The Real Game-Changer: Impact Investment and the Blockchain
Last part of my series about how the Blockchain will change Doing Good forever.
This is the last in a series of three posts, each of them addressing a different but related categories of opportunities related to blockchain in the development sector, and looking at possible applications in each.
You should read the first two parts — part 1 on how the blockchain will change the financial realities in under-served markets and part 2 outlining opportunities that go beyond money and identity, into more sophisticated — and potentially more impactful — business opportunities on these market segments.
However, the most interesting opportunities in my opinion present themselves in the area of impact investment. We are currently dealing with an unfortunate reality: modern markets are saturated and there are diminishing returns for process innovation there. So investors are forced to accept lower and lower returns for their money, which they grudgingly see as a price for an illusion of “safety”. Meanwhile, emerging markets across the global south have the potential to deliver solid, consistent growth/ returns, but are starved of capital. This is mostly because they lack the sort of institutions that investors feel would guarantee their investments and also because investors are not familiar with investment opportunities on these markets. So the main capital that flows towards these markets is donor funding, which mostly doesn’t benefit the markets that dearly need it. In fact, it often undermines the fundamentals there, creating volatility and scaring investors even more, even while it feeds an artificial economy of consultants and middle-men.
Enter the blockchain.
The opportunities here are plenty and we haven’t even started scratching the surface. Here are just two of them:
Development impact bonds on the blockchain. Current development impact bonds are really hard to scale, mostly because of the difficulty to track progress and/ or to verify that milestones have been met (more on that here). Investors don’t feel comfortable with this level of lack of visibility and they don’t feel comfortable with how expensive verification actually is. The blockchain can change all that. Agree on a real-time output indicator (here is how to pick one) and set a smart contract on the block chain that would release a payment when the indicator is registered. Or even better, don’t even call it an impact bond. Simply issue a coin linked to measurable impact. Like so:
Fundraise with Crypto Impact Coins. You could turn traditional impact investment on models in their head, by issuing a blockchain coin to raise money from investors through an initial coin offering (ICO). Link the initial value of the coin to the cost of delivering impact. Investors can trade the coin on any crypto/ asset exchange or they can hold it (or HODL it, as per the bitcoin meme). Every time a donor funds a specific project, a corresponding amount of coins gets destroyed, which will increase the scarcity of circulating coins, and hence their value. The investor/ donor relationship becomes mutually beneficial and self-enforcing, as investors benefit when donors fund relevant programs (because that reduces total no. of available coins, increasing coin value) and donors benefit from investors purchasing coins, because that leverages private funding (“cost-sharing) to the causes they fund. Everyone wins.
I will stop here. Would love to hear your thoughts on above or any other opportunities you can think of in this space. Obviously, this technology will not solve ALL problems — no technology ever has or ever will — but I am convinced that it will unlock a new era of opportunities that we cannot even conceive right now.
I can’t wait.
UPDATE: I have acted on above insights and founded Proof of Impact, an initiative designed to accelerate the impact that blockchain has on the impact space. Head there to follow progress.