Blockchain and smart contracts open up new opportunities in philanthropy, transforming aid into digital assets and building trust in charitable organizations. The givers can now track the impact of their contributions while charities can use crypto tokens to incentivize making donations.
When deciding about donating funds to charitable causes, many will wonder whether or not their contribution will have an impact. Quite a lot of nonprofit organizations have shaken people’s trust in philanthropy and made them question the credibility of charity initiatives by engaging in shady schemes to extract more revenue. Transparency is one of the key issues in today’s philanthropic world.
Enter blockchain technology, an immutable ledger where every record can be traced to its creation. Decentralized and distributed among its users, blockchain allows them to track transactions and be sure of the absence of fraudulent activities. Read on to find out more about the rise of blockchain charity projects and what benefits the technology brings for philanthropic organizations, donors, and beneficiaries.
How does blockchain work again?
A blockchain is a data structure that stores data in a growing chain of blocks that are connected by cryptography. Each block on the blockchain consists of three core components: data, the hash of the previous block, and the hash of the subsequent block. A block’s hash is a function that takes data as an input and converts it into an immutable hashed output that cannot be traced back to its input.
The blockchain’s design is what makes it ideal for storing sensitive information. In today’s technologically dependent world, we expose our identities and assets to a multitude of middlemen on the Internet, as all of our transactions must go through a central server. If this central server is hacked, all of our information can be accessed. However, blockchain eliminates the need for a middleman: it records transactions through its users’ computers and allows users to authenticate transactions.
Thus, due to blockchain’s decentralization, there is no central point of risk that hackers can target. In addition, the data within a block cannot be changed; since each block on the blockchain is linked to its adjacent blocks, by altering the data within one block, its hash will not match that of the subsequent block, leading the chain to break after the altered block. Blockchain technology enables data to be kept secure and removes the danger of tampering.
As a decentralized, secure data structure, blockchain opens the door to a world of evolving technology. Countless industries could use blockchain to streamline and fortify their systems. In particular, blockchain can revolutionize the structure of nonprofit organizations, simplifying their procedures and giving donors transparency.
An example of how charity may go astray
When we think of donating to charity, we expect that our money will be funneled towards a good cause. With the incorporation of technology into donations, when supporting a nonprofit is merely a click away, we may accidentally end up funding fraudulent campaigns.
For example, in 2014, Kai Brockington started a charity named Our Genesis Project that claimed to help the community by using its funds to create medical clinics. However, according to the FBI, Brockington instead incentivized others to fake documentation on donations to his “clinic” so that their employers would match their donations. Over the next four years, Brockington earned more than $680,000 and spent those funds on himself and his family.
Even with legitimate charitable organizations, some of these charities only allocate a small portion of their donations to the cause that they say they support. For instance, it was revealed that the Kids Wish Network, an organization that raises money for dying children, only spends 3 cents per dollar on helping the children. The rest of its funds goes to its corporate sponsors and private operators.
How a blockchain charity solution eliminates the risks
By incorporating blockchain into recording charitable donations, donors will be able to track exactly where their donations go and when they are put into use. Blockchain will provide greater transparency behind nonprofit organizations and give both donors and operators greater accountability when it comes to how donations are spent.
With blockchain’s immutable structure, donations cannot be falsified and are permanently recorded for donors to see. In addition, blockchain can track how much of every donation is funneled toward actually helping the cause that is marketed, which in turn prevents organizations from diverting funds toward lining their own management’s pockets.
With large, centralized charities, there is always the possibility that too many levels of management will eat into their funds. With blockchain-based charities, the number of middlemen between donors and those they want to help is brought to a minimum, which allows a greater portion of donations to be given to those in need.
By utilizing blockchain technology in tracking, storing, and authenticating donations, donors are able to verify their donations themselves and keep tabs on exactly how their money is used. Blockchain furthers the trust that donors have in charities by enabling greater visibility of charitable transactions, paving the way toward a more philanthropic future.
Incorporating blockchain to resolve staffing challenges
As charitable organizations grow in size, so do their administrations. However, a report by the University of Maryland found that both rural and suburban volunteering fell to all-time lows in 2015. With a decreasing number of people willing to volunteer at nonprofits, organizations bridge this gap by hiring more workers.
On the other hand, the problem with hiring more workers and increasing their management is that funds intended as donations can be diverted toward paying executives and staff in order to ensure that the charity functions smoothly.
By integrating blockchain into their systems, nonprofit organizations can reduce their body of staff without sacrificing the integrity of their organization. With a smaller administration, there would be fewer overhead costs. This in turn would ensure that a larger percentage of donations go toward the cause that they support.
