ICTworks

In this post, I intend to provide a high-level overview of Web3 and how it can benefit nonprofits and civil society; I will illustrate some criticisms and risks to be aware of. Finally, I’ll share an action plan for nonprofit Web3 champions.

Watch my GDDF lightning talk on the Web3 Playbook!

While understanding blockchain technology, I was surprised to learn how prominent and influential the sector had become. I found that the optimistic case for blockchain was well-funded and supported by a large and growing number of investors, computer scientists and entrepreneurs, and champions in the public and private sectors.

I have observed a growing interest in the technology in nonprofits for donations, civil registration, and cash aid and wanted to make sure my organization and other nonprofits had a roadmap for understanding and navigating Web3.

Key Messages

• Web3 enables ultra-low-cost operating models for services
• Web3 enables transparent, democratic organizational governance
• Web3 offers new ways for donors to engage and support social impact
• Web3 can benefit nonprofits with new fundraising, programs, finance, and governance capabilities

What’s the Big Story?

First, there is Bitcoin ($BTC), the original cryptocurrency. Bitcoin remains the most valuable. Bitcoin’s adherents span institutional investors to supporters who see it, more or less, as a perfect form of gold, an asset that can be a universal store of value without the undesirable characteristics of gold (e.g., volume, quality). Bitcoin is, in essence, a form of digital gold.

Compared to newer cryptocurrencies, Bitcoin’s functionality is limited; however, improvements are being made. Updates to Bitcoin must pass through a consensus of community members who operate the Bitcoin network. This conservative approach to change is one of the reasons for its renowned security.

Building on the Bitcoin technology, the founders of Ethereum invented a new kind of computer, a decentralized peer-to-peer computer, a so-called world computer, that can host cryptocurrencies like Bitcoin, as well as other functionality supported by a smart contract, the type of computer program that runs on a blockchain. (Smart contracts are basically blockchain applications.)

Other cryptocurrencies (e.g., Terra, Polygon) typically compete with or complement Ethereum or Bitcoin functionality. Cryptocurrencies are the native currencies of their blockchains; they are required for the economic incentives that secure the network. To use the Ethereum network, you must pay using Ethereum.

Ethereum’s first killer app is decentralized finance (DeFi). Smart contracts, pioneered by Ethereum, enable the ability to define complex monetary contractual relationships, such as with your bank, credit card, broker, or asset manager (a.k.a. programmable money). This functionality enables payments, savings, lending, trading, and other financial services for a fraction of the cost of existing services.

This same technology is transforming public goods management and positive climate action. Ethereum 2.0 will be carbon neutral, while increased scrutiny on the industry focuses its attention on ESG, economic, social, and governance criteria — keys to the sustainable businesses of the future.

So What is Web3?

Web3 is the ecosystem enabled by blockchain technology, smart contracts, and crypto-economic incentives. Web3 includes, but is by no means limited to, non-fungible tokens (NFTs), decentralized applications (dApps) and protocols, and decentralized autonomous organizations (DAOs).

Public blockchains are publicly accessible, peer-to-peer, append-only (unchangeable) databases. Crypto economic incentives are how economic value is generated to compensate blockchain network operators.

1. Non-Fungible Tokens (NFTs)

NFTs (non-fungible tokens) represent unique digital assets. They are currently used to create tokenized versions of digital art on such marketplaces as OpenSea and SuperRare.

There has been a lot of hype about NFTs. Their actual or perceived value notwithstanding, some will undoubtedly be part of art history. Beeple’s EVERYDAY: THE FIRST 5000 DAYS, Larva Labs Cryptopunks, and Yuga Labs Bored Ape Yacht Club have a strong likelihood of lasting cultural significance.

Digital artwork, multimedia, and profile pictures (PFPs) represent only one aspect of NFTs, the tokenization of digital media. However, like all things software, new functionality can be added to NFTs over time, offering entirely new platforms for value creation. For example, some NFT smart contracts include a concept of royalties, where a portion of proceeds from a resale are automatically channeled to another party. Other NFTs act as membership tokens, unlocking benefits in both the digital and real world.

NFTs have proposed applications in identity and civil registration, intellectual property, supply chain, real estate, collectibles, and luxury, among others.

2. Decentralized Applications (dApps)

Decentralized applications (dApps) and protocols are the applications that are hosted on blockchains, including financial services, marketplaces, social media, games, and network utilities.

DApps work like a regular web or mobile app, except that they connect to an underlying blockchain, and user access is authorized through a wallet that helps the user to complete transactions, such as authorizing access, sharing data, or making a payment.

DApps and protocols can also be a vehicle for social service delivery. Consider Impact Market. Impact Market is a poverty alleviation protocol that shows what is possible in universal basic income or cash and voucher assistance (CVA) using Web3 technologies. Using Impact Market, low-income communities can connect with donors to receive payments to buy necessities, invest in small business and agricultural capacity, and save for emergencies. Impact Market has distributed over $2.5 million in over 30 countries, serving over 40,000 beneficiaries.

3. Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organizations (DAOs) represent a new organizational form that uses smart contracts to manage contractual obligations and decision-making through on-chain governance, i.e., member voting recorded on the blockchain.

Many DAOs in Web3 manage the development of blockchain infrastructure, protocols, and dApps. This is a co-operative style, democratic, self-organizing structure that, with the right tools and operating model, scales.

DAOs are an open form for self-organizing and can be responsive funding instruments for social impact. For example, Move is a platform that promotes social, public good, and environmental change. It enables community organization, resource pooling, and compound giving through its endowment. Recently, this DAO has organized a movement to support community-based organizations in Ukraine.

Why is Web3 Important?

Web3 creates new economic, social, and cultural value. This technology is important because it reduces costs on an unprecedented scale, provides improved tools for social organizing, and transforms our relationship to technology and data.

1. Disruptive Decentralization

Web3 is a disruptive technology that can transform industries through unimaginable cost reduction. For example, Defi is a new sector transforming finance by reducing operating costs by significant factors. Current products enable payments, banking, lending, and currency exchange for pennies against dollars in comparison to traditional services, and ultimately DeFi not only introduces innovative financial products but substantially reduces the operating costs of traditional financial services.

2. Trustless Collaboration

Trustless collaboration allows new organizing models with open, scalable, and transparent governance. The term trustless is used because the thousands of third parties that validate blockchain transactions are essentially unknown to each other and therefore cannot be trusted. But smart contract code is available for all to see and examine, making trusting strangers that much easier. Many Web3 projects are governed openly through DAOs, and governance and funding choices happen “on-chain” democratically, even if members do not know each other, creating new platforms for effective social organization and engagement.

3. Creator Culture

Web3 transforms our relationship with technology from user and consumer to owner and creator. When the use of technology also necessitates ownership of that technology, our relationship changes; we become more invested in the social value and governance of that technology. Incidentally, this technology affords significant transparency and opportunities for governance through the DAO organizing framework and voting capabilities. The technology empowers individuals and communities to equitably own, influence, and contribute to digital life.

Web3 Nonprofit Uses and Benefits

Nonprofits stand to benefit from developments in this technology in four areas.

• Fundraising
• Programming
• Finance
• Governance

1. Fundraising

Opportunities exist in donations, partnerships, and Web3 engagement strategies. Donations can be denominated in cryptocurrency, which your organization can exchange for US dollars, exchange for another cryptocurrency, or leave on deposit. Web3 native companies, such as exchanges, are eager to partner with nonprofits, as many have similar interests in positive social outcomes as nonprofits. Finally, there are Web3 enagement strategies, such as NFT auctions.

NFTs have incredible potential to increase engagement and drive community, but to be successful, your organization must make an authentic connection with your donor community and your NFT strategy should be thoughtful, transparent, and add value. Some donors may not understand the value or interest in NFTs, and there have been some high-profile missteps.

2. Finance

There are a number of different applications that can improve operational efficiency. Vendor, Staff, and Volunteer payments may be more efficient and less costly using stablecoin technology, especially at scale or across borders. There are cash account management strategies that can lead to higher interest rates on deposits. There are opportunities for innovative finance products, such as social impact bonds or donor-advised funds.

3. Programs and Service Delivery

For programs and service delivery, initial applications existing in economic development, direct cash aid, and possibilities exist for nonprofit banking services, credentialing, identification and civil registry, and municipal service management.

4. Governance

There are several Web3 native solutions to organizing and funding for social impact. Nonprofits can consider the benefits of organizing as a social impact DAO. Nonprofit entities can use tokenized membership and on-chain voting to record decisions and specify funding. Quadratic funding is Web3 native idea that enables fairer funding practices for public good financing.

Web3 NGO Criticisms

While there are transformational properties of this technology, it does come with criticism.

1. Asset Inflation, Volatility, Fraud

There are common misunderstandings of cryptocurrencies, what they are, and how there are valued. Cryptocurrencies are a new asset class, like real estate, stocks, and commodities. They are considered speculative, risk assets, like technology stocks. Many have high valuation and volatility, and individual investors should be wary. In the future, many cryptocurrencies may not be worth their current price. That said, the value of the technological breakthrough can be distinguished from the market capitalization or price of any single cryptocurrency.

$BTC (Bitcoin) has a limited supply, a dedicated user base, and a very secure network protecting its value. Its proponents believe they have solved key problems with money. $ETH (Ethereum) is the native currency for the Ethereum network and is required to pay for transactions. Both networks have been some of the fastest-growing technology for several years. Other cryptocurrencies compete with Ethereum on speed and cost. Other cryptocurrencies provide scaling, inter-blockchain communication, and monitoring utilities.

