A thesis on the future of DeFi, DAOs, and humanity
- The world is on fire, and we need to save it.
- DeFi can fund our world-saving.
- DAOs will do the actual world-saving.
- DeFi needs to unite behind the cause of world-saving starting today, or we’ll still be fucked.
DeFi protocols represent a radically new kind of entity, one that’s almost infinitely scalable in income, and at the same time blessed with the freedom to use that income at will. I claim that yield farming DeFi protocols will be the first for-profit non-state entities in history to be truly charitable.
This is a 4 part series of blog posts on saving the world using DeFi and DAOs.
- Part 0 is context on exactly how on fire the world is. It’s optional if you already agree that the world is on fire.
- Part 1 lays out why DeFi protocols are uniquely capable of funding charitable causes. If you want to be convinced that DeFi can actually save the world, this is the part to read.
- Part 2 talks about how an economy of Impact Certificates, funded by DeFi protocols, can generate startup-level funding for nonprofits.
- Part 3 will be concluding remarks and a call to action.
It’s gonna be a long ride, I hope you enjoy it!
Part 2: Unicorns, Basilisks, and Impact Certificates
On September 16 of the year 2020, Hayden Adams released a basilisk.
Uniswap, the most successful decentralized exchange to date, released their governance token UNI. The most fascinating part was UNI’s distribution: anyone who used Uniswap before September 1 received 400 UNI, which at one point was worth $3360. Over 251 thousand addresses were eligible.
Upon seeing the news, Roko’s Basilisk immediately popped into my mind. What is Roko’s Basilisk? A basilisk is “a legendary reptile reputed to be a serpent king, who can cause death with a single glance” (Wikipedia). Roko’s Basilisk is even more dangerous and terrifying because in a sense it is real and can have real impact on the world. It refers to the idea that if a powerful, malicious AI one day gets built, it might choose to punish those who didn’t contribute to its creation. Depending on your choice of metaphysics and timelines, these punishments might involve keeping you alive to torture you or simulating your conscious state in the future and forcing your simulation (or many such simulations!) to suffer. Roko’s Basilisk is dangerous because the idea is self-compelling: if you believe there’s even a slight possibility of this happening, you would be incentivized to contribute to the AI’s creation, and if enough people did the same, your contributions would be what creates the AI in the first place. In other words, just by considering Roko’s Basilisk, you can be compelled to act in a certain way.
Sorry if I just gave you an existential crisis.
But today we are talking about Hayden’s Basilisk. Hayden’s Basilisk similarly lets future entities influence the present, but instead of giving infinite punishment to those who didn’t contribute, it gives infinite (or at least a large amount of) reward to those who did. Past Uniswap users contributed to the growth of Uniswap, so they were retrospectively rewarded by the now successful Uniswap. The reward is not necessarily a one-off thing; it could be much more:
- You may get rewarded multiple times in the future by the same entity. For instance, Uniswap may in the future give out more UNI tokens to its past users, possibly using a different cutoff date so new users can also get rewarded. Or they could hold a wild cruise party for all Unisocks holders, who knows?
- You may get rewarded by multiple entities. For instance, if you contributed to the Gitcoin grant of a project that becomes successful in the future and gets used by many other successful projects, those projects might all choose to reward you.
Thus, the potential upside of making altruistic contributions to projects and testing out new-fangled DeFi protocols becomes huge, incentivizing people to actually make more contributions and test more DeFi protocols. Which likely will make those projects successful and give out retrospective rewards to those people. This is incredibly powerful: valuable and impactful projects can essentially pull themselves into existence.
What if we went beyond DeFi? What if we could use this to bootstrap valuable projects in any field?
Can we save the world using Hayden’s Basilisk?
Impact Certificates: A Possible Future
Imagine that you are working on EXCITING PROJECT ABC that you think will do a lot of positive impact on, say, solving climate change. You don’t have enough funding to build out the project, and there doesn’t seem to be a way to monetize it. You think: “Not a problem!” and visit impactcertificate.eth, which is a service that lets you issue impact certificates. You issue a number of IMPACT CERTIFICATE ABC, which is an ERC-20 token. You instruct the platform to put a portion of the certificates up for sale, and set the royalty percentage to 10%, which gives you 10% of the transaction value whenever the certificates get traded. The platform creates a project page on the marketplace, and you add a self-introduction, your past works, project description, and what you think the impacts of your project will be.
Satisfied, you go and make some coffee, and after you came back to your computer, all of your impact certificates were sold! You check the buyers list, and the majority of them appeared to be bots, with a couple of human-looking accounts sprinkled in. Well, you got the funding, so who cares! You move on and start building EXCITING PROJECT ABC.
2 years of hard work later, EXCITING PROJECT ABC becomes immensely successful, and the atmospheric CO2 concentration actually starts slowly decreasing! Magic! Everyone is impressed with your work, and many DeFi projects decide to retrospectively reward you and holders of your impact certificates, as well as many altruistic individuals and organizations. The impact certificates’ price skyrockets, since people expect more and more retrospective rewards being distributed to their holders, and the certificates that you still hold become quite valuable. The bots that aped in on your certificates sold when the price went above the take-profit threshold, netting their owners a decent return. The owners of your impact certificates now largely consist of humans and reputable organizations, who spontaneously formed a community to chat about climate change and the future of your project. Only holders of the impact certificate can join the community. You were of course invited to the community, and found many enthusiastic and knowledgeable people with the same interests as you. You wonder what the future will bring.
Generating Startup-Level Funding for Non-profits
So, what are impact certificates, exactly?