Much of the charity administration’s job revolves around managing funds and keeping a record of how they are dispersed. With blockchain’s immutable storage, these funds would be permanently and securely logged onto a chain of blocks. The path and distribution of donations would be quickly and efficiently recorded in the ledger, reducing administrative inefficiency and potential financial fraud.
Utilizing blockchain to record these funds and their uses also generates an unalterable digital receipt of funds and improves organizations’ credibility. By incorporating blockchain into their administrations, charities could quickly resolve some of their organization’s staffing issues.
Blockchain charities and transparency
Another challenge that charities face is transparency. When people donate to charities, they generally trust that the organization will ensure that their money is spent well. However, many nonprofits are not as up-front about their spending as donors would hope, disclosing their fund distribution only in broad terms and neglecting to reveal specifics, or even falsifying their records.
Thus, donors are left in the dark as to how much of their money actually went toward helping those in need and how much was diverted toward other organizations, budgeting issues, and other overhead costs.
With the addition of blockchain into charities, donors would no longer be unaware of what’s being done with their money. Donation information would be stored in blocks along with donor information, but donors would be able to preserve their privacy with a sort of digital signature that does not reveal their identity. Since blockchain is a public ledger that is viewable by anyone, charity fraud would be very difficult to commit; donors are able to carefully monitor their funds and ensure that no data is tampered with.
Blocks are stored permanently and in chronological order, so donors can check to see how their donations are spent, who is in possession of their funds at any given time, and where their money has been transferred to.
Furthermore, if enough donors connect their computers to the blockchain (which would then function as nodes), they would reinforce the security of the blockchain, their donation information would be more difficult to manipulate, and they would have more confidence in the safety of their transactions.
Although most charities and fundraisers are legitimate and seek to help the less fortunate, there are still some false operators that are only trying to scam people out of their money. Being staged on a blockchain ecosystem, donors can use validation mechanisms to identify authentic nonprofit organizations.
Removing the middlemen from charitable systems
Many charities use third-party contractors to solicit donors and manage their funds, as this is usually much cheaper than hiring full-time fundraisers. However, in an investigation conducted by the Tampa Bay Times and their Center for Investigative Reporting, among the 6,000 charities that paid for-profit companies to help with donations, the worst 50 charities only used 4 percent of donations for direct aid. The rest of their funds were given to for-profit canvassers and companies hired to help solicit donors through advertisements and other means.
Blockchain technology can help charities manage their funds more closely and serve as a marketing strategy, removing the need for these middlemen. To liken these charity organizations to businesses, using blockchain is a sellable point, as it would encourage more people to donate with the assurance that their money will go directly to the cause they support.
Furthermore, in this increasingly digital age, a majority of people do not fact-check information they see online, resulting in opportunities for fraud and false advertisements. Rather than making potential donors research reputable organizations before donating, the blockchain, documenting the various donations throughout time, would serve as an affirmation of the charity’s legitimacy. In a fast-paced world, by presenting itself as a self-verifying platform, blockchain would incite an increasing amount of donations.
Blockchain by nature is a peer-to-peer network, with transactions verified by users of its network. As a decentralized system, it lacks the single area of risk that comes with centralized servers. With copies of the blockchain stored on multiple nodes, hackers would not be able to manipulate blockchain data without altering every single copy of the blockchain.
In addition, donating to charities sometimes involves putting our identity into the hands of the charity, and by extension, third-party contractors. In today’s age of technological advancement, the centralized server used to file donors’ private information can present itself as a target for hackers.
With blockchain, the donors’ privacy would not be violated as their private information would be encrypted and unviewable to users. Storing donor information on a blockchain would put an end to hiring middlemen to record transactions, which would ultimately fortify the security of the charity and increase donors’ trust in the organization.
Notable advantages of blockchain charity solutions
Blockchain both as a technology and the applications that are built on top of it, such as digital wallets, trading exchanges, and lending solutions could introduce a whole array of new and innovative tools for philanthropic organizations. Some of these innovative concepts and the benefits for charities are described below.
Digital smart contracts and agreements
Smart contracts are applications that run on blockchain technology that have rules and conditions programmed into them and initiate certain events when these conditions are met. In the case of philanthropy, these contracts can represent agreements between the giver and the charitable organization.
This brings a lot of opportunities for all the parties involved in the donation process and can make it fully automated and uncompromising. Clauses and provisions could be built right into the smart contracts and stipulate when and where funds, goods, or supplies should be transferred. These agreements could regulate the percentage of payments that go to support the charitable cause. The whole process of dispersing donations could be streamlined, from receiving the payment to choosing the recipients to finalizing transactions to beneficiaries.
