Towards the future of smart impact finance!
Last week, ixo was privileged to host a two day workshop in Zurich on ideating new mechanisms to finance social impact and sustainable development outcomes, powered by decentralized technologies. The fundamental question we asked was how could technology enable us to better attribute both positive and negative externalities, such that we can reward and incentivize positive contributions while properly costing negative ones?
Much of our work focused on rethinking impact bonds in the context of blockchain technology. An impact bond is an impact investing mechanism whereby the investor, who takes the working capital risk on an innovative social project, earns payments from an outcomes funder, such as a government or large foundation, upon proof that pre-agreed outcome metrics are met. Impact bonds, a bit of a misnomer as they are not actually bonds, have been around since 2010/2011, a few years younger than Bitcoin.
In less than a decade since the first impact bond was launched by Social Finance in the United Kingdom, there have been over 100 impact bond transactions. Yet challenges remain with high transaction, evaluation and monitoring costs, which stymie the ability to scale these innovative pay-for-success mechanisms. We discussed new paradigms and models for how we can properly value and evaluate impacts, and overcome frictions and market failures.
As concrete outcomes of the two day workshop, Social Finance Israel, a leading impact investor, is now looking to apply blockchain technologies to an existing impact bond in Israel. Stay tuned for more information! Several participants are now actively fundraising or planning around their ideas, such as designing a marketplace for price discovery and funding of various social and sustainable outcomes. It’s intoxicating to see this level of energy and action!
We thank UBS Optimus Foundation for being our gracious hosts, sponsors and collaborators, as we work towards digitizing the future of impact bonds with UBS Optimus. We were humbled and floored by the 42 participants that hailed from countries as diverse as South Africa, China, Portugal, Israel, United Kingdom, United States, Brazil, Switzerland, Germany and many others. Our participants brought deep experience from a range of disciplines, as impact investing practitioners, blockchain technologists, data scientists, climate finance and financial markets professionals. A sampling of the folks attended include the World Economic Forum, UBS Optimus, Social Finance UK, Social Finance Israel, Bancor, Alice, ShanZhai City, the German Development Agency GIZ, Swiss Impact Investment Association, Mattereum, Sweetbridge, to name a few.
We ended up forming a few ideation groups, clustered around topics identified by the participants collectively. Each group will produce a short white paper, which you will find on Github. We will be presenting these ideas to a donor meeting in July hosted by UBS Optimus.
- Community staking and governance
- Smart Impact Financing Marketplace
- Incentivizing for impact through token-curated registries
- Marketplace for the Sustainable Development Goals (SDGs)
- Systemic Issues in the Impact space
- Proof of Impact: Technologies and techniques for data verification
Community staking and governance
This team looked at designing a decentralized mechanism for community members to participate in the early stage of creating pay-for-success smart contracts for social development. The mechanism involves creating a governance and staking token on top of social impact bond budget, to equitably distribute to the community members an ownership stake in the project being funded, with voting and governance rights to encourage community participation in the development of the project. The community will now be able to decide on milestones, metrics, and use of proceeds of the fund, better ensuring long-term success of the impact bond.
Smart Impact Financing Marketplace
A Smart Impact Funding Marketplace is a marketplace for funders interested in purchasing outcomes and outputs, which represent future impact. These outcomes and outputs — or impact tokens — are fulfilled by service providers, impact funders and communities and impact claims are submitted through a blockchain network like ixo. Due to the paucity of verified data about outcomes and the consequent opacity of market prices for impact tokens, a market making process will need to be established by brokers in order to build the market for these impact tokens.
Incentivizing for impact through token-curated registries
This team looked at the problem of how to quantify the value of social impacts a project generates in monetary terms. This is even more difficult in that the true impact of a project might only be known years after a project has completed. The team proposes a new term called the Impact on Investment (IOI). Calculating IOI will be based on two approaches: first, through a speculative approach where an opinion is taken as to the value of IOIs and second, to use past data to calculate the impact return using machine learning techniques. On the former, one way to achieve market opinion through voting is to use Token Curated Registries, which is a blockchain based primitive for curating lists of items into a priority by incentivizing correct ordering and penalizing bad ordering and bad items on the list. It can be used effectively to speculate on a the impact value of a project.
Marketplace for the Sustainable Development Goals (SDGs)
This group discussed a tokenised SDG outcomes fund (as a way to bring impact bonds to scale) and why blockchain could be beneficial for such a fund. In particular, the team looked at various tools (e.g. price discovery system) that would be required. The team identified that using something like software wrapper templates would help reduce transaction costs and frictions. A wrapper could modularize the impact bond structuring process, with standardized parameters for project specifications, verification process, contractual agreements and terms, and other key information.
Systemic Issues in the Impact space
This group looked at larger systemic issues in the impact investing and social impact sector. Key issues include how to properly account for impact, how to allocate resources, looking at the cost of providing impact, and other variables. Liquidity, scalability and risks remain barriers to scaling of impact finance. The team explored some solutions such as creating index funds, or asset-backed crypto stable coins backed by trees.
Proof of Impact: Technologies and techniques for data verification
This group got technical with data science in mapping out the requirements for data collection and verification before and after the introduction of blockchain technologies. In the latter context, the team explored the future of decentralized data and oracles marketplaces, whereby trusted data is sourced from a range of individually owned data stores, not from centralized data providers like Facebook, and used to inform a range of smart contract and on-chain operations. In the particular context of impact evaluation, oracles may be used to scale data verification. The team discussed how standards are necessary to enable verified data to be shareable and interoperable across projects and platforms. Finally, the team discussed how local and community currencies, as they become crypto currencies, may become tools for impact verification by tracing their transaction flows.
As mentioned, we’ll be presenting these ideas to a donor meeting hosted by Social Finance in July. We’re super excited by the energy and richness of information exchange and plan to do a follow-up workshop later this year to further hone, plan and execute on the work started here. So come join us!