platform for anyone to join.

This is a valuable feature of on-chain funding and operations. For example, suppose you are developing and launching a startup and looking to fund your project. In that case, you could expand your reach by funding on the blockchain rather than in your local area.

#4. Transactions Occur in Real-Time

All on-chain transactions are supposed to happen in real-time to secure blockchain transactions. Network participants and miners must validate trades to ensure they are authentic. This real-time operation adds security and transparency to on-chain funding and operations – two things traditional business dealings may not offer.

Disadvantages of Operating On the Blockchain

While the benefits of on-chain funding and operations are positive, there are still potential disadvantages to keep in mind. When determining the best way to operate or fund a project, consider these disadvantages:

  • Cost
  • Time-consuming
  • Lack of privacy
  • Harder to run than off-chain

#1. Cost

On-chain transactions often come with a fee. Miners require a payment for their validation services used to verify on-chain transactions. The price varies but could be relatively high depending on the network’s transaction volume.

#2. Could Be Time-Consuming

On-chain transactions are supposed to occur in real-time, but sometimes that is not the case. It can take a long time to gather enough verifications from network participants before the transaction can be confirmed. Miners also have to perform their validation process each time a block is added to the blockchain, which can be time-consuming.

It can take even longer to verify a transaction if the transaction volume is high, especially if there is a limited number of available miners. In these cases, participants have to wait for the process to finish. In some cases, participants may have an option to pay an extra transaction fee so it can be validated sooner.

#3. Lack of Privacy

While the transparency of on-chain transactions may be appealing to some, others may prefer to have more privacy. Off-chain transactions are not visible on the public blockchain, offering more privacy to participants that isn’t available on-chain.

#4. Harder to Run Than Off-Chain

Off-chain transactions can be easier to deal with overall because there is no need for developers or miners to interpret and validate every transaction. The blockchain, while easily accessible, isn’t always easily understood. Off-chain transactions eliminate the public blockchain from the equation, making them easier to handle.

On-Chain vs. Off-Chain

On-chain funding and operations hold much value, especially for those looking for open, transparent, and reliable transactions. On-chain funding is key to significant future blockchain-based projects (like Web 3.0). It can also be used to support startup funding.

However, on-chain funding may not be for everyone. That is where off-chain options come into play. Off-chain transactions don’t happen on the public blockchain. That’s how they provide more privacy to participants.

This means an off-chain transaction can occur without any changes to the blockchain. It also eliminates the need for miners or validation through on-chain governance, which can significantly speed up the transaction process. Instead of blockchain, off-chain transactions can occur on other easily accessible third-party platforms like PayPal.

On-chain transactions are typically best for cryptocurrency transfers. Off-chain transactions are better suited for anything that is not crypto-related or any transaction that you prefer to be more private.

However, because off-chain transactions are not documented on the blockchain, there is no long-standing record of transactions in the network. This could be an issue if there were disputes between two parties because there is no record to review. So, while on-chain transactions may take a little longer and are entirely public, at least everything is validated and on the roster just in case.

Choosing whether to operate off or on-chain essentially comes down to a personal preference. If you prefer transparent, verified, secured transactions and operations, on-chain would be the way to go. However, operating off-chain may be better if speed and low transaction fees are more of a priority.

Examples of On-Chain Operations Today

Several projects and startups are already reaping the benefits of on-chain funding and operations to support their endeavors. Some unique examples of on-chain processes that exist today include:

  • CryptoQuant
  • OnChain Studios
  • Signum (SIGNA)

#1. CryptoQuant

CryptoQuant is an on-chain, community-driven data platform that aims to help crypto investors make data-based decisions for their investments. It is a valuable tool for both professional and novice crypto investors. The platform also provides actionable insights based on data available on-chain.

CryptoQuant is also quite successful as the leading on-chain data platform. It recently raised $3 million in a funding round led by Hashed, Asia’s most prominent cryptocurrency venture capital firm.

#2. OnChain Studios

OnChain Studios is a software company that aims to provide ownership for interactive experiences, like their new Cryptoys NFT. Cryptoys are digital toys that live on the blockchain. They’re fully interactive and can evolve by unlocking new abilities and experiences.

Cryptoys also provide the potential for partnerships. For example, OnChain Studios is working with other brands and studios to create new collections of Cryptoys specific to a brand’s intellectual property (IP).

Cryptoys is meant to be an extensive interactive experience that connects owners across the world. The project is also backed by some of the best-known names in blockchain, including CoinFund and Dapper Labs.

#3. Signum (SIGNA)

Signum (SIGNA), previously known as Burstcoin (BURST), is a cryptocurrency designed to be energy-efficient and serve as a model for green mining. Signum’s blockchain operates via a proof-of-capacity or PoC algorithm.

A PoC algorithm allows mining devices to use their hard drive space to determine mining rights and validation. It is meant to solve other mining systems’ high energy consumption issues that harm the environment.

Signum, or Burstcoin, was the first coin that used a PoC algorithm. Traditionally, the mining process for most other cryptocurrencies requires specialized, expensive machines that need much energy to operate. However, with Signum/Burstcoin, a regular hard drive is the only requirement. This means any device with a hard drive can mine for the coin, including cellular devices like Androids.

This also makes Signum/Burstcoin more accessible, as there isn’t a significant barrier to entry. It’s far more decentralized than other available cryptocurrencies.

Conclusion

On-chain transactions and operations occur on the blockchain and are reflected in a public ledger. Blockchain funding methods are transparent, adaptable, and controlled by smart contracts, resulting in a more intuitive digital funding method. As crypto and the blockchain continue to garner popularity, on-chain funding and operations may be the future of virtual fundraising and development.

jonathan hungAbout the Author

Jonathan Hung is one of the most active angel investors in Southern California; his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at โ€“ Unicorn Venture Partners.

He and his team target investments in US companies with global market potential, focusing on long-term growth expansion to East Asian markets.

As a Managing Member for his family office fund, J Heart Ventures, Jonathan developed his investing prowess, making investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, and Bitmain, to name a few startups he funded.

Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.

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