Embracing Web3 to Revolutionize Philanthropy | Bankless Consulting
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We don’t often think about it in these terms, but philanthropy is a major economic engine. By some estimates, Americans alone donated nearly $500 billion in 2020, and on a global scale, there are more than 250,000 organizations dedicated to philanthropic work. The good done by philanthropic organizations is undeniable. But it’s also common knowledge that not all charities are created equal, and that corruption and self dealing are rampant, so much so that there are organizations, like CharityWatch, dedicated to providing some minimal level of transparency into the workings of nonprofits and NGOs.
One long-standing problem with traditional philanthropy is that the funding mechanisms are not optimized to actually solve the problems for which assistance is sought. Traditional funding models are largely designed to seek out wealthy donors or well-endowed foundations. We are familiar with many of the largest of these foundations because their names or those of their benefactors greet us upon the entrance to some of the world’s leading cultural institutions. And while that’s great for museum goers, it’s hardly a system designed to actually solve problems faced by those living in remote locations, who have needs unique to their own community.
Blockchain technology provides a better way. Gitcoin Grants is a web3-enabled funding protocol that uses a novel mechanism known as Quadratic Funding to disburse matching grants. As Bankless Consulting co-founder Chuck Cummings writes in our editorial this week, Quadratic Funding “is a mechanism for matching grants based on the number of supporters for a project – not the amount of money raised.”
This revolutionary funding mechanism is currently being experimented with through a collaboration between Gitcoin Grants and UNICEF, the United Nations agency focused on child welfare. While it’s encouraging to see crypto’s leading philanthropic organization work with one of the world’s best-known relief agencies, we hope the takeaway for you is an understanding that web3 enables not just better philanthropic funding models; it offers superior infrastructure to solve many of humanity’s most-pressing problems.
Embracing Web3 to Revolutionize Philanthropy
Author: Chuck Cummings, Bankless Consulting Co-founder
Since 1946, UNICEF has been leading global efforts to improve the lives and futures of children.
Last week, UNICEF’s Office of Innovation began a new experiment in grantmaking with a blockchain technology called Gitcoin Grants.
If you work for a nonprofit or NGO you might be asking:
Why is UNICEF experimenting with their grants?
What the heck are they doing in web3?
How do Gitcoin Grants work?
Let’s unpack this! 👇
Why Is UNICEF Experimenting With Their Grants?
UNICEF is working to solve one of the biggest problems with global philanthropy: aligning decision-making power with actual community needs.
Philanthropy initiatives are often guided by top-down decision making about how to solve problems for people on the margins of society. People living in the developed world routinely make decisions about “what is best” for people in remote, faraway places.
The further you are from the people who need help, the more out-of-touch your solution will be. I’m sure that UNICEF invests as much as any organization in trying to understand the problems they aim to solve, but the people who work at UNICEF are not personally experiencing these problems.
Even with their global reach and boots on the ground, it’s hard to imagine how a team at UNICEF headquarters in New York City could know how to solve problems better than individuals experiencing them in Asia or Africa.
No matter how good your intentions are, if you aren’t closely connected to the problem, it is likely that your resources will be misdirected. You may be causing more harm than if you did nothing at all.
What the Heck Are They Doing in Web3?
UNICEF recognizes that the best solutions come from those closest to the problem. That’s why they’re turning to the blockchain, a new type of Internet technology that connects people and financial resources directly, without the need for intermediaries, in a way that has never been possible before now.
UNICEF is partnering with Gitcoin, a company that develops blockchain technology for social impact. Gitcoin has developed a better way to source ideas and input from the grassroots level than anything we have in traditional philanthropy. They call it “Quadratic Funding.”
I see your eyes glazing over. Stay with me! I’ll explain how Quadratic Funding works in very simple terms in a minute.
The partnership with UNICEF is Gitcoin’s first pilot of their new Gitcoin Grants software application. Anyone can use Gitcoin Grants to empower their community members to coordinate funding for projects that address their shared needs.
Typically, big grants go to nonprofits and NGOs with resources to pay effective fundraising and communications staff. Ideally these grants would fund the best solutions or the community’s wishes, but that’s not usually the case because it’s really hard for donors to find this signal amidst the noise of hundreds of grant applications.
Gitcoin’s technology makes it easier to identify community signals and incorporate the community’s wishes into funding decisions. The fact that it runs on a public, viewable blockchain also enables communities to see where funds are distributed.
The transparency of web3 has two important applications for philanthropy. First, the blockchain connects the donor to the grantee directly without any need for government or banking intermediaries. Imagine all of the inefficiencies and graft that this can prevent! Second, every blockchain transaction can be audited in real time, allowing grantees to know where their support is coming from and donors to know where their support is going.
