Chroma Fund is a crowdfunding site powered by the blockchain, the same underlying technology that powers Bitcoin. Learn how it's preparing to disrupt startup investing, and much more.
The blockchain is a lot cooler than Kanye West. And Bitcoin's root technology is, says Chroma Fund co-founder Marcus Estes, far more interesting than Bitcoin itself. The blockchain is public ledger technology that is now being used to fuel a new type of micro-investment--and new breed of company.
Estes is a technologist. He is also a musician. And like many musicians, he's lost gigs and experienced hard times. "I always wanted to make content, to make music," he said, "I could usually find jobs writing code, but I never made any money making music."
As crowdfunding emerged and matured into a legitimate funding path for creative entrepreneurs, Estes was touring as the technical lead and producer on a documentary about Kanye West's Watch the Throne tour. A conflict between West and the tour's financial backers resulted in the documentary falling apart.
Funding was pulled and the company Estes worked for hit the skids. "We were sent home. I was broke," said Estes. "Which was a good thing. It provided Mike [Merrill] and I with the free time to sit around, drink coffee and think about Bitcoin and build Chroma."
The uniqueness of Chroma Fund
Estes and Merrill have been friends for a decade. The pair met while renting space at Portland's co-working space Less Distracted. Mike was looking to expand on his idea of crowdfunding himself. The Chroma Fund co-founder made headlines in 2008 after he offered 100 thousand shares of himself as a 'micro-IPO'.
"Mike had this idea that a person or company could also be represented and traded as shares like the stock market," recalled Estes. And because the blockchain is encrypted and open to public scrutiny, said Estes "we could associate an action like the sale of a share of stock with the chain and verify its authenticity."
"I'm the least hardcore technical person in the company, so my understanding of the blockchain is not based on math," said Merrill. "The incredible thing about the blockchain is that it's a peer-to-peer system that is designed for scarcity. Digital scarcity is such a weird idea and I love it."
The company name "Chroma" is film and movie jargon that refers to a technique which allows low-budget producers to accomplish more with less. "This is sort of what we're trying to do with the company," said Estes.
Marcus threw himself in to researching the Bitcoin blockchain, and "asset representation"--a term used to describe things that are not Bitcoin, but still associated with and represented on the blockchain.
Chroma Fund was hatched during a frenetic 24-hour burst of specification building and code writing in late-2013. The information design of Chroma Fund takes advantage of metadata within the blockchain. Because the blockchain itself functions as a string of verified transactions it can be used as a mechanism of trust.
Estes created a diagram that details how a database should log information flow about how shares could be issued, traded, and sold. He laughed, "the next day I came in with bleary eyes and a piece of paper with flow charts written all over it."
Estes passed the specification on to developer Leif Shackelford, who wrote the basic code that runs Chroma Fund, and Adam Wong who designed the user interface.
The team also took care to craft an appealing front end. "We didn't presume only Bitcoin people would want to use as a crowdfunding tool. It's a complicated protocol, but we wanted normal people to understand why they should use Chroma to fund projects," said Estes.
Jessa Graves, co-founder of toy company and Chroma Fund partner EggDrop, said, "Chroma Fund was like falling in love with your first indie rock band." Her company chose Chroma Fund over the dozens of other crowdfunding startups because of company's unique technology.
"There's a lot of talent and innovation driving their company and we knew we needed to be a part of it," said Graves.
For EggDrop, working with investors is more important than simply seeking support from crowdfunding backers. Estes is careful to differentiate between crowdfunding and crowd investing. "When you invest in a Chroma Fund company," he explained, "you are an investor and you're entitled to a say in the company's future, decision-making process, and a share of the revenue as well."
While Kickstarter or Indiegogo backers are entitled to rewards and incentives provided by project founders, investment in traditional crowdfunding sites is often a leap of faith and expression of enthusiasm. "Backing a Kickstarter project is cool," said Estes, "but it's not really investing." If a Kickstarter project takes off, the founders can do well financially and the project can have a long and healthy life.
The beauty of blockchain
In applications, games, and on mobile devices consumers are familiar with exchanging real world money for digital items. Because digital items can be replicated at low or no cost, these items--apps, songs, game power-ups, stickers--tend to be perceived as less valuable.
The blockchain allows digital items to be both authentic and scarce. Beyond simply providing the backbone for digital currency like Bitcoin and Litecoin, the blockchain can also be used to publish unalterable public records of, for example, asset ownership. Chroma Fund offers blockchain-based digital share certificates for each company that investors fund. Because the blockchain can be used to verify the authenticity of digital items, digital items can then achieve scarcity similar to that of a physical, material good.
While the Chroma Fund share certificate is not a paper, because its authenticity is tied to the blockchain the share becomes a unique, discrete item that can be traded and sold with trust.
Owning scarce things is important, said Estes, and the blockchain "helps us create the metaphor of something real and tangible. [The digital share certificate] is the sacred object proves that your ownership and validates your investment."
Charles Hope, co-founder of blockchain startup Early Temple, and previously co-founder of video distribution platform Blip.tv, said, "The most exciting possibility is that [the blockchain] provides a way for software agents to engage in financial transactions with each other, without risk of being defrauded." Also, said Hope, much of the trust imbued in the blockchain comes from the fact that "it's completely decentralized, not owned and protected by any single corporation or government. "
The blockchain code functions as "vast financial ledger, duplicated across more than 6,000 network nodes, which holds the entire accounting history of Bitcoin," said Hope.
While Bitcoin's brand has been sullied by Dark Web urban legends and unscrupulous sites like the Silk Road, the currency itself has thus far been resistant to attack and forgery. To-date, Bitcoin has never been counterfeited. Hope explained that "the blockchain is special because it's protected by advanced cryptography, and its accuracy has proven impervious to all attacks, even ones launched by hostile nodes."
The future of Chroma Fund
Chroma Fund is close to closing an initial quarter million dollar round of financing from private investors. Because regulation compliance typically requires private investors to be authorized, for now, the Portland-based service is available only in Oregon, where investment laws allow small, private companies to seek financing online and from individuals. "Section III of the JOBS Act was important to help get us off the ground," said Estes, "because it means we can focus on the tech and on the product, rather than waste time figuring out the bureaucracy."
Hope thinks national regulatory compliance laws will eventually change, and he sees a future fueled by crowd-investing. "What the web did for publishing, the blockchain is doing for finance. Expect a wave of financial innovation which will set the precedents for the next era of the economy," said Hope. "Chroma Fund is an example of the potential for startups to use the blockchain and bring sophisticated, fraud-proof financial innovations to the market."
The Chroma Fund vision is lofty. "There is a massive shift in what it means to raise capital and how we think about the idea of investing," said Merrill. "We're pushing against it and I know it's going to start slow. But once we build up momentum this will be 'the way things work.' My goal is that someday our business is so ubiquitous that it's boring."
Estes is equally ambitious, but knows that success of Chroma Fund will hinge on their friendship. "Our connection was basically that we look very different but think the same," he said. "Mike looks like a corporate hack but he's a punk at heart. I look like a punk but I'm a corporate hack. Together, we're trying to take on Wall Street."
- What's the Blockchain, and Why Does Bitcoin Depend On It? (Gizmodo)
- Bitcoin an official commodity: US trade commission (ZDNet)
- 10 things you should know about Bitcoin and digital currencies (TechRepublic)
- Pay with Bitcoin: 10 of the most interesting places to spend it (TechRepublic)
- 5 Bitcoin and finance startups to watch from DEMO 2014 (TechRepublic)