Developing Blockchain Strategy.
In this article, we are going to explore blockchain and some of the things you might consider when developing a blockchain strategy for your business. We also look at how a decentralised autonomous organisation (DAO) structure using blockchain technology could be used to deliver payment by outcomes contracting in the social sector.
What is blockchain?
Let's get one thing clear, blockchain is not cryptocurrency. Crypto uses blockchain technology to work, as a blockchain product or use case, but it is not blockchain entirely. A blockchain is a network of computers linked together to store and replicate data independently, but in a way that is visible to all members of the blockchain. Each member of the blockchain takes responsibility for replicating the blockchain's data and updating it as it changes. In blockchain terminology, the computers participating in the blockchain by storing and replicating the data are called nodes. When one node changes the data all the other nodes "vote" to either accept or deny the change. When all nodes confirm the same data the blockchain is working and is secure. Adding more nodes increases the security of the data in the blockchain.
Blockchains can be public or private - a public blockchain is an open chain that can be accessed by users anonymously. Cryptocurrencies like Bitcoin and Ether use public blockchains. Private blockchains, sometimes called permissioned blockchains, are only open to specific people and allow them access to a restricted network. In private blockchains, each node is given unique rights and obligations in the network.
The central characteristics of a blockchain are that it is:
transparent - all the nodes can see what the other nodes see.
distributed - each node contains a replica of the data in the chain.
secure - all the nodes in the chain must agree to any changes to the data.
What are the benefits of blockchain?
Security is often cited as one of the main benefits of blockchain. Blockchain security is strong due to the use of a hash, a long string of numbers that identifies each node and is used to encrypt and validate the data in the blockchain. The use of a hash, combined with the exact replication of the data in each node provides a "proof of work" that supports the consensus among every node required for the blockchain to work. The peer-to-peer consensus that validates each block is the most robust protection offered by blockchain. A new node is assigned a copy of the blockchain when they join. When a new block tries to be added, it must be validated by each node in the network via the "proof of work". Validation by at least 51% of the network is required for a new node to be accepted. The new node's hash will not be accepted if it does not correspond with other nodes in that blockchain.
To understand why blockchain could be so useful we should look at the concept of decantralisation. Decentralisation is the process of distributing power or authority away from a centralised location. When we decentralise something, we make it more accessible to everyone involved. Blockchain is often described as a decentralised technology. This means that there is no one central point of control over the data or network. Instead, each node has an equal say in how the network is run. This makes it very difficult for anyone to tamper with the data or take control of the network.
The decentralised nature of blockchain can support:
Resistance to downtime. If one node goes down, the network can continue to function as normal because many other nodes can take its place.
Reduced transaction costs. No middlemen or intermediaries are taking a cut of each transaction.
Fraud resistance. It is very difficult to tamper with data stored on a blockchain because all the nodes in the network would have to be compromised at the same time.
These characteristics make blockchain an ideal technology for applications that require secure, transparent and tamper-proof data. Blockchain can be used to store any type of data including financial transactions, medical records, land registry records and more. The use of blockchain varies depending on the type of data being stored. For example, when storing financial transaction data, blockchain can be used to provide a secure and transparent record of all the transactions that have taken place. This could be useful for banks checking for fraud or auditing their records. When storing medical records, blockchain can be used to give patients more control over who has access to their data and how it is used. This could help to protect patient privacy and prevent data breaches.
What's the downside to blockchain technology?
Not everything about blockchain is positive. There are obstacles to adoption, just like any new business technique or process, that must be recognised, evaluated, and anticipated to achieve ultimate success. Some of the hurdles for blockchain include:
Legal and regulatory compliance - different countries have different laws and regulations regarding blockchain. This can make it difficult for businesses to operate on a global scale if they need to comply with multiple sets of regulations.
Technology - blockchain technology has only just begun and is still in its infancy. When it comes to development, blockchain is currently where the internet was 25 years ago.
Talent - There is a limited pool of talent available to businesses that wish to create blockchain projects. This is due to the newness of blockchain technology and the lack of formal education and training programs.
Cost - setting up a blockchain network can be expensive. businesses need to invest in hardware, software, and talent.
Speed of change - Because blockchain is a new field, many businesses are hesitant to embrace it. They are afraid of the unknown and the potential for disruption.
