What is Crowdsourcing? (in 2022)

What is Crowdsourcing? (in 2022)

In the recent past, if some free association of people to achieve any goal was not formalized, then, as a rule, such an association was popularly called "artel - collective labor.

Crowdsourcing - what is it in simple words?

The term comes from the English "Crowd" - the crowd, and "sourcing" - the source. Initially, in capitalist countries, this meant an informal, temporary association of several people, usually students (among whom there were usually experts) to solve a scientific problem or even a production issue. 

  • Crowdsourcing is the transfer of part of the production functions aimed at solving certain questions and problems by volunteers or in other ways, that is, it is the mobilization of human resources by means of Internet technologies to solve problems that regularly arise in business, state and social structure.

As you can see, none of the original definitions presented had anything to do with investment, finance, or business in general. This went on just until distributed networks provided an opportunity to create aggregating constructs that could:

  1. attract a much broader audience;
  2. clearly regulate and track the rules for using profile platforms.

But an entirely different question is what exactly do all these people need to come together for? Why do they need to create entire Internet platforms to regulate their relationships? First of all, of course, to raise money. Mass fundraising through such platforms becomes a very attractive, utilitarian goal to justify the existence of this electronic infrastructure. We are talking about both raised investment, that is, the sale of shares in a project to all comers, and big borrowed money (on a corporate scale).

Some may argue that the idea of the narrative brings readers smoothly to the term crowdfunding. Like, just a little longer, and it will completely replace it. But no, dear public, crowdsourcing, while initially having very similar features, in the end went its own way, occupying a separate terminological niche.

Crowdfunding, indeed, refers to the process of raising funds through distributed platforms (moreover, using the P2P algorithm discussed below) from an unlimited number of private investors, regardless of what the terms of those resources are.

 For example, it makes absolutely no difference whether it is an ICO or crowdfunding (i.e., borrowing) - whatever it is, it is still crowdfunding in the first place.

As for crowdsourcing, the term refers to a completely different, highly specialized area of financial services, namely "crowdfunding" (or crowd-funding).

Many corporate or private borrowers have a problem: they cannot take out a large loan from a classical financial institution (a bank or a financial company) without having a sufficiently valuable cluster of assets or without third-party sureties. Until recently, this circumstance was the reason to abandon development plans due to the inaccessibility of credit, but with the emergence of crowdsourced distributed networks, aggregating the micro guarantees of a large number of individuals, the problem has been completely solved, and not at a cost! Let's look at how crowdsourcing works below.

Techniques of the P2P algorithm

To understand how one can obtain a large amount of surety from a large number of individuals willing to provide it at once, we must first consider the work of the P2P algorithm.

In the financial world there is always an intermediary between the buyer and the seller of money. What's more, almost in any sector of the economy there is such a commercial layer, which, however, performs very valuable functions. Namely, intermediaries are aggregators. For example, we are talking about the money market:

  1. the intermediaries here are the traditional banks;
  2. the value of money is the interest on credit;
  3. the aggregating function is simply to have a signboard: both the person who wants to deposit his free funds for passive income and the entrepreneur who needs to finance a project, including through borrowed funds, know where to go - to the bank. This is actually very valuable.

The bank takes funds from private depositors at a lower interest rate and gives loans to entrepreneurs at a higher interest rate. In a healthy economy, in a situation where there is no crisis, somewhere within this spread is the refinancing rate, which is set by the Central Bank. This difference in interest rates is the reason why the financial institution in question exists. P2P technology made it possible for the buyer and the seller of money to communicate directly.

P2P, by the way, stands for "person-to-person", meaning that users communicate via the Internet without intermediaries.

The main characteristic feature of the P2P algorithm is the transfer of responsibility for the actions performed from the intermediary directly to the participants of the transaction.

That is, if a depositor makes all claims and demands to the bank in any case (and does not care whether the borrowers return the loans to the bank), in the case of P2P algorithm, the same lenders interact with the borrowers directly. And the problems of borrowers automatically become the lender's problems.

Of course this feature is a negative factor for the creditors (the vast majority of which are individuals), but it does not bring any significant advantage for honest borrowers (well, in fact it does not matter whom to pay off: the bank or many individuals, if he is not going to cheat anyone anyway). Therefore, the P2P algorithm provides for a reward:

  1. Lenders, thanks to a distributed P2P algorithm platform, are able to lend funds or their own obligations to borrowers who need them at a higher interest rate (generally on better terms)
  2. Borrowers have the opportunity to receive money or commitments from lenders at a lower interest rate.

The "design" of the crowdsourcing process

Crowdsourcing differs from the crowdsourcing process, which was implied in most of the cases discussed in the previous section, in that:

  • Crowdsourcing is when individuals act as lenders and collectively, through a platform, lend to borrowers who need large sums in debt.
  • And crowdsourcing is when, instead of lenders, there are individuals on the platform who are ready to provide a guarantee for the future obligations of the lenders, but the latter (in fact) have not yet become such (but are only preparing to do so).

That is, crowdsourcing can be otherwise called a public guarantee for future obligations. Of course, the cost of a loan and the cost of a surety bond differ greatly in price (crowdsourcing is much cheaper for sureties). 

Summary

So, what are the useful features of crowdsourcing that make it exist?

First and foremost, of course, there is no need for bail bondsmen to spend money at the first stage of the procedure (subsequent possible events are rarely thought of) combined with a one-time and immediate remuneration. This attracts more and more new participants to this area, which in turn makes the procedure cheaper.

Potential borrowers only need to make one additional iteration - to request such a crowdfunding, and any bank will be happy to have such a recipient as a client. This opens up entirely new horizons of financing and development for borrowers.

In general, crowdsourcing reduces the cost of credit to economic actors, making borrowed funds more accessible to the economy. It is hard not to recognize the simplicity and usefulness of this process.