Social Impact Coins
Or Ideas On How To Financially Incentivise Social Change
Attempting to financially incentivise social change isn’t an especially new idea. Logically it makes a lot of sense. Harness the forces of capitalism to work toward a positive outcome for humanity in sectors where traditional business models may not exist. It is the argument used to support tax benefits in return for philanthropy and the philosophy behind innovations like the Social Impact Bond.
Social Impact Bonds
The predecessor to the Social Impact Bond was invented as early as 1988 by Ronnie Horesh, an economist from New Zealand. The concept, also known as Pay For Success Financing, is a contract with the public sector to pay for socially beneficial outcomes that result in savings for the public sector. The idea has had some success with 60 bonds launching in 15 countries and raising more than $200M in investment toward social causes. Here’s a report from Social Finance on the state of the market from 2016 if you’re interested in diving deeper.
The concept does have it’s problems. A big issue is measurement. Social impact bonds are tied to cost savings in the public sector, because it was felt that they would function as a proxy for positive social change and they do. However, it’s very hard to decide which expenditure to use as a proxy. Not only can there be a variety of reasons why the proxy expenditure changes not every social issue necessarily has a direct public sector cost equivalent.
There is also no unified database for all public sector expenditures globally and so it is very hard to measure anything on a global scale. However, it does seem feasible that such a database could be created, at least in countries with relatively modern systems for tracking this sort of thing. Finally, the most glaring issue is that Social Impact Bonds don’t actually incentivise large groups of people to work on the respective problems. These bonds are mainly aimed at NGOs and other organisations instead of harnessing collective action.
Objectives For Improvement
In thinking about ways to improve on the concept of a social impact bond, I started by outlining the objectives of a new instrument or system.
Primary Objectives
- Create a strong financial incentive for large groups of people to work together towards a positive social outcome.
- Allow almost anyone to participate.
- Achieve powerful network effects for participation.
- Provide utility with current measurement ability and accuracy.
- Create a mechanism to maintain reached levels of improvement.
Technological Implementation
Working from the defined objectives I quickly gravitated towards using blockchain technology. Cryptocurrencies seem uniquely capable of financially incentivising large groups of people for collective action as evidenced by the phenomenal community engagement in the various blockchain-related open source projects. Cryptocurrencies also have incredible network effects as every participant is financially incentivised to help the network grow. However, it would be difficult or impossible to harness these features by using an existing currency like Bitcoin.
Thus the best way to achieve the listed objectives seems to be a new token, likely built on top of Ethereum using their ERC20 token standard.
Social Impact Coins
Disclaimer: This is just a concept. I am aware of at least a few issues, which I’ll detail at the end. There are probably many more I haven’t thought of and it’s entirely possible this whole thing wouldn’t work at all.
Social Impact Coins are tokens that utilise the proposed mechanics and economics to financially incentivise large-scale collective action for positive social outcomes. In essence they allow for fund allocation to be directed towards an issue itself, rather than an organisation, while being much more inclusive than Social Impact Bonds. The concept is comprised of a native token as well as a novel smart contract, which is connected to a source for measurement, all of which will be described below.
The concept could be implemented for a wide variety of social issues where adequately accurate and frequent measurement exists. The concept is also relatively agnostic to the geographical scale at which it is implemented, theoretically allowing it to work as well for a small town as it would for a large country.
Prerequisites
In order for Social Impact Coins to work there needs to be a reliable source for measurement. Social Impact Bonds use public sector cost savings as a proxy for improvement in social issues. This seems like a reasonable way to conduct measurement as long as an accurate proxy expenditure for each issue is found. Due to differences in public sector systems and reliability of certain governments, this does limit the amount of applications. For these same reasons, global issues may also be hard to tackle. On the bright side, there is no reason why we couldn’t solve these issues in the future, so it’s possible we may be able to overcome most or even all these limitations given enough time.
Mechanics & Economics
Resourceful organisations want to do something about social issue X. They release a token “Y” for a fixed low price or for free. They also deploy a smart contract called The Motivator. These organisations decide how much money they want to spend in improving social issue X and that amount is sent to The Motivator in some large cap currency. Any other external parties could also contribute to the smart contract. The organisations also agree on a measurement source and the most appropriate proxy for the issue to be measured. They find a trusted organisation, which actively measures X and an API feed of this measurement is plugged into The Motivator.
The Motivator then does two things. It buys tokens Y when issue X is improving and it sells tokens when issue X is getting worse. So when measurable improvement is happening around the social issue X, The Motivator hoards tokens Y, causing the price of the token to increase. When there is no progress, but no decline, The Motivator does nothing and thus the price is not affected, leaving only expectations of future performance to affect the price. When progress is measurably in decline The Motivator will sell tokens, causing the price to decline.
To provide a market participants perspective: If I want to do something about this social issue, I can purchase X tokens, do my best to help with the issue and if measurable change indeed occurs due to the efforts of myself and others, my tokens will appreciate in price. While the prices may fluctuate in the short term, they should reflect real progress made when viewed on a longer timescale.
This simple mechanic can be used to incentivise extremely large groups of people, but should function in a similar fashion for smaller groups of people as well. It also creates a situation where there is downside risk for not maintaining the level of progress previously achieved. If participants don’t produce change and metrics fall back into decline, new financial incentive is immediately created to reach the desired level once more. Theoretically, then, with this method we should be able to establish a monetary amount to fix and maintain any problem. Whether we have the funds or conviction to do so, is another question.
Further Brainstorming
I also like the idea that systems such as this could be simultaneously used as a mechanism for raising people from poverty or to just improve their financial flexibility. If every person in a city or town were given a free token which utilised the Social Impact Coin system to incentivise participants to, for example, eradicate hunger, could the town itself meaningfully improve on this metric? If they could, the value of the tokens would increase evenly distributing the monetary value created.
Potential Problems
- Measurement is too inaccurate, infrequent or manipulated, undermining the economics of the system.
- Data is not available through public APIs.
- Social issues require large upfront investments, which Social Impact Coins are not equipped to provide.
- Large amounts of money are locked up in smart contracts for long periods of time, potentially forever.
- Financial incentives aren’t consistent enough as the the price of the currency being held in the smart contract fluctuates.
- The areas where such systems are needed most have the worst measurement capabilities.
- I’m sure there are many, many more. If you foresee a problem I haven’t mentioned, leave it in the comments and I’ll add it to the list.
