Contact us anytime to know more - Abhishek P., Founder & CFO CISIN
What is Blockchain Technology and How Does it Work?
Blockchain is a huge database in its simplest form. Blockchain is a decentralized peer-to-peer network. This means that no single person or entity can control it. Each user helps manage the information flow. Once new data is added to the Blockchain, it cannot be altered.
Blockchain systems can be either public or private. Blocks are used to add data. After the blocks have been added, the computers verify (via mathematical equations called mining) that the data matches. Then, the verified blocks are chained back to the previous block. This creates a chronological, tamper-proof block order. Most miners make cryptocurrency for their work. A distributed ledger is a Blockchain. Transaction validation is when all users "agree" that the data has been added correctly, creating an immutable document.
Imagine a street of 10 houses where the owners all know each other. Crystal, who lives at number three, claims that Dave, the fifth house, owns number three. Crystal is allowed to keep her house despite the disagreements of all the neighbors. This is an example of a decentralized system in which users or people retain control. The information, like Blockchain, is transparent, reliable and shared. It can also be used for good.
All the ownership records are kept in what is known as a central system. Crystal's house could be transferred to Dave, who could also change the deeds. The system would allow Dave to take house number three. Many systems we use daily, from social media to government to banks, are centralized. The person or entity controlling the central system has the power and the ability to abuse it.
It is easy to see the appeal of user-controlled systems. They have the potential to empower anyone with internet connectivity. Everybody who signs up becomes a stakeholder. This is why the blockchain ecosystem has grown rapidly, with thousands of new projects and start-ups each month.
Are Blockchain & Cryptocurrencies the Same?
Cryptocurrencies may help the expansion of blockchain adoption. Blockchain technology is used to run digital currencies or cryptocurrencies. Because of the dependence on blockchain technology, they are intrinsically linked.
It's big business. October 23, 2022, states that over 6,500 cryptocurrencies have a market capitalization of more than $2.5 trillion. El Salvador was the first country to accept Bitcoin as legal currency. Blockchain is the technology used by cryptocurrency.
Why is Social Impact Important Today?
Social impact has many definitions, but it generally refers to how actions and activities impact individuals, families, or communities. Social impact can often be framed as addressing a social problem or the positive effects that something has on people.
Blockchain can help shape and track social impact. Although there is much talk about public and private entities announcing their plans, it's difficult to verify if they do it. It's one thing to tell us but quite another to show us. Accountability is difficult to find in a globalized, fast-paced and digitalized world. In the fight against misinformation, transparency is a key priority.
The Ethereum founder donated $1 billion in cryptocurrency to India's Covid Crypto assets Relief Fund earlier this year. We know this because the transaction was visible on his digital wallet, which is public and blockchain-backed. Imagine holding governments accountable for spending their pledges and tracking the distribution of aid and disaster relief work by charity.
Blockchain can rebuild bridges between central systems and people using its audited, tracked and publicly disclosed information. Citizens can decode the truth with verifiable timestamps and geolocations.
Does Blockchain Have a Positive Impact on Social Impact?
Blockchain offers many opportunities for social impact:
- Transparency
- Management of the supply chain.
- Digital identity
- Protection of personal data.
- Legitimacy
- Compliance
- Trust
Big tech companies keep their algorithms a secret. Blockchain's selling point, however, is its openness and irrefutable record-keeping. According to some technologists, Blockchain and cryptocurrency can be used to realign capitalism.
Let's look at how Blockchain can help reduce costs, realign the idea of borders, and disrupt the world.
Are There Positive Examples of Blockchain for Social Impact?
Blockchain is being used by many private companies, governments, as well as non-governmental organizations (NGOs) to make a positive social impact. Let's look at some cases and consider the potential implications of Blockchain.
A recent study found that 40% of fish purchased in markets, restaurants, and fishmongers worldwide was mislabeled, with some fish containing trace amounts of the pig. There was no transparent supply chain. Imagine if Blockchain could track boats, catches, markets, and delivery.
IBM has partnered with major food and beverage players to use Blockchain to create a transparent supply chain. This helps build brand trust and allows people to verify that packaging and labeling are accurate. You can track each supply chain step, including where it was grown, how pesticides were used and if local food was used. Agridigital, for example, is streamlining the grain supply chain between farmers and markets by incorporating real-time data on delivery and payment.