This builds a lot more trust between the charity organizations and the givers, allowing them to see how the money is spent and get a refund if the impact of the donation was not verified by the smart contract.
Engagement through tokenization of philanthropic assets
Tokenization is the practice of creating digital assets that represent anything of value, such as charity donations, which could be purchased and shared among stakeholders. Such digital assets could be used to sustain a fundraising system where the givers are rewarded for participating in charity events with tokens. The tokens grow in value as more donations are made by other supporters of the cause, and therefore create an effective engagement model.
Tokens could be assigned to specific causes like supporting day-to-day operations in a foster home or providing medical supplies. This way, instead of just helping an organization financially, donors will be able to decide on the projects they would like to be involved in and send their funds directly to the people they would like to support.
Beneficial blend with the growing sharing economy
Sharing economy platforms create more ways of helping people than just simple donations. Placing resources in a distributed system like blockchain makes them universally accessible. House and apartment renting, ridesharing, knowledge, and talent sharing services can be used by charities to provide affordable housing, commuting, and education for people in need.
These platforms also offer more efficient ways of locating and accessing resources for charities to operate and expand their ecosystem. Ultimately, blockchain sharing economy systems open up new channels for philanthropic action and give charitable organizations a wider reach.
Blockchain-based payments bringing tax benefits
Payments in cryptocurrency, such as bitcoin, do not attract capital gain taxes. Moreover, as charities oftentimes are global organizations, incurring fees for international payments will also not be a problem as cryptocurrency transfer fees are much lower. So the charity will get the full donated value that the contributor sends. At the same time, the donor will also be able to benefit from a higher tax deduction from the government.
Blockchain’s current impact on philanthropy
The most common embodiment of blockchain technology in charity at the moment is cryptocurrency donations. Several charities have opted to receive crypto, including the Red Cross, United Way, Save the Children, the Electronic Frontier Foundation, and the Wikimedia Foundation.
In 2018, to attract younger audiences and the new generation of donors, UNICEF launched the “Game Chaingers” initiative to generate funds for their Syrian Children Help program. This 2-month experiment was aimed at the gaming community and engaged them to use their performance graphic cards to mine Ethereum. The initiative proved to be successful, aggregating the computing power of 12,000 gamers’ machines and raising over 33,000 USD, which was an overachievement compared to the 10,000 USD goal. Recently the organization has also opened up its own UNICEF Cryptocurrency Fund to receive donations in Ether and Bitcoin and support children around the world.
Another strong charity project was recently launched by leading philanthropic organization give.org. The Wise Giving Alliance created a blockchain donation platform GiveSafely.io which allows givers to donate to trusted and accredited charities while keeping personal information private and secure. It also encourages them to share their information by rewarding them with points that could be used to redeem prizes.
Quite a few blockchain charity projects have launched over the years, including crowdfunding platforms, educational initiatives, food aid programs, and more.
Examples of philanthropic blockchain projects
Let’s take a look at some of the major blockchain charity platforms that help solve the common issues of transparency and accountability with making donations. The main goal of these projects is of course to create trust in charitable organizations.
World Food Programme
The World Food Programme uses blockchain smart contracts to provide food aid, track donations, and address the problem of global hunger.The project’s “Building Blocks” blockchain solution ensures that transfers of funds are encrypted and secured. Taking middlemen out of the picture, the platform significantly reduces fees and makes sending donations much easier. The World Food Programme’s Innovation Accelerator combines blockchain with other emerging technologies such as artificial intelligence and the IoT to find innovative solutions to global hunger.
Alice crowdfunding platform
Alice helps charities collect donations and transfers funds only when the goals and objectives of the philanthropic program are met. Based on the Ethereum blockchain, the crowdfunding platform introduces transparency and trust through smart contracts that have the milestones preprogrammed for each charitable cause. After a certain milestone is reached, the donated funds are released to the beneficiaries. If the nonprofit organization doesn’t manage to meet the conditions by the deadline, the donor can ask for a refund to withdraw their donation.
BitGive donation project
BitGive was the first blockchain nonprofit to take advantage of the technology’s potential to lower transaction costs, accelerate the donation process, and provide the ability to follow the charitable campaign’s progress. With BitGive’s donation platform the donors are provided with real-time financial information as well as the results achieved by the projects they have supported. The platform avoids dealing with banks, financial institutions, and other middlemen, making donating a seamless and trustworthy process.
