Angel Protocol: The Future of Charity Fundraising with Blockchain
One of the most remarkable features of blockchain technology is its ability to enable financial access and reimagine traditional incentive structures with tokenized ownership. In this article, I look at “Angel Protocol,” a Terra-based blockchain project whose vision is to empower charities with financial freedom.
Angel Protocol has one of the most well-thought-out token architectures I’ve come across in crypto. With the help of Delphi Digital, Angel Protocol has found creative ways to use tokenomics to align its stakeholders so that everyone wins. This is a multi-part series which I evaluate how Angel Protocol impacts each of its stakeholders, starting with its most important one, the Charities.
One of the biggest challenges for charities is the constant need for fundraising. Angel protocol supports charities in two ways. They bridge generous crypto donors/projects with charities and, more importantly, allow charities to create endowment accounts powered by Decentralized Finance (DeFi). By leveraging DeFi applications like “Anchor Earn”, Angel Protocol can help charities improve cash flow predictability and financial resilience. If accomplished at scale, I believe it could even change the incentive structure of a charity.
There is quite a bit to unpack here, especially if you aren’t familiar with the latest developments in blockchain or how charities operate. So before getting too far ahead, let’s discuss a little about the role Charities play in society and their challenges.
Why are Charities Important
There is no doubt that private and social enterprises have produced immense value for society and lifted billions out of poverty. In the developed world, the government plays a massive role in providing a social safety net for the most vulnerable, maintaining crucial infrastructure, and much more. However, there are societal challenges that sustainable businesses can’t solve, nor can government programs address efficiently because of the need for specialization. Charities tackle these societal issues where private enterprise and government programs do not.
Non-profits have also become quite important economically. It accounts for 5.5% of GDP in the US and employs over 10% of the workforce. (US Bureau of Economic Analysis 2016) This means that the financial health of non-profits can reverberate to the broader economy.
*Non-profits are a vast and diverse category. They include educational institutions, hospitals & care organizations, religious institutions, and many more. Each subsector has its own challenges and different funding sources, so it’s essential not to hypothesize with general assumptions when discussing a specific subsector or individual non-profit for that matter. For example, Health and Human services receive most of their funding from the government, while religious and environmental non-profits are funded predominately from philanthropy.
Financial Health of Non-Profits
As a sector, Non-profits in the United States are financially fragile and highly dependent on their funding source based on data obtained from IRS fillings. Roughly half have less than one month of operating reserves, 30% face potential liquidity issues, and 7–8% are technically insolvent.
The lack of operational reserves and poor cash flow predictability is not only a drain on time and resources but can hamper a charity’s long-term vision. Furthermore, financial distress also increases the organization’s reliance on grants and donors’ funds, often translating to less autonomy.
Public Perspective & Incentives
Most would agree charitable giving is a noble endeavor. However, many also see charities as ineffective vehicles at deploying capital compared to free enterprise. The narrative that charities are inefficient and, at times, borderline wasteful isn’t new. A survey in 2008 done by the “Organizational Performance Initiatives” found that 70% of people thought charitable organizations were wasteful. It has been so ingrained in how we feel about donations that “reducing overhead cost” has become one of the primary measures of a charity’s achievements. Consequently, charities have been incentivized not to take risks or invest in organizational growth; but instead focus on controlling cost at the expense of achieving longer-term visions. This sadly creates a negative feedback loop where the lack of long-term impact enforces the idea that overhead needs to be strictly monitored, further impeding the organization’s ability to succeed.
It’s understandable for donors to want their donations to go directly to the cause or the most in need rather than paying the salary of upper-level management at a non-profit. It’s a position I, too, have long held. But I’ve come to believe that for charities to have the best chance at solving big problems, they need to be given greater financial flexibility. And that includes choosing to spend more on overhead and taking chances on projects that could fail.
