At a time when biotechs are scrambling to raise funds, a new way for startups to secure investments is emerging: leveraging cryptocurrency. The motive behind decentralized financing seems pretty ambitious – to democratize funding in healthcare. But does it live up to the hype?
With VitaDAO – a decentralized collective that funds early-stage startups looking to move up in the longevity space – launching Matrix Biosciences, a biotech developing treatments for age-related disorders, the biotech industry may be warming up to the idea of cryptocurrency-based financing.
“The emerging trend of cryptocurrency funding in biotech is driven by the need for more flexible and innovative financing options in an industry where traditional funding routes are often outdated and focused on established projects,” said Alex Dobrin, awareness steward at VitaDAO. “Cryptocurrency and community-funded financing provide opportunities to support cutting-edge research and reduce risk.”
As crowdfunding gets a blockchain makeover, how exactly does it work?
How do decentralized autonomous organizations operate?
Decentralized Autonomous Organizations (DAOs) are open, member-driven entities that operate through smart contracts on a blockchain, explained Israel Mirsky, co-founder of decentralized community Pharma DAO. A smart contract is a computer program that is stored on a blockchain that automates the actions required in an agreement or contract.
“The premise of a DAO is to have a decentralized governance structure where decisions are made collectively by its members,” said Mirsky.
Funding for DAOs often comes from individuals or entities interested in the DAO’s goals and mission. The level of public interest in a DAO’s goals can significantly impact the amount of funding it receives, as more interest can lead to more contributions, according to Mirsky.
Funding by the DAO is driven by a combination of domain experts and public attention, he explained. In the case of biotech proposals, they are complex, and so, domain experts play a crucial role in these DAOs by vetting projects and investments. These experts aim to ensure that the DAO’s funds are allocated to promising endeavors.
Upon vetting the investments, the DAO members get to vote using tokens that allow them to go for or against a proposal. In exchange for voting tokens, they contribute funds to the DAO. These tokens are significant in being able to participate in key decision-making processes within the DAO.
“The blend of expert guidance and democratic voting aims to balance informed decision-making with decentralized governance, transparency, and public accountability,” said Mirsky.
U.K. biotech project receives cryptocurrency funding
This way, companies can tap into a wider pool of investors. One of the first biotech projects in the U.K. to be fueled by cryptocurrency and blockchain technology was undertaken by Newcastle University. The $285,000 project funded by VitaDAO, aims to identify novel bioactive autophagy inducers. Autophagy inducers trigger cellular pathways that can help the cells clean out or recycle damaged components in cells. This is believed to help combat age-related and neurodegenerative diseases.
What took around four weeks to close the deal – from submitting the proposal to contract execution – the process of securing the funds was based on a number of things. DAOs look at how feasible the project is, its innovative value, and whether it tallied with the DAOs, where, in the case of the Newcastle University project, it had to align with VitaDAO’s focus on the longevity industry.
With the global decentralized finance market size valued at more than $13 billion in 2022, according to a report by Grand View Research, the biotech industry may be dipping into the pot as of late. Last year, Molecule, a science platform where research projects can obtain funding through a DAO, raised $13 million in seed funding. As a part of what is now known as the DeSci – short for decentralized science – movement, it has catalyzed financing for 12 projects worth a total of nearly $2 million, so far. The major DAOs it collaborates with include VitaDAO – which has contributed more than $1 million – AthenaDAO, specializing in reproductive health, HairDAO, focused on hair loss, ValleyDAO for the field of synthetic biology, PsyDAO in psychedelics, and CryoDAO specializing in cryopreservation.
Molecule has created a non-fungible token (NFT) – a kind of digital identifier that is recorded on a blockchain that is used to validate ownership of something – framework wherein details of the intellectual property (IP) are stored digitally. Molecule’s marketplace, Molecule Discovery is a space for researchers seeking funding, to upload their projects, negotiate licensing agreements, and be taken notice by DAOs who could potentially support their projects.
Decentralized funding provides patient advocacy
One of the perks that could drive blockchain technology into the biopharma funding space is the ability for patients to gain more agency in the way drugs are developed. According to a report by Nature, a platform like Molecule looks to be more transparent with those who are most likely to benefit from the medical discoveries that are being funded, and leveraging DAOs to distribute the responsibility for funding novel treatments and share the risks associated with them.
Through DAO communities and by vetting the investments that are made, patients would be able to attain access to a drug that they need, Paul Kohlhaas, the co-founder of Molecule, told Nature. In a way, they get to have a say in which drugs move from bench to bedside. Moreover, if a person who is diagnosed with a certain disease participates in a DAO that funds multiple projects related to a cure for said disease, the patient would co-own the IP, just like how a pharmaceutical company would own IP. This practice of sharing IP gives patients agency, and allows them to vote on the terms on which a project is licensed.