Proof Points developed blockchain technology to convert data from traceability tools across the supply chain so that shoppers can verify product claims about sustainability and origin. Blockchain is a way for brands to prove their positive impact claims. With real data, customers can select honest and trustworthy suppliers to whom they will pay their money.
Blockchain can be used by NGO and charity sectors to save money on bank fees and unlock cash to help people in need. Consensys, an Ethereum technology company, created a cash-and-voucher program for Oxfam in Vanuatu using the Ethereum blockchain. To create a transparent, open, fast and more transparent system faster than banks, Oxfam, the aid recipients, and shopkeepers used Blockchain and cryptocurrency.
Blockchain has many uses. Blockchain could have many potential uses. It could track and monitor government spending, and it would also allow financial transactions, from tax payments to profits. Your medical records and treatment could be stored securely and instantly available to doctors in an emergency.
Blockchain Will Make Banking More Accessible
Blockchain is dependent on accessibility. Because banks have centralized systems that exclude them, over 1 billion people worldwide cannot access bank accounts. The unbanked can now pay digitally for goods and become more connected using cryptocurrencies. Businesses and individuals have many new customers that can be paid digitally.
PoolTogether is a micro-level crypto-based lottery and savings program based on premium bonds. Deposit money is to be entered in a weekly prize draw. You can also quickly see who won and withdraw your deposit anytime.
Cryptocurrencies allow people from different countries to pay for one another. This eliminates the financial borders that banks and governments currently control. Many areas of financial development include welfare, emergency aid, fines and others.
Blockchain is also being designed to offer greater flexibility. Blockchain and smart contracts can interact to enable complex transactions. When certain conditions are met, a smart contract executes the action by reading external data. These include monitoring supply chain movements, voting, and paying out winning bets.
Is Blockchain Technology Good for the Environment?
Given the inept nature of blockchain technology, it is not yet a panacea. However, it has the potential to revolutionize how we relate to energy. Many blockchain-based programs are working to stop climate change. Every coin can be used to avoid driving more than 2,500 miles. Users can track and give carbon offsets.
DAI cryptocurrency, which is a stablecoin, is pegged to USD. One DAI coin is nearly always worth one USD. With minute fluctuations occurring thousands of times daily, one DAI coin is almost always worth one USD. DAI holders can donate the interest from price fluctuations to the rTrees Project to plant trees. This allows people to reforest the world without actually doing anything.
Many cryptocurrencies have pledged to be powered 100% by renewable energy by 2030. Cryptocurrency Candela claims that all of its mining is powered by solar energy. They want to encourage people to sell their excess solar power to neighbors. Plastic Bank allows you to track plastic's progress from recycling to being used as banknotes.
Blockchain's indirect influence means that greenwashing may be a thing of the past. It holds governments and businesses accountable for green promises. This could boost the Environment as aid reaches its destination.
Is Blockchain Technology Harmful to the Environment?
Mining is used to verify transactions in most cryptocurrencies and blockchain systems. This is known as proof of work. This concept is the backbone of Blockchain. It means that transactions can be validated and added to the Blockchain. Mining can require a lot of energy.
Bitcoin, the most well-known cryptocurrency, was created as digital coins "mined by computers". Complex math problems are used to add transactions in blocks to the Blockchain. It's a race for math solutions; the winner gets a valuable Bitcoin. The other computers were unsuccessful, resulting in a lot of wasted energy.
The annual consumption of Bitcoin miners has been estimated to be around 110 Terawatt hours per year or 0.5% of global electricity production. If it were a country, Bitcoin would have a higher electricity consumption than Argentina. The annual amount of e-waste generated by Bitcoin is 30.7 kilotons. This is comparable to the small IT equipment scraps in the Netherlands. The United States is the largest Bitcoin mining country.
Miners claim they use much renewable energy that could otherwise be lost, such as wind power surpluses and hydropower. According to estimates, Bitcoin mining energy can be as high as 74% renewably sourced at 39% to 74%. There are indications that more investors and miners are becoming more conscious of Bitcoin's environmental impact.
Companies now use waste such as flared natural gas to power mining rigs. This maximizes fossil fuel energy's benefits but doesn't address the environmental damage of burning them. North Vancouver will also be heating its homes using energy from Bitcoin mining to turn energy waste into a benefit. Blockchain's potential benefits for energy consumption will be the subject of more discussions. The blockchain community is working on many technology solutions to make the industry more sustainable.