Binance Charity is a decentralized donation solution with fully transparent transaction flows. Givers see exactly how their funds are dispersed and the impact they are making. There’s a variety of projects already initiated on the platform, including providing healthy food for children in Africa, improving living conditions of refugees, supporting education in developing and least developed countries, rebuilding and renovating, and disaster relief. Supporters can choose which project to donate to or just transfer funds to the Binance Charity Wallet and let the organization distribute them. Donors can easily follow and see how their contributions made an impact.
AIDChain is a charity platform that connects philanthropic organizations, donors, beneficiaries, and service providers into one ecosystem. It allows charities to promote themselves and their projects while also leaving the opportunity for them to collect donations on their own platforms. They’ve developed a payment gateway and widget which could be placed on websites to accept cryptocurrency contributions.
AIDChain supports 23 of the most popular currencies and has partnerships with trading and exchange platforms such as Bittrex and Bitfinex to allow beneficiaries to easily exchange crypto for fiat. The charity project also allows donors to easily track their donations and the impact they are having.
It’s not all sunshine: drawbacks and limitations
Despite its significant positive impact on philanthropy, blockchain technology does have certain limitations that may slow down its global adoption. Let’s take a look at what’s holding it back.
Although blockchain is inherently very secure, protected by strong encryption mechanisms and its distributed and decentralized nature, it is still not entirely impenetrable. Smart contracts are essentially software that is also prone to bugs and vulnerabilities that may provide a backdoor for hackers trying to steal funds.
Holding cryptocurrency donations also carries the risk of losing the wallet private keys and with them access to funds, with no chance of recovering them. And if the keys are not properly stored in a secure manner, with general precautions taken to restrict their online accessibility, this may also lead to donations being stolen by malicious parties.
Cryptocurrency markets are highly unstable and oftentimes this can lead to an unwanted drop in value. For instance, back in 2018 bitcoin suffered a huge swing when its market price dropped from $20,000 to $3,000 within the year. Although it wasn’t a rapid swing and the cryptocurrency has since recovered its value, this can seriously alienate donors. A good way of preventing losses is storing donations in stablecoins, which are special cryptocurrency pegged to stable fiat assets like USD or commodities like gold.
Blockchain’s learning curve
People who are new to cryptocurrencies and blockchain may find these concepts quite puzzling. A lack of understanding of the basics of blockchain and smart contracts may discourage potential donors. Some philanthropic organizations could also be hesitant to adopt a new technology they don’t completely trust, without fully understanding the advantages of blockchain for charities.
Lack of an established regulatory base
Most policymakers in countries around the world are only just starting to roll out laws stipulating the use of blockchain and cryptocurrencies. As the long-term implications and the full potential of the technology are still not clear, regulations are subject to change and modification. In some jurisdictions, the beneficiaries accepting cryptocurrency donations might incur additional taxes imposed for using digital assets.
Bright future of blockchain charity and philanthropy
Blockchain networks are distributed and decentralized systems, which means they create a boundless environment for members to interact and exchange services. Each platform has its own architecture and applications built on top of it. Bitcoin mostly serves the financial and payments sector, while the Ethereum network provides the foundation to develop new systems with various use cases spanning from financial to healthcare to philanthropy.
As blockchain platforms become more and more commonplace and spread across the business landscape, joining them into one single network and ecosystem of services will be the next innovative step toward a brand new economy. This will create a global, open, and decentralized network on top of the internet. For charity and philanthropy, this kind of boundless global ecosystem will eliminate current challenges with accepting donations from international contributors by cutting down fees, lowering administrative costs, and speeding up processes with no middlemen involved.
Placing the capabilities of smart contracts and cryptocurrency payments together, alongside other recent developments such as decentralized finance (DeFi) with streamlined lending and borrowing, could prove to be a paradigm shift in charitable giving. Blockchain charity solutions will also benefit from integration with the IoT and artificial intelligence systems which could enable gathering large amounts of data on how donations are spent, and generate insights from that data to optimize the distribution of funds.
With its decentralized nature, complete transparency, and immutable storage of records, blockchain is a game-changer for philanthropic organizations. It can create a global ecosystem for charitable giving where the givers can easily track their donations and extract value from supporting the ones in need with tokenized assets.
With increased trust in charitable organizations, they’ll be able to provide larger donations to the causes they support. Backed by blockchain smart contracts, beneficiaries will receive the aid in the most direct way, while donors can be sure their contributions make a difference. Having proven experience in delivering DLT software projects, we strongly encourage nonprofit organizations to take advantage of these benefits and offer our blockchain development services and expertise.