Blockchain is one of the most hyped technologies of the 21st century. Blockchain enthusiasts predict that within the next couple of years the technology will entirely disrupt the world we live in, including the world of philanthropy. However, philanthropists and many other involved stakeholders have developed unrealistic expectations about how blockchain can rejuvenate the third sector. What is clear is that the key benefit of blockchain for philanthropy is that it enables more transparency and accountability and can therefore provide the “proof of impact” for goals achieved.
Despite its promising qualities, blockchain is still a young technology and its application brings with it a number of challenges. Blockchain is believed to have an overextended ability to provide trust, but many stakeholders do not entirely understand how the complicated algorithms behind it really work. Blockchain sceptics argue that any wrong data or incorrect metrics introduced could create meaningless chains.
As researchers interested in philanthropy, we wanted to know whether we could benefit charitable organizations, donors and recipients.
Here are the benefits and drawbacks:
Transactions at a higher speed and lower cost
Blockchain facilitates an exchange of value at a higher speed and lower cost between peers, while eliminating the need for trusted intermediaries. Because every transaction executed on blockchain is recorded in near real-time and is available to everyone, blockchain can help to significantly decrease the cost of annual reporting on a charitable organization’s budget and spending, while increasing its overall transparency. Transactions performed on blockchain can reach recipients faster and at a lower cost than if performed via other transaction methods because all crypto transactions are posted immediately. Furthermore, there are no daily limits on crypto transactions and their costs are calculated based on factors such as transaction size, number of other transactions made at the same time, or the computational complexity of a smart contract.
Highly visible and traceable transactions
One of blockchain’s most attractive features for the philanthropists is that it enables highly visible and traceable transactions, allowing givers to track all their transactions from the beginning to the end and verify where their funds went. By monitoring the entire sequence of transactions, givers can easily find out whether their funds reached their intended target. Well-documented and tracked transactions enable givers to make better-informed decisions when choosing between various charitable organizations for their future donations.
Overrated ability to provide trust
A common notion is that, due to its immutable nature, blockchain can redefine trust. Since the system itself verifies all transactions, the assumption is that users do not need a trusted central authority. Instead, blockchain users need to trust many distributed and anonymous participants (i.e. global miners). In practice, this means that blockchain has no central governing body or auditor that would take responsibility for the system’s failure if needed. Furthermore, blockchain immutability is inordinately expensive. As blockchain networks grow, technical and storage requirements become more demanding, and transaction fees and response times needed to transact via blockchain platforms may increase.