Despite these obstacles, blockchain is a potentially transformational technology with the ability to change the way we interact with the digital world. By understanding the benefits and challenges of blockchain, businesses can make informed decisions about whether and how to adopt this innovative technology.
Beyond cryptocurrency how can we use blockchain?
One interesting use case for blockchain is smart contracts. Smart contracts are computer programs that execute automatically when certain conditions are met. They outline the terms and procedures for carrying out an agreement, as well as define the flow of events. These smart contracts allow developers to use considerably more complex blockchain technology than simply sending and receiving cryptocurrency. Smart contracts can decentralise and automate a variety of agreements. They're particularly well suited to reducing, automating, and simplifying routine and repetitive processes such as legal contracts, insurance contracts, crowdfunding arrangements, and financial derivatives.
Another interesting use case for blockchain is the idea of a DAO - a Decentralised Autonomous Organisation. DAO's govern projects or companies and the decision-making process is decentralised and democratised. This increases transparency regarding decisions, allowing everyone to see what's going on. Using blockchain technology and smart contracts, DAOs can also automate a lot of tasks that would traditionally be centralised. For example, they can automatically approve expenses and make payments. This could help to increase the efficiency, transparency and efficacy of the entity.
The DAO of Payment by Outcomes
Let's look at how a DAO could be used to transform the way the emerging field of payment by outcomes contracting in the social sector is managed.
Payment by outcomes contracts are used to finance the delivery of social services to achieve better outcomes from programs that target social issues and deliver social outcomes. In these contracts, the government or another organisation pays for the delivery of services only if specific outcomes are achieved. This means that service providers are incentivised to achieve positive outcomes, more efficiently.
The impact of using a DAO to deliver payment by outcomes contracting could include:
Adding value to the current operating model without major change - Decentralised data collection and analysis could improve speed, accuracy and transparency. This could further incentivise service providers to achieve positive outcomes more efficiently. A DAO could also be used to create a new social contract between service providers, commissioning agents and other stakeholders. This would enable all parties to see what is happening and contribute to decision-making at a level far greater than a centralised, non-blockchain contract.
Opening payment by outcomes contracting to more open participation by partners or customers - A DAO can manage its records, activities, and payments in a secure, transparent and efficient way. By using blockchain, DAOs can improve the transparency, efficiency and trust in their operations. This could have a significant impact on the way social services are delivered and could lead to better outcomes for those who receive them. It could also significantly reduce some of the investment and establishment barriers that exist and democratise payment by outcomes contracting.
How could a DAO delivering payment by outcomes contracts be constructed?
In this concept model, the DAO would use blockchain technology and smart contracts to build a set of connected tokens, each programmed to support a specific role within the payment by outcomes contract.
A conceptual model of a DAO for payment by outcomes.
Commissioning token - only one commissioning token would be available, usually held by a Government agency tasked with delivering the social outcome targetted. It provides seed funding, receives outcome data and receives equity in the DAO by way of the social outcome delivered.
Service delivery tokens - these tokens would be held by one or more service delivery organisation, usually, for-purpose organisations specialising in the delivery of services targetting a social outcome. They, would receive client enrollments, deliver services, receive a fee for service and receive a fee for the delivery of validated outcomes.
Governance token - only one of these tokens would be held by a specialist company that would validate client enrollment data, validate outcomes data, and receive a fee for service.
Funding tokens - additional funders, such as philanthropy, could purchase funding tokens. These tokens would be transferable/saleable, provide additional operating funds, receive outcome data and receive equity in the DAO either via social outcomes or financial value.
Service recipient tokens - held by the people whom the social service was constructed to support/benefit these tokens would be limited based on total funding in the DAO, be transferrable, receive the social service(s) and provide the outcomes data required by the DAO. In an advanced DAO model, these tokens could also receive incentive payments based on achieving targetted outcomes and possibly even receive financial equity in the DAO if it was constructed in that manner.
Why blockchain for this solution?
