Blockchain offers unique opportunities for donation traceability and fundraising, but it doesn’t come without a catch.
Blockchain – you’ve probably heard the word, but what is it, and what does it mean for fundraising?
In a recent iRaiser webinar, CEO of NFP-focused communications agency Adfinitas, Déborah Berger, spoke about blockchain use for the specific purpose of traceability in nonprofits. Blockchain can offer fundraising transparency and new revenue streams through its unique digital paper(less) trail.
Before we dig into Déborah’s insights further, let’s first absorb the definitions she provides
Blockchain is a decentralised digital ledger that records transactions. The data for each transaction is stored in a ‘block’ and blocks are chained together in sequence. These transactions are not centralised. Instead, they are maintained across a network of peer-to-peer computers and that is the strength and the very principle of blockchain – that no one person detains all the information.
Ethereum is a platform powered by blockchain technology. It enables the smart contracts and applications built on its blockchain to run smoothly without fraud, downtime, control, or any third-party interference. Established in 2013, Ethereum is not the only platform in existence, but it is the one most used for the purpose of traceability.
A smart contract is an agreement between two people in the form of computer code. These contracts run on the blockchain, so they are stored on a public database and cannot be modified or falsified. The transactions that happen in a smart contract are processed by the blockchain, which means they can be sent automatically without a third party.
Non fungible tokens
A non-fungible token (NFT) is a way of proving that a digital item is the only one of its kind in existence – it therefore cannot be copied or reproduced without the owner’s consent. NFTs can be thought of as digital certificates of authenticity. In theory, NFTs can be applied to any digital file that is unique and non-interchangeable, but the most excitement to date has centred on artworks.
A first-hand example of blockchain traceability from Déborah
Blockchain can be used to improve supply chain traceability and transparency in any of industry and for any product. Before stepping into her role at Adfinitas, Déborah was Head of Sustainable Development at a French textiles company where she helped set up an eco-responsible, blockchain-based natural fibre traceability chain for Merino wool.
The issue: the textile industry is the second most polluting industry in the world (the fuel industry holds the top spot). A growing number of fashion brands are trying to become sustainable and an important step is understanding how their materials and fibres are sourced. Natural fibres (think wool, silk and flax) don’t require the same level of chemistry as man-made or chemical fibres (nylon, lycra, viscose), and they are more biodegradable. One of the most sustainable fibres of all is wool. Déborah’s company wanted to demonstrate and prove their commitment to this preferred material.
They focused on eco-traceable wool sourcing and to provide proof to their clients (brands or textile manufacturers), they needed full traceability in the chain, from farmer to garment.
The company had also made a number of commitments: to the sheep that there would be no cruelty; to the environment that harmful chemical products would not be used; and to the workers that minimum welfare and wage levels and decent working conditions would be provided. They wanted to demonstrate that these commitments were being upheld.
In assessing different solutions, blockchain was the obvious winner because it is the only solution that provides full transparency and a clear, instant value chain to stakeholders.
Working with a French tech company, they developed a platform that uses Ethereum blockchain to register all the steps along the supply chain, seen below.
Many of the farmers in Step 1 do not have a computer or wifi while working, so the process must take place on their cell phone. When a farmer delivers wool to a combing mill, the platform automatically generates a text message asking the farmer to confirm if they did deliver a certain quantity of wool on a certain date to a certain combing mill. The farmer then replies yes or no.
The platform follows the same process with the combing mill and only when the two parties have confirmed the same transaction does it validate the first step of the value chain and move onto the second step, in this case between combing mill and dyeing mill
What does this wool traceability case study have to do with fundraising you may ask? Well, it’s an example that could easily be transferred to an NFP. Let’s find out how.
Blockchain in the nonprofit space
- Blockchain traceability can be transformative for overseas projects
Many nonprofits, especially those operating in developing countries, may be hampered by the quality of information tracking. They may have no alternative but to use intermediaries to deliver funds and services. In other words, it’s risky business.