Could Proof-of-Stake Help Energy and Blockchain?
Ethereum, the most widely used blockchain program in the world, is nearing proof of stake adoption for transactions. Many consider proof of stake the answer to Blockchain's energy-intensive processes. It eliminates mining and allows transactions to be approved.
To validate transactions, users interested in Ethereum's cryptocurrency, Ether, must stake their Ether. They validate the transactions and then add the block onto the Blockchain. They get more Ether for their efforts. They can still lose money if they go offline or if they verify suspicious or malicious transactions. Ether holders must verify their transactions honestly to make Ether more valuable. The proof of stake takes a lot less energy than proof of work to process payments. One computer adds a block, and none fails to mine it.
Read More: 20 Biggest Misconceptions People Have About Blockchain
What Could Blockchain Do for Us in the Future?
At the highest levels of power, work has already begun. The Blockchain for Social Impact Coalition is a non-profit that assists the United Nations in examining the potential use cases for blockchain solutions. The coalition will attempt to unite government agencies, non-governmental organizations, and other stakeholders to achieve the United Nations Sustainable Development Goals.
Financial services and fintech could be used to support existing systems or replace them using blockchain technology. Worldcoin, a tech start-up, wants to scan people's eyes in exchange for cryptocurrency. Blockchain-backed Iris recognition could create a global digital identity that is secure and irrefutable.
Blockchain can reduce costs and eliminate financial service barriers faster than current systems. It also allows for borderless payment systems, which can be used to speed up the process. The combination of Blockchain and artificial intelligence is being studied by many. As with the internet, people don't know where blockchain technology might lead.
What other Issues May Stop Blockchain's Success?
We have seen the benefits of Blockchain in helping the unbanked to connect, negate borders, and facilitate various types of supply chains. The information must be digitized to reign supreme. This would require digitizing all physical data from books and records.
Other questions include identity proof. Many would love to be able to use a digital identity that is 100% secure and blockchain-backed to authorize transactions. Who holds this information? Could identities be stolen or exploited by others?
According to figures, 4.7 billion people are online, roughly 60% of the global population. This is great news for Blockchain and cryptocurrency, but it's not good news for the 40% of people who live offline. Internet connectivity can lead to imbalanced societies.
It is important to consider whether societies can function under transparent conditions. The internet of things (IoT), artificial intelligence, and artificial intelligence are rapidly developing. These technologies could be the foundation for the future.
There could also be trade-offs, such as privacy versus accountability or Blockchain's permanence vs flexibility. What happens if someone makes an innocent error? Blockchain's intense mathematical microscope may make it difficult to see human behavior and culture.
We Believe The Growth In Impact Investing Is Being Stifled Because Of
- It is difficult to account for the impact of investments on social and environmental outcomes due to the lack of reliable data or high costs.
- Issues surrounding the "attribution of impact" refers to an investor's allocation of an impact-related claim. It is often dangerous for investors to "double-count" claims.
- Roadblocks to monetizing impacts - I.e. High transaction costs, uncertain returns, illiquid impact markets.
- Blockchain-based solutions could solve these problems.
Blockchain technology is revolutionizing the storage, management, and transfer of value among digital identities across many economic sectors. Blockchain-based tokens can be used to crowdfund business ideas, improve transaction-based business processes, and, more generally, serve as stores of value.
Blockchain is a recent addition to the impact investing community. A wide range of applications is being developed to benefit from its features. This has led to creation of a new category of applications called "impact tokens".
These tokens are used to represent UN Sustainable Development Goal-related impacts. They usually take the form of a quantified unit-based measurement metric linked to their origin (the activity that created them), representing their identity. These tokens can be used for performance-based payments, tracking impacts through supply chains, and substantiating claims regarding SDG support.
Blockchains and Impact Investing
Blockchain-based asset management has many advantages that could benefit impact investing. These include greater transparency, enhanced security and traceability, higher transaction efficiency and speed and lower costs. These features are a real benefit in the context of impact investing.
1. Trust
Impact investments are often made in countries with low trust and institutional capacity. Blockchains reduce the need to trust because of their trust-generating features. This helps to lower reputational risk from unverifiable claims.