How Do Gitcoin Grants Work?
Gitcoin Grants use the power of Quadratic Funding to fund public goods. It is based on some math that was published in an academic paper in 2020.
Quadratic Funding is a mechanism for matching grants based on the number of supporters for a project – not the amount of money raised.
This is a breakthrough for philanthropists who wish to make an impact at the grassroots level!
Historically, matching grants programs are biased towards projects that are able to raise the most money. But the ability to raise money is not a very good signal that an organization has broad, community support for its program or intervention. In fact, there’s a trade off between raising money for a program and providing direct services to the people.
To be able to raise large sums of money, you must spend your time with people who have money – not with people who are experiencing the problem you’re trying to solve.
Quadratic Funding puts more fundraising power in the hands of the community being served.
To understand how Quadratic Funding works, let’s use a simple thought experiment.
Maxine is a wealthy donor sponsoring a matching grants fund for two nonprofit literacy programs in her community. She says she’ll match up to $10,000 of what the nonprofits are able to raise themselves. Alpha Scholars is able to raise $5,000 from two donors who sit on their Board of Directors. Beta Readers raises $1,000 from 20 parents who have seen their kids benefit from the reading intervention strategy that the program uses.
In a traditional matching grants program, this is how the funding would look:
Notice that Maxine’s full $10,000 donation is not unlocked because the two organizations did not collectively raise $10,000. Maxine is bummed. She wanted to give more!
We can assume that Beta Readers has more grassroots community support than Alpha Scholars since they were able to raise money from so many more people. And yet, despite getting 10x as many donations, Beta Readers only received 20% as much matched funding as Alpha Scholars.
We can also assume that Alpha Scholars have more resources to begin with, since they are connected to board members with the means to contribute $5,000 to this fundraiser.
Even in nonprofits, the rich get richer? Come on. Seriously?
Based on their 10x support in the same community, Beta Readers is likely doing more good with less resources than Alpha Scholars. But for whatever reason, they aren’t able to raise as much money. Their great work serving their community is not translating to successful fundraising.
Now let’s examine how this matching grants program would look with Quadratic Funding. (Here is a Quadratic Funding calculator you can play with.)
With the Quadratic Funding model, more community support translates to more financial support. Notice that Beta Readers receive over 2x more matched funding than Alpha Scholars, even though Alpha Scholars raised more money.
With a strong community behind them, Quadratic Funding enables Beta Readers to focus more on the kids in their literacy program. They face less pressure to devote their resources to fundraising.
Notice also that even though the two nonprofits still only raised $6,000, the Quadratic Funding model unlocks all of the $10,000 that Maxine wanted to give to this cause. Maxine is stoked!
Quadratic Funding for the win!
Gitcoin has pioneered the application of this technology in web3, helping over 3,300 web3 projects receive financial support to do more good for the communities they serve.
Now UNICEF is testing this technology for their global grants program. Between December 9-21, 2022, Gitcoin will facilitate a Quadratic Funding grants round for a select group of ten impact-focused, innovative projects from around the world.
The Future Is Grassroots
As a believer that the best solutions are built from the ground up, I’m excited to see how Gitcoin and UNICEF are using web3 technology for real-world impact.
This UNICEF experiment is Gitcoin’s first test of the Grants Protocol with an external partner. In 2023, they intend to release the application to the public so that anyone anywhere can use it. This technology would be great for any industry that suffers from the effects of top-down decision making. Public policy. R&D. Higher education.
If you have an idea for how to use this technology to do good for a community or cause that you care about, please let us know!
This article originally appeared in our co-founder Chuck’s newsletter Web3 x Social Impact. Subscribe here for biweekly emails about web3 applications that are making the real world a better place to live.
Donate to the UNICEF <> Gitcoin Grants round before December 21.
You can learn more about the UNICEF Office of Innovation Gitcoin Grants experiment here.
Charles “Chuck” Cummings is building Bankless Consulting’s social impact practice, where he’s helping organizations implement web3 technology to maximize their impact. He also serves as the Strategic Advisor to the Do Good Institute at the University of Maryland. Chuck lives in Baltimore and likes to eat tacos.
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Chuck Cummings, siddhearta, Ryan Anderson, HiroKennelly
This week on the Bankless Podcast 2022 Year in Review, Vitalik Buterin emphasized philanthropy as one of the most relevant proven use-cases for Ethereum. The ability to donate directly to a cause creates huge efficiencies that didn't previously exist. That's compounded by matching funds from Gitcoin via quadratic funding, unlocking game-changing innovation for non-profit fund raising.
Great work laying out that use-case Chuck, and Sidd, Hiro, Ryan on the entire BC Newsletter.
Another top issue!