An impact certificate is the tokenized form of the positive impact that a project has generated (or will generate). Once an economy of impact certificates exists, we can enable non-profit projects to raise the level of funding that Silicon Valley for-profit startups enjoy today.
How is this possible?
Well, let’s first look at an oversimplified view of how startups raise money. Startups issue equity, which promise their owners a share of future profits. Investors purchase startup equities, and if the startup starts generating profit the equities will become more valuable, giving a nice profit to the investors. So, investors would put money into a startup if they believe its equities will become more valuable in the future.
If we replace the startup in this description with a nonprofit, the analogy breaks down. Since a nonprofit does not generate profit, its “equities” will be worthless pieces of paper that provide no financial value to their owners. No matter how much good the nonprofit does in the world its “equities” will not significantly increase in price, making it a tough sell to investors. Thus in today’s world, nonprofits cannot raise money in the same way startups do, and whatever funding they do get would come from altruistic donors, not investors.
A corollary is that if we could somehow tie the price of the “equities” issued by a nonprofit to the amount of positive impact it has done, then nonprofits can raise money in the same way startups do, not from altruistic donors, but from speculative, profit-seeking investors willing to throw millions upon millions at early stage projects.
And that’s exactly what impact certificates are: the equity equivalent for nonprofit ventures, whose prices goes up when the ventures generate positive impact.
The idea is that if a nonprofit venture has generated a lot of positive impact in the past, people may choose to reward it with money and prestige. Essentially awards, like the Nobel prize or the Fields medal. This money is normally distributed to the people responsible for the impact, but if we instead distribute it to the impact certificate holders, we can form a link between the price of impact certificates and the positive impact done by the issuing nonprofit. Thus, if an investor believes that a nonprofit venture will generate a lot of positive impact and receive many awards, they would purchase its impact certificates expecting the price to go up.
One advantage this has over other seemingly-similar concepts such as social enterprises and socially responsible investing is that it better aligns speculators’ valuations with their best guess of the moral values of future rewarders and the future impact of the projects. Whereas social enterprises can only exist in the intersection of “profitable” and “good for the world”, nonprofits funded by impact certificates face no such restriction. As long we can set up a system where altruistic groups can retroactively donate, the incentives will be aligned.
An better system for distributing funding to nonprofits
The biggest question, then, is: Where does the award money come from? Well, remember part 1 of this blog series where we demonstrated how DeFi protocols can generate a ton of funding for charities and public goods? DeFi protocols will bootstrap the impact certificate economy and provide the retrospective awards to nonprofit ventures. And they will use impact certificates, rather than something else, because an economy of impact certificates is simply a better system for everyone involved: DeFi protocols, nonprofits, regular altruistic donors, profit-seeking speculators, the world, everyone.
The assumption here is that we have a number of DeFi protocols with money earmarked for funding charity and public goods, and they would like to have a method for deciding who to give money to and how much to give. There are in general two types of donations: investments and grants. Investments refer to giving funds to early-stage projects that have yet to prove themselves, which is an investment into their future ability to produce good; grants refer to giving funds to established nonprofits that will directly convert the funds into positive impact. In the status quo, both investments and grants involve altruistically giving money to projects, with no expectation of financial return. A world of impact certificates is strictly better for donors:
- When making investments, you give the money to the project all the same, but in addition you get some of the project’s impact certificates, that might be worth something someday. Clearly better for donors, and this kind of giving would actually become financial investment.
- When making grants, instead of giving money to the nonprofit directly, you distribute the money to the holders of the nonprofit’s impact certificates.
- Assuming the nonprofit retains much of their own impact certificates, they will directly receive money from you all the same, and if the price of their ICs rises because of your action, they might even receive more money than what you gave.
- Moreover, you would be supporting the IC economy, by showing speculators that ICs can indeed generate returns, thus giving them confidence in continuing to purchase ICs issued by early-stage projects, as well as providing financial incentives for talented people to build out their wild projects for helping the world.
- This is similar to how the regular distribution of the Nobel prize gives universities confidence in the system of funding promising researchers for a chance of receiving prestige & donations, as well as incentivizes researchers to do impactful research.
- In addition, it becomes possible for altruistic donors to focus mostly, if not solely, on making grants to established nonprofits, since the speculators will take care of funding early-stage projects. This significantly reduces the difficulty of choosing who to fund, especially for distributed organizations like DeFi governance DAOs. Rather than having to debate the possible impact a nonprofit will generate in the future, donors can now instead choose to focus on debating the existing impact a nonprofit has done in the past, which is far less controversial, far less politically divisive, and far easier to do in practical terms.
A world of impact certificates is also better for nonprofit ventures. Today, the only money going to funding nonprofits come from altruistic sources; impact certificates expand the source of funding to profit-seeking speculators, who have orders of magnitude more money to spend and are far more willing to give away that money if they see potential returns. By issuing impact certificates, nonprofit ventures can get more funding faster, and more nonprofits can be funded.
How can we build the Impact Certificates economy?
Building the IC economy is not a technical challenge, it is a social challenge, a paradigm shift.
We already have all the technical pieces today: ERC-20 tokens for representing ICs, Merkle distributors for retroactively rewarding IC holders, and myriad of exchanges for trading ICs. Building out a minimally-viable IC infrastructure is quite doable, but the meat of the work is in the convincing. Convincing nonprofit projects to issue ICs, convincing speculators to purchase ICs, and convincing donors and DeFi protocols to distribute rewards to IC holders. Whatever IC infrastructure we build must make the idea of ICs feel natural, if not obvious.
What exactly will such a system look like? We are working on one such implementation to release soon here at WhalerDAO. If you are excited about impact certificates and a world where nonprofits can easily raise funding to do good, come join us!