WhitePaper Series: The Global Impact Marketplace
Heya everyone, it’s Proof of Impact here. We will be coming out with posts and articles called the WhitePaper Series. This series is meant to outline, define and explain the issues in impact investing, POI’s solution and application that we believe are necessary for the impact industry to bring forth the Purpose Economy and promote measurable and transparent progress in our world. This third installment of the WhitePaper series will be talking about the global impact marketplace being developed and innovation with the different derivatives and products that can be created.
A Global Impact Marketplace
A global public and transparent Impact Marketplace would allow for easy funding, execution, and trading of impact investment products. Such an Impact Marketplace would allow impact buyers (i.e., donors, investors, payers, consumers) and sellers (i.e., impact implementers, service providers, impact-minded communities, impact driven companies/corporations, etc.) to come to a global platform, and trade events (i.e., outputs) across any sector or geography.
The Marketplace will have established market rates and returns for a set of measurable impact events (impact outputs) that can be “bought and sold” by funders and implementers alike. The completion of impact events will be rigorously validated using transparent and predefined proof points specific to each type of event (see below: Verification), and each completed impact event will be issued a digital certificate (“Token”) that is listed on a public, immutable ledger.
Upon verification of impact events, implementers will be paid for their services and funders will be able to easily view their return on investment, whether that be an impact return, a financial return, or both. The Marketplace will operate efficiently by conducting transaction settlement and impact attribution through the Proof of Impact payment platform, which will allow for seamless transactions among all stakeholders involved.
Broader categories of impact events, or impact event types, will be the basis of the Marketplace and will allow for easily traded — and widely scalable — impact commoditization. At scale, the Impact Marketplace can allow the rapid directing of resources to emergencies, and other priorities by increasing the flow of capital to related impact events. The impact events listed on the Marketplace are outputs, not outcomes. Verified immunizations, not units of child survival. The goal is to create a menu of impact event types that are 1) highly correlated with achievement of outcomes, and 2) easily and objectively verified.
The rationale for this decision is to simplify, standardize, and lower the cost of setting up customized impact investment products and circumvent models that require the most burdensome evaluation methods. In the Marketplace, each impact event type will have predefined terms and all of the necessary information that users will need to participate, cutting out the time and resources needed for planning, contracting, and negotiating the terms of each customized impact investing project.
Proof of Impact has already begun developing this global Marketplace. As we are implementing and scaling this model, there are several prerequisites that need to be addressed in order to unlock the full potential of the marketplace.
Prerequisites :
Individual Event Verification (Impact event proof points)
Before an impact token can be created, the unique underlying impact event needs to be objectively verified. The verification needs to fulfill a minimum set of criteria:
- The event to be verified is an output — Girls educated, Vaccinations. Tons of CO2 — that correlates strongly with a higher level impact outcome (Reduction in child mortality, Financial inclusion, etc);
- The event needs to be uniquely identifiable: it needs to contain unique features that distinguish it from any other, similar events;
- The verification needs to happen in real time, or as close to real time as possible;
- The verification should be reasonably invulnerable to human error — Ideally the verification should as much as possible be machine-generated;
Verifying these events is an operational challenge whose difficulty increases exponentially at the last mile. Solving the verification problem is critical to the ability of this model to go to scale. However, there is a tremendous opportunity for verification to evolve into a dynamic, profitable market on its own.
Currently, there is relatively little verification happening. Most outputs that get counted by impact implementers are either self-reported (by front-line staff such as nurses or community health workers), or they are modeled based on samples collected through surveys. Sometimes — rarely — they are individually audited.
However, there is currently a vibrant ecosystem of verification applications being developed and implemented in projects across various sensors. Most of these are mobile-based. Some of them use features inside mobile phones (GPS, camera, biometrics). Others rely on combinations of specialized devices and cell phones. As verification models and technology evolve, they free up frontline workers to focus on delivering impact rather than filling in paperwork. They also eliminate significant data flaws, increasing the quality of the data and its usefulness. IOT devices are becoming cheaper and more reliable, with new technologies vastly improving problems related to batteries and connectivity. These technology advances are making real-time, individual event verification possible at scale and in frontier operational environments. We expect a vibrant market to emerge where dedicated verification businesses will develop products and services for event verification. Each type of event is different — by its nature as well as operationally — so specialized verification models will emerge. High resolution satellite images to verify forest regeneration. Biometrics to verify identity. QR codes scanned on delivery. Verification can be highly specialized, and, as long as there are incentives in place, scalable verification models will evolve.
