For anyone who doesn’t know what an ICO is (and yet for some reason has chosen to read a blog about blockchain!), it is basically a way of raising finance for a new organisation or venture by issuing digital tokens (or ‘coins’) that can be freely purchased by anyone through a cryptocurrency exchange. It can be though of as a form of crowdfunding in which you purchase the right to share in the future success of the organisation in question.
What, you might justifiably ask, does this have to do with charities or philanthropy? Well, as a result of the work I have been doing on Blockchain for the last few years I have obviously been keeping up to speed with developments in terms of applying blockchain to philanthropy. And whilst there are some great examples of projects that are up and running (eg Alice, Disberse, BitGive Foundation, GrantHero Foundation), there are still only relatively few of them. However, based on conversations I have had and the number of approaches I get from people with ideas for blockchain philanthropy implementations, I suspect we may be about to see a pretty big increase in the size of this market in the coming year. And ICOs appear to be a big part of the plans of many of these social good startups.
We may be about to see a pretty big increase in the size of the blockchain philanthropy market in the coming year. And ICOs appear to be a big part of the plans of many of these social good startups.
So I thought the time was right to ask whether ICOs and token issuances are actually a good idea in the context of philanthropic organisations, and what the challenges and opportunities might be.
The starting point is to look at why you might want to issue tokens for a blockchain philanthropy initiative. I can think of 4 clear reasons (there may well be more, and in reality the motivation is likely to consist of a combination of 2 or more of these, but for the purposes of analysis let’s stick to these four for now!)
All of these are legitimate in the right context. However, they also pose distinct challenges- ranging from purely practical ones to conceptual and pretty much fundamental ones
1 USING TOKENISATION TO ENABLE FIAT DONATIONS
This is the least sexy but most pragmatic reason for issuing tokens: simply to enable people to use your platform without having to make or receive donations in cryptocurrency. This is an obvious thing to do, at least in the short term, because the adoption of cryptocurrency is far from widespread among donors or charitable organisations at this point, so any platform that requires either to operate in crypto is going to radically reduce the size of its potential market. Hence offering a mechanism for converting into crypto and back out again makes a lot of sense. (The platform could obviously also allow direct crypto donations for those who want to make them).
Any platform that requires donors or charities to operate in crypto is going to radically reduce the size of its current potential market. Hence offering a mechanism for converting into crypto and back out again makes a lot of sense.
There are some practical challenges to doing this, such as protecting against the volatility of the underlying cryptocurrency (most likely bitcoin or ether at the moment), so that fiat donors don’t suddenly find their donations reduced in value simply as a result of daily movements in the crypto markets (which aren’t exactly noted for their stability…) However, the bigger challenge is that if you are converting in and out of fiat currency, the benefits of using the blockchain (e.g. transparency, reduced transaction costs etc.) only apply in the portion of the system that is tokenised, and that might be a relatively small part of a long value chain.
For example, if you are running a blockchain platform on which international aid payments and donations can be made (which is where a lot of current focus seems to be), then you can only guarantee enhanced transparency up the point at which you inevitably have to convert payments into fiat currency so that recipient organisations can use them. And this might not necessarily get you that close to the intended end beneficiary, so there is still room for corruption, mismanagement etc. to occur. The alternative is obviously to demand that crypto is used at all points along the value chain so that full transparency is guaranteed. But as we have seen, that also means you will significantly reduce the current market for the platform.
However, let’s not be too gloomy: the point of creating a tokenised platform of this kind - despite the limitations outlined above - is surely to establish a proof of concept that will pay off properly if crypto usage becomes ubiquitous? So it is almost certainly worth doing (particularly given the regular announcements from countries considering introducing crypto versions of national currencies, which so far includes China, Estonia and Russia among others). What the discussion above should highlight, though, is the need to manage expectations in the short term; and to find donors and organisations that are willing to engage with an admittedly limited platform at this point because they have a view to the long term.
One quick thing to note (particularly in light of what we are about to consider in the next section) is that if tokens are simply used as a way of allowing fiat currency donations into the system and tracking them, and are always pegged to an actual sum of fiat currency; then the token itself will not increase in value. (Basically they operate like digital poker chips, with fixed exchange values.)
2 RAISING MONEY VIA AN ICO
Now we come to the reason that I suspect many people would consider issuing tokens for a philanthropic platform: as part of an ICO designed to raise capital to fund the development or expansion of the platform. And this is the one that concerns me most.
There is an obvious intuitive appeal to having an ICO. As I’ve already pointed out, loads of people are making money through coin offerings at the moment (CoinDesk even reported that in Q1 of 2017, ICOs overtook venture capital as the main financing mechanism for blockchain startups).