By using blockchain technology, the DAO would have a decentralised data infrastructure that would allow for the faster measurement and validation of outcomes as data would not need to travel through centralised points. This would improve service delivery, outcomes measurement, payment times and enable the program to adapt its delivery and accept changes faster. This would also increase trust as all data would be tamper-proof and transparent. Furthermore, the use of blockchain would allow for increased engagement of stakeholders as they would all have access to the same data and be able to see the connection between service delivery and outcomes. Service delivery recipients would have a voice, be actively involved in the success of the program and be able to "vote" and contribute to service enhancements. Their role would shift from having the service provided "to them" or "for them" to having a service created, delivered and enhanced "with them".
While a DAO constructed in this way would not completely solve all the challenges facing payment by outcome contracting, it would provide a platform that could help to improve the overall efficiency and effectiveness of this type of funding model.
What could some of the hurdles be to using a DAO for payment by outcomes contracting?
There are some hurdles to using a DAO for payment by outcomes contracting
in addition to the common challenges that blockchain encounters. These include:
Vulnerable people and technology - end users could be vulnerable people with various levels of internet and technology access and knowledge. They would need to be able to understand how to use the DAO wallets and tokens to receive services and contribute data.
Privacy and security concerns - as with any decentralised platform, there are privacy and security concerns that need to be considered. For example, how would personal data be stored on the blockchain? Who would have access to this data?
Crypto or fiat currency?- Commissioning and funding tokens will need to provide value and other tokens will receive value. What form of value meets all needs? Fiat currencies are often tied to nation states and can fluctuate based on economic conditions. Cryptocurrencies are not linked to any nation state but can be volatile.
Measuring the value of the DAO - Ideally, we want the value of the DAO to increase in both economic and social value. How do we measure this? Social benefits are often harder to measure than economic benefits. Economic benefits need to be valued and regulated outside the DAO.
Token transfer/succession/payout - Can we transfer tokens – to other funders, to the next generation of end users to measure outcomes? Could the DAO measure outcomes in perpetuity?
Network effects - Will the DAO need to be part of a bigger picture to make it work or can it exist as a standalone entity?
These are some of the hurdles that need to be considered when using a DAO for payment by outcomes contracting. While they present some challenges, they are not insurmountable and the potential benefits of using a DAO for this type of funding model warrant further exploration.
How might we test our assumptions in a low cost/low-tech way?
There are a few ways that we could test our assumptions in a low cost/low-tech way. One way would be to create a prototype DAO on a test blockchain platform such as Ethereum's Rinkeby Testnet. The Rinkeby testnet is a developer-friendly Ethereum test network that allows you to experiment and perfect your own decentralised apps. The network is safeguarded by pre-authorised nodes, which prevents spamming and boosts performance. Developers may use a Rinkeby Faucet to acquire free testnet Ether and try out their smart contracts without risking actual monetary assets. This would allow us to test the functionality of the DAO without having to use real currency. Another way would be to use a spreadsheet or other type of software to simulate the transactions that would take place on the DAO. This would allow us to test the assumptions around how the DAO would work without having to create the actual platform. Finally, we could conduct interviews with potential token holders like end users and service providers to get their feedback on the concept and to understand what challenges they see with using a DAO for payment by outcomes contracting. This data could be used to further build the model.
All of these methods would allow us to test our assumptions in a low-cost/low-tech way and to get feedback from potential end users. This would help us to refine the concept and to make sure that it is feasible and meet the needs of those who would be using it.
What are some next steps?
If we decide to pursue using a DAO for payment by outcomes contracting, there are a few next steps that we need to take.
First, we need to flesh out the concept in more detail and create a roadmap for how the DAO would work. This would include deciding on the platform that would be used, the tokens that would be used, how the DAO would be funded, how outcomes would be measured, and how payouts would work.
Once we have a detailed concept, we need to test it in a low-cost/low-tech way to make sure that it is feasible and to get feedback from potential end users.
Finally, we need to find a way to pilot the DAO in a real-world setting to see how it works in practice. This could be done by partnering with an existing organisation that is already using payment by outcomes contracting or by finding a new organisation that is willing to pilot the concept.
How could the DAO be extended beyond the minimum viable product?
This is where things can get exciting. A DAO replicating the current payment by outcomes contracting model would yield great benefits, however, it's the second-generation DAO that could be the ultimate game changer.
Current social services often run to 3-5 year fixed term contracts based on funding availability. This creates a short-term focus for service delivery organisations and funders. Often social outcomes take a long time to deliver. A DAO could be built to run in perpetuity, potentially becoming self-funding and tracking long-term multi-generational outcomes.