Like many ventures, some cryptocurrencies have not lived up to their expected value, and many projects have been released with little intention of creating lasting value. Some could undoubtedly be characterized as fraud (a rug pull in crypto speak). That said, characterizing the industry as a whole as a ‘Ponzi scheme’ is not accurate. This is how technology change works: many large and small bets fund many new ideas, and a few breakthrough products take the lead. In this competition, bad actors inevitably emerge to try to take advantage and extract value.

2. Environmental Impact

Some blockchains use the Proof of Work protocol (e.g. Bitcoin, Ethereum) which is criticized for its energy use and impact on the environment. Usually, these characterizations compare energy usage to small countries, overplaying the impact on the environment without looking at the economic advantages of the technology or weighing the value to society.

Environmental impact is a serious issue, and the industry is responding with a focus on positive climate action. Newer blockchains work via more energy-efficient technology (e.g., Proof of Stake). Many Bitcoin miners are moving to and supporting the development of renewables.

Ethereum 2.0 will be carbon neutral. In addition, there are several DAOs and industry foundations working on new initiatives and features that enable environmental and regenerative finance. There is significant attention on the carbon economy and the tokenization of natural resources. Notable actors in this area are KlimaDAO, Toucan, Regen Network, and Moss.Earth.

Indeed, Web3 should be viewed through an Environmental, Social, and Governance (ESG)lens and, like every other organization in the early 21st century, should be preparing for an energy transition away from hydrocarbons and toward renewables.

Other blockchains are engaging in decarbonization efforts. For example, Polygon, an Ethereum scaling solution, recently announced a $20 million decarbonization effort. The Celo blockchain is noted for being carbon negative.

In particular, environmental organizations should study how public goods management and negative externalities can be priced and traded through blockchain-based governance and enable global and transparent environmental governance.

3. Risks

There are also risks in dealing with cryptocurrencies that nonprofit organizations should be aware of.

First, managing cryptocurrency transactions is currently a bit complicated. Managing transactions of non-trivial amounts of cryptocurrency requires planning and training. This is due to the relative immaturity of user interfaces in the technology. There are a few emerging conventions, and next-generation wallet technology offers greater security and usability, but challenges remain.

Second, users should watch for theft and third-party risk by doing due diligence on products and services. Reputable services have open governance, known leadership, and audited code, which lowers the risk of loss. Similarly, defective software could result in a loss of funds (bugs and hacks). This is typically mitigated through third-party audits, and the industry itself is increasing its attention on security.

Finally, new regulations could change what is available and some of the rules for use.

3-Step NGO Web3 Action Plan

Now that you have the background understanding and have some idea of the areas your organization can benefit from, you are ready to be a Web3 champion.

1. Awareness

Who in your organization is working on these issues? What is the organizational perspective? More or less conservative? Is there a push or pull toward Web3? What is the donor environment? Web3 champions must learn how to communicate the value of Web3 to help organizations in order to answer questions and educate leadership.

2. Buy in

What aspects could your organization benefit from?

• Fundraising
• Programming
• Finance
• Governance

Who are the leaders in these areas? Do they have the information they need to make a decision? Are other organizations in your sector taking action in this area? What case studies do you have that encourage adoption?

3. Pilot

Once you have awareness and buy in, you can work with your team to build and action plan.

• List materials to prepare
• List people to meet plan and align with
• Document steps to a pilot

As part of this process, you should be able to communicate clearly why your organization should undergo the pilot, what success would look like, what next steps following the pilot should look like.

Final Thoughts

There is substantial innovation in the Web3 space. It is expected to grow significantly over the medium term. Nonprofit and civil society leaders should understand how this technology is affecting our greater society and business and how the use of blockchains can impact fundraising, programs, finance, and governance. The Web3 industry has many grant funding opportunities available to expand nonprofits’ capabilities in this area.

The ethos and technical implementations of decentralization, democratic governance, and transparency built into Web3 technology should appeal to mission-driven organizations seeking to empower their clients and serve their donors.

Top Web3-native companies are community first. Defi offers the possibility of ultra-low-cost financial services, which can improve the reach, scale, and productivity of capital in the most challenging places and for the most underserved communities, including those living in extreme poverty. DAOs offer new, transparent, democratic organizational tools and structures.

Organizations driven to empower their clients should be aligned with these aims and values, support the development of the Web3 industry, and work to understand how the uses of Web3 can improve fundraising, payments, programming, and financing.

Further Reading

• Bitcoin Whitepaper. Nakamoto, 2008
• Ethereum Whitepaper. Buterin, 2013
• Mastering Blockchain. Lantz and Cawrey, 2020
• Defi and the Future of Finance. Harvey, et al, 2021
• Sustainability solution or climate calamity? UN News, 20 June 2021
• Will 2022 be a boom year for cryptocurrency philanthropy? Devex, Beasley, 05 January 2022

Daniel Coughlin is the Director of Data Insights, Systems, and Architecture for the International Rescue Committee and this post was originally published as The Web3 Playbook for Nonprofits.