But there are also many challenges: the most obvious being reputational risk. Plenty of people are already warning that ICOs are forming a huge bubble, and that it will burst soon. But even if that doesn’t turn out to be the case it is certainly true that there are a lot of shoddy ICOs out there at the moment and some of them are bound to fail in a pretty big way. So any existing charitable organisation or philanthropy startup looking to use an ICO needs to be cognisant of the dangers of being tarnished by association.
By far the best way of minimising this danger, as far as I can see, is to present a credible theory to explain how and why your token is going to increase in value. Surely the point of an ICO is to get people to buy tokens, and the main reason they are going to do this (unless it is for the reasons outlined in 3 and 4) is because they believe that the token is going to increase in value, and thus makes sense as an investment (albeit probably a very high risk one).
This is where a lot of the scepticism about commercial ICOs comes from: with little more than a white paper and some chutzpah, it seems like you can raise millions off the back of some pretty heroic claims about how your platform or organisation is going to grow and why your tokens are therefore going to be worth loads. That is why tokens often seem to some extent like “magic beans”, and their appeal depends on the extent to which you buy the story about them growing into a fairy-tale beanstalk, or think they are merely the basis for an unsatisfactory dinner.
So how might you go about crafting a credible narrative for value increase in the charity case? I’m not pretending I have the perfect answer to this question (if I did I would already have launched my own ICO by now!), but I do think there are a few key things to bear in mind.
The first is that a two-sided platform needs to drive up adoption on both sides (in this case donors and orgs receiving donations), as the platform only has value if there are a lot users on either side. To see why, imagine Airbnb, but with only 3 properties on it. Or with the existing number of properties and only 3 rental users. Does that seem like a worthwhile platform for anyone? Not really. (For more on the economics of 2-sided platforms, I recommend the highly-readable Machine, Platform, Crowd by Andrew McAfee and Erik Brynjolfsson).
So in the philanthropic case you have to be able to outline a credible vision of how and why both donors and recipient organisations are going to want to adopt your platform. And that will require a pretty detailed narrative about the overall picture of private money being voluntarily given away for public good and the way in which non-profit financing works, and why your token and platform meet an important need on both sides.
A two-sided platform needs to drive up adoption on both sides, so you have to be able to outline a credible vision of how and why both donors and recipient organisations are going to want to adopt your platform. And that will require a pretty detailed narrative about the overall picture of private money being voluntarily given away for public good and the way in which non-profit financing works; and why your token and platform meet an important need on both sides.
The second thing that strikes me is that any compelling narrative about a charity token is likely to have something to say about the potential wider functions of the token beyond simply being a means for people to invest through a crowdsale. If not, then the proposition for why the token is going to increase in value is basically: “my blockchain philanthropy platform is going to be so awesome that all the donors and charities will want to use it”. Which is obviously not that enlightening, and invites the follow up question “what is so good about it, and why is it better than other similar platforms?”
The answer to that question will probably involve some general discussion of the increased transparency and reduced intermediation that comes with using blockchain, and some specifics about why the functionality and user experience of this particular platform is better than its rivals. A well-crafted and evidenced version of this argument might well be pretty compelling (particularly if you have an existing non-blockchain platform that can demonstrate track record and customer demand), but I think we still need to maintain a healthy scepticism towards any claims that a blockchain philanthropy platform is going to be massively commercially successful simply because of the function and UX of the platform itself. (As a useful thought experiment, ask yourself how many non-blockchain philanthropy platforms would have won traditional VC investment. I suspect the answer is not many).
That is why I think the onus is on telling a wider story- one that explains why establishing a philanthropy-specific token is worth doing beyond simply enabling ICO investment for its own sake. And that bring us on to 3 and 4.
3 DELIBERATE CREATION OF SOCIAL VALUE CURRENCY
Tokens can fulfil all sorts of purposes. They might act as digital equities, allowing mass investment in a business just like standard shares. Or they might be commodities, which have value that might increase, but are not primarily intended as a means of exchange. (For a proper look at the economics of tokens, check out this paper by John Conley). However, if tokens are to replace cash in a blockchain philanthropy platform (which is the case in many that I have seen so far), then surely they have to be viewed as a currency of some sort? And since they are presumably designed specifically with charitable giving (or perhaps broader social good) in mind, we have to ask: Is a currency pegged to social good in this way going to be appealing, and how is it going to work?
One immediate thing we need to consider, for instance, is how tokens can actually be used to buy things in the real world (as it is only then that they have real value). Do we allow them to be exchanged back into standard crypto or fiat currency? If so, then how do we stop value simply flowing out of our system? Conversely, if we don’t allow conversion (i.e. our system is closed) then how do we ensure that a sufficient number of companies, vendors etc. start accepting the currency as a way of purchasing the goods that are actually necessary for charities and beneficiaries to deliver social outcomes, so that it has utility?
