How to use blockchain to improve the governance of charities

Charities and non-profit organizations play an important role in society, and the advantages of blockchain technology can also achieve a complementary effect in these scenarios involving economic transactions.

The Charities Aid Foundation (CAF), a UK charity, has been a model in exploring how to use blockchain technology to enhance the ability of charities and non-profit organizations to manage charitable funds. It is no coincidence that British organizations can play a leading role in this field, as the UK is one of the few countries with a dedicated agency to manage charities.

This article focuses on three key areas

CAF's latest paper, "Block & Tackle," specifically explains how blockchain technology can improve three important aspects of charity governance: registration, reporting, and governance. The paper mentions that blockchain technology has applications in all three areas. Without the involvement of third-party institutions, blockchain ledgers improve transaction transparency, reduce transaction costs, and increase transaction credibility. Although CAF has done in-depth research on the use of blockchain technology in private charitable organizations, there are not many cases of actual deployment. Molotti Davis, head of CAF's "Giving Thought" think tank, told CCN: The entry threshold of blockchain technology is high, and private charitable organizations are usually unable to master the technology (except for a few exciting cases).

It will take at least a year for blockchain technology to be implemented

Davis pointed out,

“I have mentioned the potential of blockchain technology in many activities and conferences of non-governmental charitable organizations, and it has received a lot of attention. However, I think it will take at least a year for the first application that can fully use blockchain technology for registration in non-governmental charitable organizations to be implemented. The questions I raised in the paper are mainly to trigger discussions and make non-governmental charitable organizations realize that blockchain technology is developing rapidly and will have great potential in the field of innovation and decentralized charity governance.”

The registration process can confirm whether the organization is a charity and a non-profit organization. This will help the organization raise funds, negotiate business and obtain corresponding funding. Blockchain technology provides a more efficient way to manage and disclose online identities. The paper mentions that blockchain technology can even allow charitable organizations to complete registration on their own. Multiple smart contracts create a decentralized organization by executing a series of confirmed programs to make it a new organization. The Distributed Autonomous Organization (DAO) investment fund is an example of this. It forms an autonomous organization by running smart contracts on the blockchain in Ethereum. DAO's decisions require consensus among all nodes. The same rules apply to charity.

What do you think of the DAO hijacking incident?

When asked about how to prevent hacker attacks in light of the recent DAO hijacking, Davis responded that the unfortunate incident was mainly caused by human error and program vulnerabilities, but these can be improved in future upgrades. He said:

“I don’t think this is a fundamental fault with the DAO infrastructure, and hopefully the next DAO upgrade (which is already being finalized) will make it more robust. At the same time, DAOs in the philanthropic space have a better chance because they don’t require participants to make decisions in their own self-interest (e.g., investment decisions), but rather are more charitable acts of collective benefit.”

Key benefits of using blockchain technology for charities

Since no third-party agency is required, non-governmental non-profit organizations using blockchain technology will greatly reduce operating costs. Management costs will also be reduced. In addition, management can be achieved by recording transaction data directly in the blockchain. By deploying the right algorithm on the blockchain, the registration process can automatically decide whether to accept or reject the received information. A small number of uncertain nodes will be automatically rejected. Such a system works based on a consensus protocol; in this way, non-governmental non-profit organizations can have their own information registration system. As for the reporting function, blockchain technology has brought major changes, which will provide transaction information in real time. By using digital currency or digital tokens, information will be automatically propagated in the blockchain. Participants can have more trust in the integrity of the data without the need to spend extra money on audits.

Smart contracts make a difference

Full transparency and real-time updates will also help regulators. Since private non-profit organizations will be governed by smart contracts, functions can be built into the contracts to ensure supervision if the trigger conditions are met.

Smart contracts can also prevent charitable organizations from breaking the rules in the first place. Smart contracts run by private charitable organizations on the blockchain can prevent improper fund expenditures by the organization, as expenditures will also be managed by smart contracts.

Rule by algorithms?

Algorithmic governance plays an important role in preventing illegal activities through smart contracts. Of course, it is necessary to consider how smart contracts are designed. However, regulators have not shown enough interest in the application of blockchain technology to the charity industry like non-profit organizations in the UK. Davis said:

“So far, I’ve observed that part of the focus in the space is still on cryptocurrencies.”

Private charitable organizations have not yet realized the profound impact of blockchain technology on charitable business. One of the focuses of my paper is to trigger these thoughts.

Which chain will be preferred?

Davis did not make a clear statement on which chain will be preferred. He said:

“Maybe it will be a public chain we have never heard of, or a private chain (at least with different levels of permissions)”.

Many countries have official forms of non-governmental public welfare organizations. If these organizations transfer the registration process to the blockchain, they will also need to use some form of certification to complete it, so it is more likely that a private chain will be used. Of course, it is also possible that some people decide to abandon the traditional non-governmental public welfare organization structure and establish a public welfare organization like DAO on a public chain based on consensus nodes, which will create a two-level non-governmental public welfare organization environment (both "traditional" organizations approved by the government and "new" organizations based on consensus nodes).