BUSINESS CONSULTING PETER VOGEL MALGORZATA KURAK JOHANNES HUEBNER BLOCKCHAIN AND PHILANTHROPY Innovative giving and innovative taking In this article the authors seek to address the opportunities and threats put together with adopting blockchain in the giving space. 1. EXECUTIVE SUMMARY chain and Ethereum blockchain), the fundamental purpose Blockchain is one of the most hyped technologies of the of a blockchain is to immutably record data or events in se- 21st century. Blockchain enthusiasts predict that, within the quential order, thus creating an incorruptible digital ledger. next couple of years, this technology will entirely disrupt This technology enables the exchange of value between two the world we live in, including the world of giving. Philan- parties, eliminating the need for the trusted intermediar- thropists and many other involved stakeholders have devel- ies such as banks or companies that provide financial ser- oped unrealistic expectations about how blockchain can re- vices [2]. Almost anything can be incorporated into a data file juvenate the third sector. The key benefit of blockchain for or an event – passwords, movies, music, images, dates and philanthropy is that it enables more transparency and ac- account balances (to name a few), even though not all types countability and can therefore provide the “proof of impact” of data are well-suited to being stored on blockchains (e. g. for goals achieved. Despite such promising reviews, block- for privacy reasons or because the storage of large files is chain is still a young technology and its application brings usually economically more expensive on blockchains than with it a number of challenges. Blockchain is believed to have elsewhere) [3]. Beyond the actual transfer of digital curren- an over extended ability to provide trust, but many stake- cies, blockchain can be used for a wide variety of applications, holders do not entirely understand how the complicated al- such as cross-border payments, trade finance, voting sys- gorithms behind this technology really work. Blockchain tems, ownership tracking, copyright, provenance of docu- sceptics argue that the wrong data or incorrect metrics in- ments, etc. serted into the blockchain will create meaningless chains. 3. HOW CAN PHILANTHROPY BENEFIT 2. WHAT IS BLOCKCHAIN? FROM BLOCKCHAIN? Blockchain was first conceived as part of the peer-to-peer Blockchain in conjunction with philanthropy can benefit electronic money system Bitcoin [1]. It is a decentralised stor- many stakeholders, including charitable organisations, do- age technology that can be used to store and transfer value nors and recipients. Blockchain could even help decentralise or data across the internet. All data stored in a blockchain, charities altogether, directly routing payments from a pool such as Bitcoin transaction records, lives on thousands of of givers to the recipients without the need for an inter- computers (nodes), with anyone free to download the entire mediary in charge of managing the contributions. In this database and also participate in the network. Blockchains sub section, we discuss the key opportunities of using block- consist of blocks of data that are each linked to the previous chain in philanthropy. block using cryptography in a way that makes it virtually im- possible to alter data once it has been added. Even though the 3.1 For givers data on blockchains is (usually) public and no central entity 3.1.1 Transactions at a higher speed and lower cost. Transactions controls it, its integrity and maintenance are ensured using performed on blockchain can reach recipients faster and at cryptography and built-in economic incentives. Although a lower cost than if performed via other transaction me- different variations of blockchains exist (e. g. Bitcoin block- thods [4]. To illustrate this, we compared the speed and cost PETER VOGEL, MALGORZATA KURAK, PROFESSOR OF FAMILY POSTDOCTORAL RESEARCH BUSINESS AND FELLOW AT IMD, ENTREPRENEURSHIP LAUSANNE, AT IMD, LAUSANNE, WEF GLOBAL SHAPER DEBIOPHARM OF THE GENEVA HUB CHAIR FOR FAMILY PHILANTHROPY 3 | 2019 EXPERT FOCUS 133 BUSINESS CONSULTING Blockchain and philanthropy of common transaction methods with the most popular trusted intermediaries. Because every transaction executed cryptocurrency – Bitcoin [5]. Clearly these arguments also on blockchain is recorded near real-time and is available to hold true for other cryptocurrencies with a related purpose, everyone, blockchain can help to significantly decrease the such as Ripple or Zilliqa. cost of annual reporting on a charitable organisation’s budget For example, the speed and cost of an exemplary trans- and spending, while increasing its overall transparency. action of a remittance transfer of CHF 160 from Switzerland to Rwanda performed via Bitcoin would be CHF 0.25 in 3.1.2 Highly visible and traceable transactions. One of blockchain’s roughly 50 minutes [6]. By contrast, the same transaction most attractive features for the giving space is that it enables performed via Azimo (that is, the “second-best option” as in- highly visible and traceable