Pushing Boundaries in Impact Financing: Introducing Topl’s Impact Token Pilot
Utilizing web3 to redefine who can invest in impact and how impact projects access capital
Authored by: Adelaine Bhattacharjee and Erin Murphy
If we can tokenize art, why not tokenize impact?
Web3 excels at creating markets. Over the past few years, we have seen significant growth in the tokenization of art, real estate, and carbon on blockchains. Given this new paradigm of tokenization (the process of standardizing and securing data to generate digital assets), we at Topl posit a market for impact tokens — a digital representation of social and environmental impact generated in the real world.
We’ve set out to revolutionize impact investment by increasing liquidity in funding, reducing reporting time, and democratizing impact investing. The result? An impact market is open to everyone, creating a sustainable flywheel of growth for organizations previously dependent on grant funding, philanthropy, or inconsistent investment. In short, by creating an impact market, we offer the unique possibility to monetize impact practices by leveraging blockchain technology.
A better instrument for achieving increased liquidity, benefiting both investors and investees
The motivation for impact tokens arose from the challenges and problematic characteristics in status quo impact financing. Currently, the global impact funding marketing, running the gamut from philanthropy to ESG to impact investing, totals a whopping $2.6 trillion. However, impact funding today is opaque, inefficient, and highly centralized, with only a fraction reaching beneficiaries. Furthermore, the most innovative models are often constrained by high costs of capital, arduous reporting requirements, and low levels of liquidity. These constraints cripple the effectiveness of impact projects and limit their reach. Impact tokens, as a new funding instrument, can be instrumental in forging a more community-driven, liquid, and transparent impact economy.
For investors, tokens enable impact investment to be democratized or, perhaps, more precisely, pluralized. In the current landscape, impact investment is primarily accessible to ultra-wealthy philanthropists, specialized institutions, and development aid agencies. Retail investors are frequently relegated to donation or sponsorship models, which ultimately diminishes the industry’s total liquidity. In addition to opening up investment opportunities to retail investors, perhaps the most value-generating outcome of impact tokenization is that this process solves myriad coordination problems. By making it more straightforward to assemble project financiers and to layer in their varying investment preferences, tokenization will drive an increased plurality of investors (and liquidity) to projects. Furthermore, investors have increased opportunities to interact with the projects they invest in. With greater visibility into the data regarding the use of funds and proof of ongoing project impact, unlike philanthropic instruments, tokens act as a store of value and have resale and profit potential.
For investees, impact tokens offer access to the liquidity of the large market of retail investors interested in supporting a broad range of social or environmental initiatives, providing implementing individuals, communities, and organizations more equitable access to capital. As token sales and resale royalties begin to unlock new ancillary revenue streams, some benefits to investees include:
- For-profit companies increase their bottom line by being financially rewarded for their social or environmental business practices (e.g., fair wages, water reuse) or their CSR or ESG initiatives, thereby demonstrating the value creation potential of doing business more responsibly
- NGOs or community organizations reclaiming the excessive amount of time (sometimes up to 25%!) spent on reporting
- For all token issuers, ramping up reinvestment into operations and growth, ultimately catalyzing that flywheel of impact initiatives becoming economically sustainable in their own right, eliminating the need for long-term (and frankly, untenable) subsidization
Finally, due to blockchain ecosystems’ decentralized nature, projects can collect real-time evidence of impact from a wide range of IoT integrations, such as satellite imagery, lidar, or sensors, and even individual attestations (e.g., a mother can attest via SMS to the fact that her daughters are, in fact, now going to school). And since blockchain transactions encourage granularity, investors and donors can access more comprehensive real-world results, posing an alternative to popular impact financing models, such as Results-Based Financing (RBF).
Topl’s Impact Token Pilot is testing the demand for non-carbon impact tokens
When Toplers look at carbon markets, we acknowledge the current challenges of verification, pricing, and incentivization. But mostly, what we see is that, albeit with varying levels of commitment, the global economy has managed to put a price on carbon or, to put a price on a negative externality. Our logic is then: Can we also put prices on positive externalities? In the same manner, in which companies are rewarded for carbon emission performance through the sale of carbon credits, can we incentivize positive social or environmental impact by attaching a financial value?
Our team at Topl set out to pilot a selective set of non-carbon impact tokens, testing them in the market to inform the architecture of the tokens and of the minting and exchange platforms on which they will be created and traded. Our hypothesis that there is no shortage on the supply side for impact tokens was quickly validated by the various reputable, accomplished impact organizations that decided to join us in this venture. In collaboration with these for-profit companies and NGOs, the Topl Impact Token Pilot Program has established a diverse portfolio of impact tokens to assess market demand, pricing dynamics, and data requirements associated with these assets.
