I've listed some of the issues I've learned about below, and also talk about how we can work towards improving these figures:
I am new to this field so please correct me if I make any mistakes in my assessments.
For-profit companies efficiently extract and produce value because there's an aligned incentive for the employees to perform. By bringing in more value for the company, employees typically get compensated accordingly, or there's equity structures (which is also a powerful incentive alignment).
At it's core, it can be written in a simple math equation:
Employee Compensation ⬆️ = Employee Value ⬆️
The key assumption that will remain constant is that when an employee increases "value" to an organization, 1) the company's value also increases and 2) the company is profitable for a sustainable amount of time. For example, if you were the founder of a one person company, your compensation wouldn't necessarily increase because the state of your company is so volatile at that stage.
Several examples below:
For-profit companies have an incentive that rewards performance. With non-profits, it's different for one reason:
It's not guaranteed that the employees get paid more based on the impact that they make.
And this is a problem because...
While causation and correlation can exist at the same time, correlation doesn't mean causation. - Dr Herbert West
For example, if I were to be an employee of a non-profit such as the SPCA (who helps enhance the quality of life for animals), the SPCA allocates a set portion of its revenue (donations) to their employees.
This is because there is no direct correlation from the bottom up, but rather the top down; salaries are broken down to the forecasted donor budgets they receive.
This makes it difficult to attract top talent. Why work at a non-profit when you can make double the money in the private sector, and see correlation and causation align?
Like politics and the people in office, I believe that there needs to be a compensation structure that aligns public sectors accordingly to the private sector - both in terms of wage and performance. This will 1) attract the smartest people to build impact based organizations and 2) accurately measure and review performance transparently.
Most non-profits publish their impact and financial reports yearly, and there's several problems with this. Here's why:
If you knew this organization's assessment on Charity Intelligence, would you donate to them? https://www.charityintelligence.ca/charity-details/416-lloydminster-region-health-foundation
More often than not, the media reports on negative news rather than positive.
For example, stories cover how the Former CEO of Make a Wish Foundation Iowa stole over 20k here, Rick Singer and his college admission scandal here, John Briers, the head of a non profit stealing over 700,000 here, and more.
The media does affect the way we think, so my bet here is that the media lowers the level of trust people have with charities, rather than increase it.
I wrote about how blockchain and triple ledger accounting can help financial transparency here.
^For a summary of the article above: By synchronizing non-profit financial, banking, & accounting data to a general ledger, anybody can access the non profit's finances in real-time, which does two things.
1) Builds trust for people who actually want to donate and see the impact of their donation.
2) Automates several aspects of auditing, which non-profits have to pay public accounting firms for. This saves costs and helps them allocate a higher % to the cause.
A lot of decentralized autonomous organizations in crypto are open source and built for the community. A charity can be the same, but instead of distributing wealth, it's distributing impact.
Let's break this down further - I imagine a "localized" DAO.
For example, let's say we do the BC SPCA, and I'm assuming here that most of the donor revenue for the BC (British Columbia) SPCA branch are from British Columbians themselves.
If the BC SPCA had a DAO and community governance token, it could work like this:
Firstly, like any sustainable crypto protocol, establishing a fair token distribution. I'm not quite sure what the number could look like, but the FEI Protocol writes a great article on how and why they're doing 80% community, 15% team, and 5% investors. With non-profits, it can be something like 60% donors (or community) and 40% team as an example.
Now, let's say that there's a limited supply of tokens to govern the non-profit, and we'll say 1,000 as a simple example. As a person who wants to donate, I can buy a token of the non-profit (it doesn't have to be "one" token, but rather 0.000001 of a token as an example).
This token now allows me to do the following. First, it allows me to track, in real-time, exactly where the funding is going through cryptography and encryption. For example, if I were to purchase 0.000001 of a token, 10% of that might go to salaries, 65% might go to a dog named Charles that got hurt, and 25% to a cat named Lucy.
The token also allows me to participate in governance. If the BC SPCA was thinking of opening up another branch, they can get direct feedback and public opinion in regard to their strategy. The powerful factor behind governance is aligned incentives, as the community is incentivized to provide feedback to the non-profit that helps BC SPCA increase their impact.
The one thing that I'm questioning is if there should even be speculation associated with the token - should the token value increase if the impact of the organization is amplified, or, should it be stable with unlimited supply? Should there be a certain ratio/multiple that increase token value accordingly to impact?
I don't know the answer to this, but from first thought, it sounds reasonable that more people will donate to the BC SPCA, if their quality and quality of impact is improving year over year. Some charities are worth more than others, so I'm going to think about this more, and I'll probably tweet about it.
There's a couple of benefits of a localized charity DAO:
Lastly, it all goes back to the famous blockchain/crypto quote:
Maybe take out the validate or die part, but you get the point.
To sum it all up - Trust is an asset that is seemingly decreasing in value every single day, and charities are going to have to innovate for trust to increase again.
Notes about this scenario:
PS: I believe that speculation is healthy in most cases, and provides entrepreneurs and crypto protocols with high growth potential with capital leverage so they can take it to the next level.