Many of us have heard about blockchain, or at least its most famous application in cryptocurrencies like Bitcoin. But what exactly is blockchain, and what are its applications for nonprofits?
Blockchain made its first appearance in a whitepaper published in 2008 by Satoshi Nakamoto, the alias of the founder of Bitcoin. Blockchain was introduced as a method to streamline transactions over the internet by eliminating third parties such as financial institutions in order to allow these transactions to become purely peer-to-peer. This technology is the virtual equivalent of moving cash or a document directly from one personal safe to another, with each of the safe holders possessing the only key or combination to their individual safes.
It is important to note, however, that blockchain and cryptocurrencies like Bitcoin are two separate things. Bitcoin utilizes blockchain technology, but blockchain has many uses beyond Bitcoin. Essentially, blockchain is a distributed ledger or database chain of transactions that is owned and maintained by all users of the system. There are different types of blockchains such as public, private, or hybrid. For the sake of simplicity, we will be focusing on public blockchains, which are not privately owned or operated by anyone.
Blockchain technology records a digital signature for each transaction entry and has an encrypted and unchangeable hash number of each transaction in a continuous chain. In the process, that transaction must be verified. For instance, when you make a purchase from an online retailer, a network of computers will rush to check that your transaction happened in the way you said it did. They will confirm the details of the purchase, including the transaction’s time, dollar amount, and participants. That transaction then must be stored in a block. Once your transaction has been verified as accurate, it joins the ledger. The transaction’s dollar amount, your digital signature, and the retailer’s digital signature are all stored in a block. There, the transaction will likely join hundreds, or thousands, of others like it. A unique identifying code, known as a hash, must then be assigned to the newly created block. Once hashed, the block can be added to the blockchain.
An example of what hashes look like can be found in Bitcoin’s public blockchain. If you take a look at this ledger, you will see that the hashes do not contain any personal identifying information about the transacting parties, so this publicly available data cannot be directly traced back to the user. You will, however, be able to see general transaction data, along with information about when (“Time”), where (“Height”), and by which mining platform (“Relayed By”). Nothing can be altered once it’s in the blockchain ledger.
Whenever a new block is added to the public blockchain, anyone can view the contents of the blockchain, but users can also opt to connect their computers to the blockchain network as nodes. Doing so allows their computer to receive a copy of the blockchain that is updated automatically whenever a new block is added, similar to a social media news feed that gives a live update whenever a new status is posted. Each computer in the blockchain network will have its own copy of the blockchain, which means there can be thousands, or in the case of Bitcoin, millions of copies of the same blockchain. The benefit of having a plethora of identical copies of the blockchain is that spreading that information across a network of computers makes the information much more difficult to hack or manipulate. Moreover, there is not a single, definitive account of events that can be manipulated. Instead, a hacker would need to get a hold of every individual copy of the blockchain on the network. This is what is meant by blockchain being a “distributed” ledger.
Most current databases used by companies and nonprofits are on centralized in-house servers, which makes them more susceptible to being hacked and altered. In contrast, blockchain’s distributed system would require that a majority of database nodes binge hacked simultaneously for any records to be changed. The Bitcoin blockchain, for example, is supported by roughly 10,000 nodes hosting its freely downloadable database software. It has never been hacked during its ten-year history.
Since its inception, there have been a surprising number of applications for blockchain technology and nonprofits. For instance, blockchain can give an organization complete control over its own data. The technology is intentionally designed to protect and streamline the flow of information between parties by automatically keeping an unalterable record of currency exchanges. This would allow a nonprofit to permanently log every dollar that moves in and out of each department. Not only will hackers be unable to penetrate the system, but it will also be impossible for internal users to alter data or delete archival information.
Nonprofits can also enjoy the cost-reducing benefits of blockchain. Blockchain solutions can automate many repetitive administrative processes that can slow down the operations of nonprofits. Removing regular tasks such as record-keeping and data audits from the tasks of nonprofit employees will streamline workflows, allowing your teams to allocate more time towards high-level strategy and fundraising rather than day-to-day housekeeping responsibilities.
Perhaps the most obvious blockchain opportunity lies in receiving Bitcoin and other cryptocurrency donations. It is estimated that 1% of nonprofits or NGOs worldwide now accept bitcoin, and hundreds of millions in cryptocurrencies have been donated to a range of organizations over the past couple of years. In fact, Motherboard reported six years ago that “the ultimate philanthropic potential of digital currency may lie in the developing world, where high exchange rates, bank fees and inflation can dilute the buying power of international donors. Taking and transferring small donations without losing too much to PayPal or credit card transaction fees is a big potential benefit of bitcoin donations.”
A related application of blockchain in the nonprofit sector is the transparent tracking of donations and international aid. For instance, organizations can employ blockchain systems to provide a public record of when donations occurred, to whom they were made, and even for what purpose they were used. A live example of this is Bitgive Foundation’s bitcoin donation tracking System, GiveTrack, which shows donation activities and project impact in real time.
Moreover, whether a nonprofit opens itself up to cryptocurrency donations or simply uses blockchain to organize its internal workflow, the technology can aid nonprofits in assuring donors that their information is being rigorously protected. Because blockchain promotes transparency in operations and cryptocurrency encourages anonymity, a nonprofit wielding these technologies can make a stride towards truly selfless giving.
While blockchain is still a budding technology in the nonprofit world, and the time may not be quite ripe for most small and medium-sized nonprofits to get onto the bandwagon, it is something for your organization keep an eye on. Over 16 million Americans use Bitcoin now, so it should not come as any surprise if more foundations start to use blockchain-style contracts or more social good projects involving blockchain appear in the future.