Capstone Project

On-Chain Governance for

Charities

A proposal for a blockchain solution in governance

Prepared by:
Seyed Ehsan Shahrestani
 A Proposal to create On-Chain Governance for Charities

1. Overview
Humans have learned to live together in a civilised form for a long, long time. Yet, they have
not found a solution for their governance. The most recent ones, i.e. communism and
capitalism collapsed in 1990 and 2008 respectively. We consider democracy to be the right
format of governance, but yet we need to find a true democracy in the world. We live in a
global village, we like it or not, even if we accept it or not, in the era of internet, we live in a
borderless world. Yet, we do not have democracy in the global village. United Nations is
effectively controlled by 5 countries that have veto power. People cannot vote directly on
almost any issue even in the local level. Rise of Populists across the globe is the norm now.
In this current situation, talking about a change in the structure of governance and perhaps
using blockchain to solve its problems sounds pretty naïve. But we should not give up hope.
Despair is more destructive than any world war. We have to find the problem and then try
to find a solution to that.
In my humble opinion, the problem lies in our tenets. We have emotional tenets and we
have reason. Emotions look for subjective ‘goals and benefits’ which can be tagged by the
word ‘ego’. Contrary, the reason looks beyond self and wants to find higher values for
humanity such as altruism, love, empathy, and respect. Reason understands that we as
humans can get higher benefits if we sacrifice ego. But ego in turn is fighting for its survival.
We have effectively a game theory to run within ourselves. If we let the ego loose, we get
anarchy and if we tame it, we get democracy. But this is a philosophical discussion more
than a blockchain solution. Nevertheless, if we do not know the problem, we solve
something else, but the facts remain effective even if we do not address them. That is why
we believe that governance has historically been a polarizing topic and if we do not solve or
at least address the above points, it will continue to remain so.
Other commonly agreed problems in governance are these:

 In general, government structures are explicitly defined and exceedingly difficult to

change. Government models of authority and power typically take decades, if not
centuries to form and often grow parallel to cultural changes for the reasons
explained above.
 Misinformation is a legitimate problem today. This has helped increase mistrust
among members of the society as a whole.
 People do not trust politicians – or CEOs of multinational corporations for that
matter - anymore.
In this study, we are proposing to use blockchain to solve the governance as a whole, but in
a step by step policy. We should try this new and promising technology to solve some social
problems first – like formation of charities based on blockchain policies - , and by advocating
its success try to build wider and more effective models of governance until it becomes our
platform for true democracy.
2. Why Blockchain?
There is no magic power in blockchain. It is simply a cryptographically secured database. But
in a trustless society, this is a precious commodity. According to some theories, the role of
governance is to reduce the cost of transactions. This can be done in several ways, but the
simplest one is to increase the trust between stakeholders. And blockchain can do that.
The other power of blockchain is in its notion of consensus. All stakeholders should give
their consent before an action is authorised. This includes leaders – who can have veto
power by the way – and all users.

The third tenet of blockchain is in its transparency. People like to know what is happening
and why leaders have taken certain decisions. There is no need for having majority or
consensus of all - since this will stop any decisions to be made; but they want to know what
everybody wants, and to know when leaders have agreed to the public opinions and where
they refused to do so. So, transparency in the information (polls) is the key to any successful
implementation of a sustainable governance.
In our initial solution, we think it is appropriate to use the following as main features of
blockchain to be incorporated:

 Information: Distributed ledger between donors and users, as well as businesses

involved in charities provides transparency and the so much needed trust.

 Governing Structure: Decentralised transactions between recipients, production,

sales, and donors. However, main decision making is kept to trustees / managers.

 Consensus: The consensus in on-chain governance models is typically achieved

through direct voting through the protocol. Contrary to this, in our proposal
consensus is used as information only and not as an automated execution embedded
directly in the protocol. Decisions are made by elected bodies, allowing the platform
to use the experience of managers / trustees of the charity. Effectively, this means
that trustees have veto power. This is necessary because historically, decentralized
governance has only worked well in small groups such as communities.
Decentralized governance of anonymous users presents profound challenges due to
human nature.

 Incentives: Again, usually incentives in on-chain governance is obtained by

transferring power from the miners and developers to the users. As explained above,
we are not proposing that completely. Transparency is preserved, but decisions are
relied on elected, more experienced members of the society. This structure, in
addition to a secured, untampered information system builds trust: There is no space
for fake news. And building trust in a governance means reducing transaction costs.
And this is the best incentive a society can have. It unites them further, strengthens
bond between members and society becomes more humane as a whole.
3. Proposed Solution
Before discussing the solution, we need to understand the stakeholders in charities. Of
course, we have all sorts of charities and the structure would be different for each of them.
However, for simplicity and just discussing the issues, we have considered a charity in Iraq
which supports orphans and their families. The policy of this charity was to limit the amount
of cash paid to the individuals – a common practice in Iraq – and instead encourage them to
get involved in a production or services like shop keeping. The goods from workshops would
be sold in these charity shops among other general goods. A simplified chart of activities is
given in Fig.1.