transactions, allowing givers to dicated by World Bank Remittance Prices) is about 28 times track all their transactions from the beginning to the end and costlier, and it would take up to 24 hours for the recipient to verify where their funds went. By monitoring the entire se- receive the money [7]. The reasons for such differences in a quence of transactions, givers can easily find out whether transaction’s speed and cost are rooted in the innovative ways their funds reached their intended target. Well-documented in which blockchain technology deals with the transaction and tracked transactions enable givers to make better- confirmation and transaction size. informed decisions when choosing between various charita- Put simply, most banks rely on a model of payment pro- ble organisations for their future donations. cessing known as “correspondent banking”. This means that banks hold accounts with each other (either directly or 3.2 For recipients: more money, faster and increased se- through intermediary banks), and transactions are per- curity. One of the key benefits of blockchain for the recipi- formed by debiting and crediting several accounts at each in- ents of money is that they receive more money than they stitution. All banks involved in a single transfer deduct fees would have otherwise. There are a number of reasons for this. from the money being transferred. Many banks post trans- The primary reason is that expensive transfer mechanisms actions in a “batch” at the end of the day and impose daily are bypassed, which allows donors to send more money di- limits on the transaction size. rectly to the recipients. However, it also prevents fraudulent All crypto transactions, on the other hand, are posted re- intermediaries from pocketing part of the money that was al-time. Each crypto transaction is first broadcast to the net- meant for the recipient. Ultimately, it increases the pressure work into a pool of unconfirmed transactions and then on charities to operate more effectively and efficiently and picked up by a global miner (that is, a member of a peer-to- therefore channel the maximum amount possible directly to peer network of computers) and added to the blockchain as the recipient. part of a valid, mined block. This process is called confirma- tion and usually takes around 10 minutes, on average, in 4. WHAT ARE SOME OF THE LIMITATIONS the case of the Bitcoin blockchain; other blockchains (e. g. OF BLOCKCHAIN? Ethereum) are designed to generate blocks more quickly [8]. No matter how useful the underlying technology is, or how Since there is still a chance another miner will create another widely it can be applied, there are real and substantial risks block at roughly the same time, and the blockchain network involved in blockchain. Like any new technology, blockchain consents to including the other block, blockchain users tend has its limitations. Building social services around it pre- to wait for at least six confirmations (i.e. six additional blocks maturely may lead to unpredictable outcomes and lead to subsequently mined) for a single transaction in order to be negative social implications. In this subsection, we discuss sufficiently sure that the transaction has been immutably the key threats of using blockchain in philanthropy. added to the blockchain. As a result, the whole process may take up to 50 minutes. 4.1 For givers There are no daily limits on crypto transactions and their 4.1.1 Overrated ability to provide trust. A common notion is that, costs are not calculated based on the monetary value of a due to its immutable nature, blockchain can redefine trust. transaction, but rather on factors such as transaction size, Since the system itself verifies all transactions, the assump- number of other transactions made at the same time, or the tion is that users do not need a trusted central authority. In- computational complexity of a smart contract. Hence, block- stead, blockchain users need to trust many distributed and chain facilitates an exchange of value at a higher speed and anonymous participants (global miners). In practice, this lower cost between peers, while eliminating the need for means that blockchain has no central governing body or au- ditor that would take responsibility for the system’s failure JOHANNES HUEBNER, if needed. Furthermore, blockchain immutability is inordi- DOCTORAL RESEARCHER nately expensive. As blockchain networks grow, technical AT THE AUTO-ID LAB and storage requirements become more demanding, and OF ETH ZURICH transaction fees and response times needed to transact via AND UNIVERSITY OF blockchain platforms may increase. ST. GALLEN Some blockchain enthusiasts go even further in overrating blockchain’s ability to provide trust, arguing that smart con- tracts (e. g. via Ethereum) will replace today’s binding legal contracts [9]. Smart contracts are defined as computer pro- 134 EXPERT FOCUS 2019 | 3 Blockchain and philanthropy BUSINESS CONSULTING grams that can be stored in the distributed ledger of a block- process is the proof-of-work, in which the global miners con- chain system [10].