To add to that, Mirsky explained that DAOs promote democratic funding. “Traditional funding routes for biotech companies often involve venture capital firms, grants, or IPOs, which can be lengthy, competitive, and restrictive. Crucially, the selection of projects tends to focus on those entrants that are likely to result in blockbuster drugs, said Mirsky. “Unfortunately, because of wildly misaligned incentives and massive cost bases for large pharmaceutical companies, drugs need to pay back $2 billion+ per year in order to be worth pursuing. This means projects that would be significantly impactful for public health but wouldn’t hit that mark – because they are off-patent, for instance – are often passed over.”
“By leveraging blockchain technology, biotech projects can secure funding through DAOs or other decentralized financing methods, enabling a broader range of investors to contribute. Furthermore, the transparency and accountability inherent in blockchain technology can create a trusted environment for investors.”
Echoing Mirsky’s thoughts, Dobrin believes that decentralized financing is “setting a new standard for scientific research” and “making it more accessible via the DAO model.” Dobrin thinks that this could pivot research in fields like women’s health and take on overlooked diseases, as well as boost patient advocacy.
Now with the Pfizer-backed spinout Matrix Biosciences, led by the University of Rochester in the U.S., bagging seed funding of $300,000, VitaDAO’s position takes center stage within the biopharma DAO sector. Based on the science that mole rats, which have a lifespan of more than 10 times that of normal rats, are cancer resistant because they have plenty of hyaluronic acid in their tissues, the startup’s research has found that transgenic mice expressing naked mole rat hyaluronan synthase gene (NHAS2) have fewer tumors, improved health, and live 10% longer than rats without the transgene. So, the company is taking its research a step further by developing a class of small molecules to modulate the enzyme hyaluronidase for cancer treatment.
Can regulatory concerns push biotechs away from cryptocurrency?
However, it’s not to say that this mode of fundraising doesn’t have its setbacks. Like most investments, decentralized financing is regarded as a risk. And although cryptocurrency has been up and running for more than a decade now, it is still in its early days compared to conventional and more established investment methods. Therefore, regulatory risks come with the territory, which Dobrin pointed out was a “gray area” as well. The regulatory status of certain cryptocurrencies is unclear, where, if there were to be a sudden regulatory crackdown, it could make it difficult to sell these currencies or would even spur a plummet in prices. Besides, due to the lack of government assurances, sketchy coins accompanied by scammers do their rounds on the DeFi platform.
Max Unfried, scientific advisor at VitaDAO said: “Unfortunately, cryptocurrencies are still very much associated with scams. At the root of every biotech are scientists, and scientists are very skeptical people. While at least in the longevity space, VitaDAO has gathered the trust of the scientific community and overcome the initial skepticism other branches of science are yet to be convinced. While younger scientists especially at the postdoc and young PI level are more open to it, the scientific gerontocracy seems more skeptical.”
He also added that getting connected to the blockchain is still not as smooth, and that the user interface needs improvement.
While these concerns need tackling, calling for uniform international laws to regulate cryptocurrency – to prevent a collapse like that of FTX that occurred last year – Mirsky believes that communities like PharmaCollective.io are gaining traction in the biotech sector.
“They signify a move towards creating platforms that combine the principles of decentralized finance with the specific needs and goals of the biotech sector. Such platforms can act as intermediaries, guiding funds from investors to promising biotech projects in a transparent and decentralized manner.”
However, while this movement seems to be pressing forward, Unfried believes that it’s not meant to be a means for all biotechs to raise money, and is concentrated in underfunded, niche areas of research. As decentralized financing was created as an alternative to the current financial system, according to Unfried, he said: “The community is not much interested in the status quo, but more into biotechnologies that can be game changers – and change the world from sick care to true healthcare.”
“We are still at the beginning of the decentralized science and decentralized financing movement. Given it is still early, the total amount of funding that can be distributed by DAOs and other decentralized funding schemes is low in the grand total. While the available funding amount is going to increase over the next few years at the current state, it is probably most interesting for orphan and rare diseases that are overlooked by big pharma.”
As the cryptocurrency industry is poised to join the trillion dollar club in the next decade, according to Unfried, around 1% would typically be allotted toward biopharma projects. And, because of this influx of capital, “DeSci DAOs having $100 to $200 million would make them competitive and serious contenders in the biotech space.”
As startups like Matrix Biosciences spin out of DAOs, it could maybe drive more trust towards the DeFi movement. But how the young startup, and the healthcare DAO community at large, will fare, we will have to wait and see.