The world is in desperate need of innovative solutions to tackle global challenges, from climate change to poverty alleviation. Traditional funding models have struggled to provide the scale and sustainability required to make a lasting impact, so an innovative approach is desperately needed.
Enter Tokenized Impact Bonds—groundbreaking financial instruments that merge the power of blockchain with social good. These digital assets have the potential to revolutionize how we back public goods, making them a crucial tool for impact-driven funding in the digital age.
The following blog post will highlight the power of decentralization in supercharging public goods and societally impactful projects. After breaking down RetroPGF and Quadratic Funding, we at the DCF are curious to (re-)discover other Web3 mechanisms delivering on the promise of resilient public goods funding.
What are Tokenized Impact Bonds?
Tokenized Impact Bonds (TIBs), also known as Tokenized Impact Certificates, are blockchain-based representations of a verified, measurable social and environmental impact. They’re not certificates or bonds per se, but rather tokens, denoting a tokenized event. For example, each certificate could represent the removal of a certain amount of carbon from the atmosphere, or the empowerment of a specific number of people through education or economic relief.
TIBs are issued by organizations, usually decentralized autonomous organizations, that provide a transparent, immutable record of the impact achieved. The token typically features a signature of a trusted body to serve as a proof of verification; that way, anyone could trace the claim back to the origin and confirm that the impact is legitimate.
Social Impact Bonds, But Tokenized
The idea of financial instruments supporting socially responsible initiatives is not new, and those have existed in the Web2 world for more than a decade. Have you heard of social impact bonds (SIBs), pay-for-success bonds, or social outcomes contracts? These are different names for the same legacy tool created to pay for improved social results.
A Social Impact Bond is a public-private partnership in which private investor(s) fund a socially focused project, with a public governing body repaying them once specific outcomes are successfully met. However, investors are only repaid and receive a return on their investment if the desired social impact is achieved.
As Wikipedia clarifies:
The first-ever SIB scheme debuted in the UK in 2010 with the aim of financing a prisoner rehabilitation program. According to the OECD, 138 SIB initiatives have been executed since, raising over USD 440 million and benefitting 1.7 million individuals. It’s no wonder that such a successful example of socially conscious investing has been replicated in Web3 with the Tokenized Impact Bonds. The key difference between traditional impact certifications and tokenized versions lies in the blockchain: TIBs are digitally verifiable and immutable, providing an added layer of accountability.
The Power of Decentralization
One of the most compelling aspects of Tokenized Impact Bonds is the decentralization behind them. Traditional philanthropic and funding models often suffer from issues like inefficiency, lack of transparency, and mismanagement of funds. These issues can undermine trust in charitable efforts and reduce the overall impact.
Blockchain technology introduces decentralized governance and credibly neutral verification, which addresses these challenges head-on. In the case of TIBs, a DAO, often called Impact DAO, plays a crucial role in ensuring that the verification of impact is decentralized and transparent. This means that the impact claimed by an organization can be confirmed by a broader network, mitigating the risks of fraud or misreporting.
TIBs make it easier for donors, investors, and organizations to engage in the verification and funding of public goods. They allow for decentralized trust, a system where a community of decentralized stakeholders, rather than one centralized institution, validates and monitors the impact being created.
The Role of Impact DAOs and Governance
Impact DAOs embody a new governance structure that is focused on driving positive externalities. Think of it as a digital non-profit organization whose purpose is to make people’s lives and the planet better.
In the context of Tokenized Impact Bonds, these DAOs ensure that credibility and neutrality are central to the certification process. By enabling decentralized, community-driven decision-making, governance bodies like Gitcoin Governance could serve as the validators, confirming the legitimacy of the impact claims.
The role of governance is crucial. With decentralized governance, the Impact Certificates are demonstrably trustworthy. This means that, if an Impact DAO claims to have removed 15,000 citizens from poverty, the statement can be validated by the decentralized governance process, ensuring that the impact is real, measurable, and verified.
Building a Market for Impact Bonds
A truly powerful use of Tokenized Impact Bonds lies in their ability to create a liquid market with buy pressure. This market could create a self-reinforcing cycle, where projects and organizations receive funding to generate real impact, and in turn, their success attracts more investment. Over time, as the system matures, this could create a new model for funding public goods that competes with traditional venture capital and government aid.
Imagine a world where crypto-wealthy philanthropists and impact investors participate in a dynamic market where they can buy and sell these bonds as proof of their contributions to public goods. They can use TIBs as a way to flex their social responsibility or showcase their commitment to causes they value. In this case, Impact Bonds not only serve as a tool for validating impact, but also as a new form of digital philanthropy, where the purchase and ownership of these tokens directly contribute to future funding.
Use Cases for Impact Tokens
In 2019, the International Institute for Sustainable Development recognized Impact Tokens for their key benefits in addressing “some of the challenges of impact investing, thus contributing to reducing the United Nations’ Sustainable Development Goals’ financing gap”. In a dedicated paper, the institute examined 10 case studies highlighting single focus, as well as multi-issue focus impact tokens. The projects outlined there include:
- Plastic Bank: a plastic offset program that rewards people with tokens or fiat for collecting plastic waste and taking it to recycling centers.
- BYD: a manufacturer of electric vehicles and power storage batteries, integrating blockchain technology in its product line to offer a carbon banking solution that instantly rewards individual users with carbon credits.
- SolarCoin: a digital asset to incentivize solar energy production and accelerate the global energy transition by increasing returns on investment and decreasing payback time.
TIB use cases range across agriculture, fisheries, and forestry rejuvenation, environmental conservation and protection, education and healthcare support, financial literacy, and many more. The potential of Tokenized Impact Bonds is truly enormous.
An Innovative Model for Public Goods Funding
In a world where many essential initiatives lack the sustained funding they need to succeed, Tokenized Impact Bonds offer a new frontier for social impact and public goods funding. By decentralizing the verification process and creating a transparent, market-driven system, TIBs have the potential to not only reshape the way we fund important projects but also make those projects more sustainable and scalable in the long term.
The future of funding public goods is digital, decentralized, and tokenized. This is particularly evident as research, development, and experimentation in the field are largely taking place within the Web3 space.
It’s a mission for DCF to support innovative solutions empowering decentralized cooperation and public goods development, and we’ll continue to do so. We invite you to be a part of this revolutionary shift.
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