As that happens, platforms such as POI will simply treat verification as a micro-service connecting into the Marketplace APIs and providing the trigger for the impact token to be minted.
Financial Structuring/ Financial Engineering
Once the event has been verified and the token is minted, you now have an official, validated impact event. This impact event can now be privately held, transferred or transacted like any asset, which lies the big opportunity: We can now structure financial products around impact events.
The most basic financial structure is simply a digital attribution. Because the impact event is unique and identified on a public ledger, there is full impact attribution. Whoever paid for the impact event owns the token, which means they own the impact attribution. For example, a funder gets credit for their donation and visibility into how their money was spent.
But the exciting opportunity is to build financial structures that are a bit more complex and that would be attractive to wider segments of investors. Some examples include:
a. Simple Output tokens
Output Tokens are verified events that are made available to a buyer in a private sale or on a secondary market. This is the most basic model for a financial product: the buyer receives attribution and the seller receives cash. The transaction can be prepaid or postpaid. Outputs can be sold/bought clustered/ batched or individually.
b. Event-triggered Performance based tokens (PBT):
A Performance Based Token is a smart contract by which a buyer and a seller agrees to purchase verified individual events at a pre-agreed price. Transactions can occur clustered or individual and the payment can be made up-front, in real time or at delivery. In an event-triggered PBT, the buyer puts forward an offer to purchase specific events (i.e.: individual trees planted) at a pre-agreed price. This offer is locked in a smart contract and the Money gets transferred into an escrow account. Every time an impact event is verified, the corresponding amount of money is released in the seller’s account/ wallet.
c. Outcome Tokens are structured on top of an impact theses that uses available evidence to model correlations between outputs and outcomes. An example of an outcome token would be a token corresponding to a ton of CO2 sequestered out of the atmosphere (outcome). This outcome would be essentially a portfolio combining a pre-defined number of outputs (individual trees planted), based on the assumption that there are X trees necessary to absorb 1 ton of CO2 in one year.
d. Tokenized Impact Indexes are outcome tokens structured around impact thesis that are
more complex than a simple outcome correlation. For example, a Child Survival index would be balanced around different types of individual events that correlate to child survival: Pregnancy Milestones, Ante-Natal Care Visits, Immunization, Nutrition, etc.
e. Tokenized Impact Bonds. A tokenized impact bond is structured around an offer made by
an outcome underwriter (outcome buyer) to pay a pre-agreed amount if a certain outcome is achieved. For example, an Underwriter would offer a payment of 30mil EUR for a min 5% reduction in child mortality in a given community. Investors purchase individual events (outputs) that are known to correlate with the respective outcome — i.e. immunizations, ante-natal-care visits, etc. Once sufficient output events have been verified, the outcome milestone is met and the Underwriter is paying investors their investment plus a premium. Investors make a profit for putting capital towards immunizations and the underwriter gets 100% outcome attribution while only paying for success.
f. Tokenized loans; A tokenized loan allows a community/ recipient to borrow money for a specific purpose (build a hospital, build a school, roll out broadband, upgrade grid, irrigation scheme) and then pay back the lenders over a pre-agreed period of time. Tokens get issued to lenders and the capital thus collected is invested in the agreed purpose.
g. Others (Complex financial products, Futures, Other Impact products). Once impact events are liquid and viewed in the market as an asset class, more complex financial products can be structured and listed for trading. Other sectors and markets — financial and non- financial — can benefit from integrating elements of event verification and/ or tokenized outputs into their products. Donor-Advised funds can use them to track performance. Companies can use them to reward milestones or loyalty along their value chains. Corporations can put impact assets on their balance sheet to prove their impact portfolio/footprint — either voluntarily or as part of regulatory compliance. Businesses can offer buyers in one part of the world the opportunity to invest in specific outputs on the other side of the world, through simple acts of product purchase.