This is the same challenge faced by local currency initiatives (eg the Bristol pound, or the blockchain-based Liverpool Pound where I now live), which get people to convert fiat money into what are essentially tokens tied to a geographic area as a way of encouraging them to use local shops and services. And the solution would seem to rest on appealing to the desire of consumers to support their local area and the desire of business owners to demonstrably identify themselves as ‘local’, rather than trying to argue that the currency makes straightforward commercial sense in its own right. The same is likely to be true of any proposed social good or charity token currency: businesses, charities and donors adopting it at first will have to buy into the overall vision and therefore be willing to accept some additional hassle in the short term on those grounds. This is far from impossible, but it is obviously a big ask to convince multiple groups to adopt an entirely new currency so the rationale for doing so needs to be pretty compelling!
Another concern is that this already-difficult task might be made even harder by proliferation: if everyone and their dog is setting up different, competing charitable tokens, then the potential market for each one is going to be smaller. Hence it will be harder for any of the platforms to get to the required scale, and the likely utility of their tokens as a currency will be more limited.
The task of creating viable charity tokens might be made even harder by proliferation. If everyone is setting up different, competing charitable tokens the potential market for each one is going to be smaller. Hence it will be harder for any of the platforms to get to the required scale, and the likely utility of their tokens as a currency will be more limited
This is not a problem limited to charitable ICOs, as the same point applies to commercial ventures issuing multiple different, incompatible tokens. One interesting idea that might be at least part of the answer is the notion of “Community Token Economies” put forward in a white paper by Outlier Ventures. The suggestion is that rather than individual orgs all launching their own tokens, those operating in the same space and with relevant shared interests (e.g. autonomous vehicles, digital identity, charitable giving) should instead look to launch joint community tokens that work across all their platforms. There could then be an API layer on top of all this, so that individual organisations could still developing their own UI and branding, but crucially the underlying tokens would be usable across all platforms in the community.
This seems to me to make a lot of sense in the charity case: rather than trying to create a myriad of different charitable tokens, wouldn’t it better for those interested in creating blockchain giving platforms to agree a set of shared standards that could be used to define a token that worked across all of them? The immediate response might be that this would be unappealing for organisations that view themselves as in competition. However, I would argue that it shouldn’t for two main reasons:
- If these orgs have a social mission to increase/improve giving, they stand a better chance of doing that if their token is successful, and this seems more likely if the job of promoting adoption is shared
- Whilst it is true that no one organisation will get sole benefit of increase in value of community token, they will all benefit equally. And, by aligning interests of multiple different orgs/donors/platforms behind single token, the chances of success are again much greater.
4 CREATION OF A DAO
The other reason you might want to issue tokens is as a mechanism for creating a DAO structure (and rewarding desirable behaviour/punishing bad behaviour within that structure). This makes sense, and is something I have previously considered at some length in a previous discussion paper on Blockchain and DAOs where I explored the possibility of creating a DAO (or AIDAO) in which donors and beneficiaries were able to interact directly to get money and other resources to where they are required to deliver desired outcomes. Intriguingly this is an idea that appears to be being taken forward in the plans of various organisations that I have seen.
I’m obviously a big fan of the idea of social good DAOs, and I think that decentralised structures of this kind are going to play a big role in the future of charity, but there are a couple of important questions to ask up front:
- What are participants in the DAO actually able to do through the structure?
- What are the punishment/reward mechanisms? (Particularly important if donors and beneficiaries to be part of same DAO, as the idea of punishing those in receipt of donations for failing to achieve outcomes or similar is quite challenging)
- What are the consensus mechanisms?
With all that in mind, it is important to make it clear that I’m not trying to suggest that ICOs for philanthropy platforms or other philanthropic ventures are necessarily a bad idea. As I hope I have explained, there is a range of good reasons for organisations potentially wanting to issue tokens. What I think we need to guard against, though, is any notion that having an ICO is some kind of miraculous get-rich quick scheme for philanthropic organisations. Not only do I think it is highly unlikely that you would in fact get rich if you went into it with that sole aim, but it could also do significant reputational damage to the idea of using blockchain in a philanthropic context, or even to philanthropy more widely, and that should be a real concern.
For anyone contemplating a charitable ICO, therefore, I think there are a couple of key questions to answer:
- How is issuing tokens going to further your social mission? Is it just by raising capital through an ICO, or is there more to it than that (as outlined above)?
- If an increase in the value of the token is part of that vision, do you have a credible narrative for how and why that is going to happen?
- Are there options to build on top of other existing charitable token instead, or to work with others to share the adoption of your token, in order to create a Community Token Economy?
- If tokens confer membership of a DAO, what is the purpose of that structure and how do any punishment and reward mechanisms work? (In particular what safeguards are there against beneficiaries being unjustly punished)
If you can answer all of those questions satisfactorily, then go for it. In fact, put me down for some tokens at the pre-sale…