Let's look at an example of payment by outcomes DAO built to support small business creation amongst unemployed people. The long-term theory of change, in this case, is that economic activity from running a small business reduces or removes the need for unemployment benefits this improves the wellbeing of the person and reduces the payment burden on the Government. The long-term benefit is that economic activity and prosperity reduce poverty and increase individual and social prosperity, health and well-being that ripples over to future generations and beyond.
To run in perpetuity a DAO would need:
To create economic value that could be owned, invested and transferred or sold by token holders. In this case, this could be achieved by the DAO taking an equity position in the small businesses it created when providing the initial funding. As the businesses became successful and grew the DAOs equity would increase. They could then sell or trade the equity to create value and cash flow as required. Additional cash flow could be used to provide more services and start more businesses which would continue to build equity in the DAO.
To measure long-term outcomes over generations. This could be achieved by incentivising the service recipients to provide outcomes data in return for equity in the DAO. Their tokens would then become an asset that could be passed onto future generations who would be further incentivised to continue to provide outcomes data. These outcomes could then be sold back to the government at future dates to add equity and cash flow to the DAO.
This type of DAO would significantly change the way we currently fund and deliver social services. The benefits could include:
Long-term focus on outcomes instead of short-term funding cycles.
The ability to measure and report on long-term outcomes over generations.
The potential to become self-funding through income from selling data and equity.
The ability to use cash flow to provide more services.
The potential to create a legacy that continues to provide social value long after the initial funding has been spent.
While this is just one example, the possibilities for using DAOs to fund and deliver social services are endless. The key is to think beyond the current models of service delivery and funding and to imagine what could be possible with DAOs and smart contracts using blockchain technology.
Where to from here with blockchain technology?
This is just the beginning of blockchain technology. The potential applications are vast and the possibilities are endless. We are only limited by our imagination.
If you're interested in exploring blockchain technology further, there are many resources available online including a list of references in the reference section below. A good place to start is the Ethereum website which has a wealth of information on DAOs, smart contracts and blockchain technology.
The development of DAOs and smart contracts on Ethereum is still in its early stages. However, there are already several organisations and projects experimenting with these technologies. These include:
Aragon: a project building decentralised organisations on Ethereum
Colony: a platform for decentralised organisation management
daOstack: a framework for building decentralised autonomous organisations
Giveth: a project working on decentralised philanthropy
MakerDAO: a project developing a decentralised autonomous organisation for the creation and management of Dai, a stablecoin on Ethereum
These are just some of the organisations and projects experimenting with blockchain technology and DAOs. As the technology develops, we are sure to see many more amazing and innovative applications for blockchain technology emerge.
Blockchain technology has the potential to change the world as we know it. It has the potential to create a more equitable and just society where power is decentralised and everyone has a say. We are excited to see what the future of blockchain technology holds and we hope you will join us on this journey.
References
RMIT Online Course Notes for Developing Blockchain Strategy BLC101-2022-JUNA July/August 2022
Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system.
Berg, C., Davidson, S., Potts, J. (27 September, 2017). The blockchain economy: A beginner’s guide to institutional crypto economics. Medium.
Mamoria, M. (30 June, 2017). WTF is the blockchain? Medium.
Kasireddy, P. (4 February, 2018). ELI5: What do we mean by “blockchains are trustless”? Medium.
Song, J. (14 May, 2018). Why Blockchain is Hard. Medium
Massesssi, D. (12 December, 2018). Public Vs Private Blockchain in a Nutshell. Medium.
Blockchain 101 - A Visual Demo https://www.youtube.com/watch?v=_160oMzblY8
Boder, R (29 July 2022) DAOs Are the Future For Business, Here's Why https://www.entrepreneur.com/article/430576
Geoffrey See, Ashlin Perumall, Assel Zhanassova (23 June 2022) Are 'decentralized autonomous organizations' the business structures of the future? World Economic Forum https://www.weforum.org/agenda/2022/06/are-dao-the-business-structures-of-the-future/
Stevens, R. (12 April 2022) What Is Tokenomics and Why Is It Important? https://www.coindesk.com/learn/what-is-tokenomics-and-why-is-it-important/