As Dan Pallotta, founder of the “Charity Defense Council,” says, we have a discriminatory code of ethics on non-profit spending. Dan argues that the incentive structures and limitations on how non-profits can spend their funds put charities at a significant disadvantage. Charities cannot compete on compensation for talent, are disincentivized to advertise for donor dollars, punished for taking risks, measured on overhead expenditures rather than long-term accomplishments, and restricted from paying for-profit to attract risk capital.
This topic deserves an entire piece on its own and is outside the scope of this article. That said, I highly recommend taking a look at Dan Palotta’s book “Charity Case” or at least his Ted Talks “The Way We Think About Charity is Dead Wrong” to get a more in-depth understanding of the issue. At the crux of his argument, people confuse morality with frugality, which ultimately is detrimental to the cause.
Indeed, reframing the public perception on the ethics of how charities use their funds is essential to breaking what Dan Palotta calls a circular mess. However, improving the financial health of charities with influence-free money can also go a long way if done at scale. And that is how Angel Protocol is seeking to help transform the narrative.
Angel Protocol
Angel’s protocol platform helps donors find and donate to causes important to them. Donors can give to a specific charity or an index of charities organized along with the UN’s 17 sustainability development goals. With the help of Terra-native on-ramp partners and Thorchain integration, donations on Angel Protocol can be in both fiat and crypto at no nearly additional cost for the charity. The current benchmark for crypto donations is $2,000 for set-up + 5% processing fee .
Angel Alliance
One of the most extraordinary developments as a Terra community member is watching the development of the Angel Alliance. It started with Apollo DAO, a Terra-based yield aggregator, announcing that it would pledge 1% of its revenue to Angel Protocol. Loop Protocol then followed this act of generosity, and soon many others followed suit. As of writing, the Angel Alliance includes over 70+ protocols, validators, and NFT projects that have pledged to contribute.
The funds received will be used to bootstrap and fund the endowment accounts of charities on Angel Protocol. While it’s anyone’s guess how much the Angel Alliance could raise, it would not surprise me if it ends up being tens of millions if the current growth trajectory is any indication.
DeFi Powered Endowment Accounts
Endowments are investment funds where a foundation can make consistent withdrawals from returns generated from invested capital. Endowments can improve cash flow predictability and be a long-term funding source for non-profits. The problem is that the barrier to establishing an endowment is often too high.
Angel Protocol allows charities to easily create endowment accounts on the platform with no set-up or onboarding cost. The endowments will leverage DeFi dapps and provide a perpetual funding source that will grow and be free of influence.
DeFi yields are very competitive compared to traditional finance yields, even after accounting for smart contract risk. For example, “Anchor Earn,” yields a stable 19–20% on deposits, far better than the near-zero rates paid in conventional saving accounts. Depositors can also purchase optional coverage through “Nexus Mutual” and “Unslashed Finance” to insure against smart contract and de-pegging risk. Net yield on deposits even after accounting for the cost of insurance is currently ~10%. While DeFi yields may diminish over time, they will still likely remain higher than yields offered in the traditional financial system since smart contracts remove the need for intermediaries.
The example above shows how an Angel Protocol endowment using “Anchor Earn” could create a perpetually growing principal with reinvested returns and provide a predictable funding source every year. The illustration assumes a 25% reinvestment of returns every year, with the other 75% distributed for immediate use.
In summary, Angel Protocol is utilizing its platform and relationships to help charities fundraise, but most importantly, it has democratized access to superior financial tools. By leveraging blockchain and the emerging DeFi ecosystems, Angel Protocol’s endowment can improve cash flow predictability and reduce financial vulnerability.
Big problems need big solutions, which often require long-term investments. Suppose charities cannot obtain greater economic independence or change the public’s perception of overhead expenditures. In that case, they’ll forever be confined to treating the symptoms rather than the root cause of problems they are trying to solve.
If successful, Angel Protocol has the potential to make a meaningful impact on a charity’s financial strength and empower them with the financial freedom to solve the world’s most pressing challenges. And with some luck, maybe even help rewrite the narrative on how we see Humanitarian institutions altogether.
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I’ll be releasing Part 2 in the coming weeks. Follow on Medium to get notifications and updates.
Relevant Source Material