Recognizing the tendency for tech companies to build solutions in ivory towers, we decided to work alongside impact economists and community organization experts from Interpeace, Radical Flexibility Fund, Realized Worth, and ClimaFi to solve challenges around on-the-ground data collection, impact quantification, pricing, and technical token standards. As a collective, we have assembled a cohort of 6 organizations working on use cases across different United Nations Sustainable Development Goals (SDGs):
The MVP we’re building is an accessible, web2.5 platform where investors and donors can see the impact token portfolio, explore the associated blockchain transactions, and learn the specifics of the expected impact return for a given token before purchasing. The final goal of the pilot is to conduct market research with institutional and retail investors, multilateral organizations, aid organizations, donors, philanthropic organizations, impact investors, and ESG departments to understand token demand and pricing and to gauge signals of market traction.
What we’ve learned so far…
By conducting interviews with our current participants, we have already gained key insights before taking the tokens to market. Token standards are sets of rules and conventions for governing how a crypto token works. Popular standards include ERC-20, BEP-20, ERC-721, and ERC-1155 (Binance Academy.) While useful in specific contexts, we’ve realized that existing token standards, such as ERC 20, ERC 1115, and Hypercerts, are not sufficient to encapsulate the complexities of impact evidence. Hence, we have created a new and more flexible technical token standard called the Topl Asset Model (TAM). The token design is currently in progress, but its core differentiator is the ability to compose real-world pieces of data into a customizingly fungible digital asset. What this means in practice is that instead of trying to fit a square peg into a round hole, we’re building a token ontology that can better represent the nuanced picture of impact projects, account for their varying investor preferences, and capture the value of ongoing impact.
Given that most of our participating organizations work across multiple SDGs and impact targets, we need a way to offer multiple constituent impact tokens as a part of one overarching impact token. For example, Regen Organic’s circular economy model not only promotes regenerative agriculture (SDG 12, Responsible Consumption and Production), but it also increases food security in Kenya (SDG 2, No Hunger) and creates green jobs from upcycling residual organics (SDG 11, Sustainable Cities and Communities). To appeal to a plurality of investment priorities, horizons, and impact verification expectations, we’ve architected two particular components of the TAM standard, divisibility and reversibility.
Finally, while impact tokens can be attractive to institutional investors such as impact investing funds, philanthropic foundations, and family offices, we predict that the largest source of liquidity for these impact tokens will come from retail investors — ordinary individuals who want to invest their money into impact projects. Beyond retail, we anticipate that another major source of demand will be complementary industries and companies that benefit from the positive externality created by the organizations issuing these tokens.
Harking back to carbon markets, we see that the highest demand for carbon credits comes from companies with the highest carbon emissions looking to offset their footprints. Using this same logic, let’s consider how a marine preservation impact token would achieve value. If a reef restoration project generates tokens for Healthy Reefs’ SDG 14: Life Below Water representing increased biodiversity, coastal resorts, cruise lines, or fisheries might be the leading investors in such tokens. Not only do their respective businesses benefit from increased biodiversity, but this token also provides them with an opportunity for returns on an investment that directly corresponds to their own negative externalities (e.g., pollution, marine species depopulation).
What’s next?
At Topl, we have two guiding principles we discuss with all of the projects who want to use our tech: 1) Blockchains are not magic (i.e., they can’t fix real-world processes that are broken), and 2) Junk data in, junk data out (i.e., they don’t simply make information true by virtue of that information being on chain). Given that so many of our team members have spent time in the impact space, we know just how hard it is to architect a project so that the people on the ground can use the tech to its fullest extent. It’s therefore critically important that we convey here that finding better financing solutions for impact is not as simple as opening up a marketplace where anyone and everyone can flood the market with tokens, and investors will just buy them all up. Here are some critical questions we’re still seeking to answer as we take this initiative forward:
- How many different sources of input do investors need to trust that a project is legitimately creating an impact? For an agricultural project, for example, is it a certain number of farmers that must attach photos to transactions?
- Though blockchains are decentralized, is there a degree of centralized verification that would make impact tokens more trustworthy? For example, could a DAO of impact experts, community members, and investors create and continually iterate verification methods and standards?
- To create a fully-fledged impact marketplace, how do we create tradeable digital assets without neglecting the nuances and differences in impact outcomes? Is it realistic to think that a certain amount of reef biomass restored is equivalent to a certain number of villagers who now have access to clean water?
- How do we compose a token standard that allows for investors who prioritize outputs (e.g., a school built in a village) and those who prioritize outcomes (e.g., children educated over a period of 10 years in that village) to both achieve their investment goals within the same project?
Over the next few months, we will launch our impact token MVP to get feedback and market insights. We will also host several events for both tech and non-tech audiences, including Twitter spaces, Topl Improvement Proposals (TIPs), and Discord discussions to solicit validation and criticism alike. We’re excited to invite you, the broader impact and web3 communities, to take part in designing these impact tokens and revolutionizing the way we invest in and monetize impact.