Blockchains can be used to automate and speed up impact measurement and verification. This is a significant improvement over current processes and models that are slow and costly. Impact creation can be used to monitor performance and manage impact investments faster and with greater reliability. The blockchain boom attracted speculators with fraudulent intent. Image by Unsplash
2. Attribution
Impact tokens are a way to track the investment's impact (i.e. In sustainable production) through a supply chain. They can be passed on - i.e. They can be passed on to potential buyers of products that have been produced sustainably.
3. Impact Monetization
Transaction costs can be reduced, and the monetization process of impacts can be expedited. High-trust tokens with high-trust, particularly those measured per unit, can be used as a key metric in designing results-based financing schemes. These tokens can be monetized quickly or even instantly, which creates strong behavioral incentives at the implementation level. Immediate rewards are more effective in influencing behavior. This lower transaction cost makes it possible to transfer funds directly to individuals without the need to use intermediaries.
Therefore, it is not surprising that there have been a lot of impact tokens on the market in the past year. Although these tokens have different purposes and designs, they all claim to be quantifiable units of impact that can be related to one or more SDGs. To finance a) the activities that generate the claimed impact and b) those who develop the blockchain platform that manages them, some of these tokens were made available to the public via Initial Coin Offerings (ICOs).
These Five Criteria Will Help You Determine The Quality Of An Impact Token
1. It Is An Added Value In How The Impact Can Be Accounted For
Blockchain technology's key feature is its ability to automate the creation and management of decentralized verified data. A well-designed impact token would have data acquisition and verification models free of human intervention or judgment.
This feature could significantly contribute to the design, operation, reporting, and verification of systems for greenhouse gas management under the Paris Agreement. It also may help implement market-based strategies, which are already being explored and tested by UN organizations. If we want to raise capital to protect the Earth, Blockchain is vital.
2. It Builds Trust Between Stakeholders And Users
Because they are collaborative projects that have high transparency and decentralized consensus-making, successful blockchain projects inspire trust. They reward those who help the Project evolve and protect its integrity. Because of the wide support and buy-in of stakeholders and users, they are successful.
These principles will be the foundation of a well-designed impact token. As of today, however, no impact tokens have been created based on these principles.
3. It Increases The Flow Of Impact Investment
Current impact-related financial instruments, such as development impact bonds, are difficult to scale due to the difficulty in tracking progress and verifying that milestones were met. UN Principles for Responsible Investment initiative listed many areas where Blockchain startups could speed up financial flows. These areas include energy trading systems and secure recording of educational certificates for local school districts. They also noted that not all of these areas had been widely adopted yet.
The most well-known use of Blockchain for good is the World Food Programme's Building Blocks platform to pay refugees. This has resulted in millions in savings. Blockchain technology can create a unique digital identity for eligible beneficiaries. This is done using a retina scan, fingerprint or another method to identify the beneficiary. Regular cash transfers are made without any transaction fees.
Another good example of the use of impact tokens for funding new solar projects in Africa is the Sun Exchange. The most impressive aspect of this fundraising effort is its scalability: Impact investors can invest as low as $1 to fund their impact. Finally, well-designed impact tokens will reduce the financial intermediaries' role and reduce costs.
4. It Is Transparent, Open-Source And Easy To Use
The context in which the impact investment community exists is a wide range of stakeholders. It must be open to all and responsive to the public's interest. Any blockchain network used to manage impact tokens must be open-source and freely available.
5. It Controls Its Energy Consumption
Last but not least: the design of an impact token must consider the environmental impacts. Numerous studies and websites show how much energy and greenhouse gas emissions are caused by bitcoin and ethereum operations, which are the most popular cryptocurrencies. This is the first peer-reviewed study on the topic.
Conclusion
Blockchain application is a revolutionary technology that can help scale impact investing by providing transparency, trust and low transaction costs. It is still early days for impact tokens. The impact investing community must be ready for trial and error.
The complex creation of the carbon market, which is arguably the first large-scale payment-for-impact scheme in the world, has shown that trust must be developed and consensus built around the community's processes and procedures. Impact tokens can only succeed if there is broad cooperation among the community and a willingness to adhere to common standards. This will allow for the unlocking of large-scale finance to meet Sustainable Development Goals.