When all users share a process in real time, when remote locations are no bar to participation, and when data cannot be altered without permission from all who share the network, the results can be transformative. NFPs can see exactly what is happening in their supply chain, and they can accurately monitor donations and the disbursement of funds.
So not only does blockchain technology enhance transparency, it reduces risk from dealing with unknown and potentially corrupt third parties, it protects NFPs from damage to reputation and creditworthiness, and it increases impact on the ground.
In 2018, we wrote about the World Wildlife Fund’s (WWF) use of blockchain to track the sustainability of tuna fishing in Fiji. The monitoring was part of a broader project to cease the use of unsustainable fishing practices by unregulated and illegal fishing vessels.
For WWF, blockchain’s key components made it an ideal tool for the project – the technology’s transparency and immutability. But the efficiency that comes with removing paper-based processes, which are prone to error and fraud and can be costly to audit, also appealed.
- Non-fungible tokens
Although still new and small in number, NFTs have emerged as a sizeable potential revenue opportunity for nonprofits. Many artists and creators who have sold NFTs have donated some, or all, of the proceeds to nonprofits. Here are just a few examples.
In March 2021, Twitter CEO, Jack Dorsey, sold an NFT of his first tweet, fetching US$2.9 million, which he donated to GiveDirectly, an organisation sending funds to poor families in Africa impacted by COVID-19.
Blazed Cats, a new breed of cat jpegs according to the company’s website, donate a portion of profits and royalties to Mental Health America, contributing US$270,000 to date.
Most recently, an artist from the Art Blocks community made the largest NFT donation ever recorded, with a gift of ETH (Ethereum’s cryptocurrency) valued at US$3.5 million to Médecins Sans Frontières Australia.
There is a catch…
… isn’t there always, and while blockchain can play a valuable role in creating fairer and more transparent processes, it does not have a completely clean rap sheet itself.
Blockchain has high environmental impact because it is decentralised and relies on a network of computers that require a lot of energy.
Another criticism is that offers only digital, not physical, traceability. If you’re only using the technology to trace funds and these funds comes from cryptocurrency, then you can fully trace. But if you’re tracing a physical product, you do need to link digital and physical traceability to each other. For example, in the wool project, Déborah’s company created a digital avatar of the wool fibre to help them track all the steps of the transformation – it was a smart workaround, but the reality is that there is no way to ensure a physical outcome 100% reflects what you are monitoring digitally.
In a nutshell, blockchain traceability comes at a significant environmental cost and it is not 100% bullet proof.
How nonprofits can consider blockchain traceability
We hope we haven’t lost you by this point – the concepts discussed are complex and ever-evolving. Here is Déborah’s advice on getting started:
- Blockchain is a plus if you already have a very strong and omni-channel fundraising strategy – with this, you can clearly decide where and what you want to trace
- You should really evaluate the environmental impact before you start. The innovation king himself, Elon Musk, was heavily criticised when he announced he would accept cryptocurrency at Tesla and he subsequently backed down on the decision. Nonprofits – especially those at the forefront of climate action – should weigh up the environmental and reputational risk of utilising blockchain against its benefits
- Consider establishing relationships with artists who will donate proceeds from the sale of NFTs as part of your fundraising mix
- In terms of accepting crypto donations, your charity will need a digital wallet and the same goes for accepting the proceeds of an NFT sale. While new to the market, providers are emerging that can convert a crypto wallet into a currency wallet.
Blockchain beyond traceability
The capacity for many users (even those in remote locations) to access shared traceability in real time, a means to provide transparency around disbursement of overseas aid, and the acceptance and authentication of NFTs are all ways blockchain can help nonprofits.
It doesn’t stop with traceability of course – there are a raft of other considerations relating to blockchain and cryptocurrency, but we’ll leave those for another day…
To watch Déborah’s webinar with iRaiser in full, click here.
To read about WWF’s use of blockchain to track tuna fishing sustainability, click here.