Fig. 1: Governance structure of an existing charity in Iraq

In practice, it was very difficult to have this structure running smoothly. Corruption was the
main problem. Trustees had to make sure that the following transactions took place in a
proper and right way. The actual structure is more complicated since they have branches
and each branch has its own management team. In Fig. 1, the word ‘trustees’ means the
managers of the central office as well as the local centres. These problems were:

 The recipients were genuine in their need for donation

 The money despatched to recipients actually reach them in exact amount – No
amount was deducted from them by carrier officers.
 Goods invoiced by wholesalers were the same as those arrived at workshops or sent
to individual recipients.
 Goods arrived at shops were appropriate (not sooner or later than necessary, be
correct amount, sold at set prices, etc.) and the money transferred to trustees were
correct.
 Waste at production centres were kept to its minimum and no corruption took place
there.
In order to insure the above, trustees had to change or modify their procedures many times.
For example, in one occasion, trustees tried to give recipients tokens instead of cash and
requested shops to accept them and they promised to pay the value of the tokens to shop
keepers. But in practice, shop keepers accepted tokens in much less than their face values. It
is this aspect of controlling the whole charitable transactions that is a waste by itself.
This is not an exceptional story. Almost all charities suffer from the loss of donations toward
controlling corruption or misuse. For example, a donation from Australia to plant trees in
Kurdistan, Iraq could plant around 15% of its value. The rest 85% were used toward
controlling the process of this donation and making sure that those trees were actually
planted! It is really a waste by any standard.

3.1 What type of Blockchain?

Although charities are public entities and should be accountable to public, we suggest a
private blockchain for all charities in order to make them more efficient. The advantages of
Private Blockchains are as follows:

 Reducing the concern with conducting trustless transactions and instead focus on
making inter-business interactions faster, more reliable and more transparent.
 Caring about optimizing processes and transactions between multiple businesses
 Rules of consensus protocol are custom, and defined by the businesses involved in
the network. Especially in our case that we give veto power to managers / trustees.
 Members must be authenticated into the network and can have different access
rights. In fact, public bodies such as government agencies and tax office can have a
node without any control. They can see what is happening and be sure of the
legitimacy of the transactions.
The governance structure in this case is shown in Fig. 2 below.

Fig.2: The structure for on-chain governance for charities

As can be seen, the flow of goods does not change at all. The flow of cash is reduced a bit.
Only payment of cash to individuals is omitted since we can accommodate the whole
process within the charity using cryptocurrency tokens. Of course, if the wider society opts
to use cryptocurrency, then all these cash transactions could be deleted. The number of
control flow is even increased and not reduced. This may sound unfeasible for adopting
blockchain for charities, but this is not true.
What is changing is the quality of management. What is lost, is the amount of waste spent
on controlling the flow of work in charities. Moreover, by adopting blockchain, government
bodies, especially the tax office will change their views of charities from a trustless
organisations to fully trustworthy ones. This is by itself a monumental achievement toward
building a blockchain governance in the national level. Since a lot of government jobs are
some sort of social services, they can be transferred to private bodies in the form of
charities. The main stumbling block, or delay factor in transferring social services to charities
in the current governance systems, is the accountability and trustworthiness of charities. By
adopting blockchain structure, central governments can easily reduce their budgets and
focus on other issues. They can let people run their own requirements. People are capable
of doing great things. Wilhelm Röpke, the author of the book titled ‘A Humane Economy:
The Social Framework of the Free Market’, believed that humans have a great power within
themselves that if unleashed, can change the economic situation of a society tremendously.
So, our conclusion is positive for adopting on-chain governance for charities.

4. Limitations and Further Works

Many of the on-chain governance implementations have either just launched or not even
launched yet. This means we are at infancy stage of using blockchain in governance. So, the
solution proposed above needs to be tested. However, there are recent experiences that
will indeed help us improve our design.
One such attempt is made by the mayor of London. He has initiated a think tank platform
called Talk London and has requested Londoners to participate in shaping its policies. You
can get more information in their website: https://www.london.gov.uk/talk-london/. This is
off-chain governance, but nevertheless by transferring it into on-chain system, one can
improve the existing platform and gain more experience in the proposed solution.
The main limitations to implementing the above proposal are as follows:

 Need to build Trust in Blockchain itself

The solution itself needs quite a lot of publicity in order to familiarise authorities and
even stakeholders within a charity to implement it. That is why we need one pilot
scheme in order to show its advantages. Developing countries are better situated in this
respect since they do not have an established governance in place in the first place. As
Jonathan Hennessey puts it: “Ignorance is ultimately the worst enemy of a people who
want to be free.”
  Emerging IT Technologies
Fortunately, technologies - especially in IT – are improving our lives tremendously. The problem
is in their human interfaces. Even this, is now improving. POS terminals and smart phones are a
common feature used in developing countries as well. So, technology does not pose a problem
as such.

.
 The Need to Educate users
The main problem remains cultural. A lot of effort is needed to persuade all users and
stakeholders to agree to adopt this new and challenging system. They are not concerned with
the amount of waste done in the conventional process. They are worried if their working habits
become more complicated. This has proved to be true among our office clerks. To the extent
users are reluctant to give receipts or fill a questionnaire. But Apps are taking this barrier out by
making it much easier to give the feedback such as putting their fingers on the screen as a proof
of receipt or simply scan the goods they received.

 The Costs
The last issue to be addressed is the cost of implementing blockchain solutions. Miners in
blockchain need to invest rather heavily on their computers and spend electricity for providing
the consensus. We can limit the number of these nodes in the local centres and use simple data
gathering Apps of normal mobile phones for the rest. So, this is not a real problem and is
justified by reduction in salaries, fees, and implementation of feedbacks so necessary to run a
charity smoothly.

niloo@blockgeeks.com n