We’ve all heard about blockchain, or at least its most famous application – bitcoin. But what exactly is blockchain it and how is it relevant for nonprofits?

Blockchain Simplified

At its core blockchain is a database technology. What makes blockchain unique as a database, however, is its distributed nature. This means that its software sits on a network of separate computers (called nodes). Each node is required to verify transactions and store the same records in the database it hosts. Most current databases used by companies and nonprofits are centralized on in-house or cloud based servers, which makes them easier to hack and alter. With a distributed system a majority of database nodes would have to be 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, and it has never been hacked during its ten-year history.

Transactions on a blockchain are cryptographically secured, unchangeable, and enable the peer-to-peer exchange of information or transaction processing. Cryptocurrencies such as bitcoin can be sent directly from you to me or vice versa in minutes for a very low transaction fee using an online wallet. This exchange does not require a payment processor or other institutional middleman to manage the process. It is the virtual equivalent of moving cash or a document directly from one safe to another, with each of the safe holders possessing the only key or combination to their individual safes.

The reason that the platform is called blockchain is because transactions or the recording of information occurs in batches or blocks, with each block cryptographically tied to the next in a linear fashion. Database node owners are incentivized to verify a block’s information because they receive a reward (e.g., bitcoin) for doing so. These so called “miners” compete to win the reward by solving a difficult mathematical equation generated by a blockchain-based algorithm. Once the puzzle is solved by one mining node, all nodes must confirm that the transaction is correct before it is approved and recorded as part of a block. The production of a block can be likened to gold panning. When one panner discovers a nugget all of the other panners must agree that it is indeed gold. The public announcement that a nugget has been found and validated, say in a newspaper, creates a transparent record of the occurrence for all to see. Putting this into blockhain-parlance, a block has been added to the chain and the information it holds can no longer be changed. (Note: Public blockchain transactions such as with bitcoin are “pseudonymous,” meaning that the time and characteristics of the transaction are made public, but not the names of the transacting parties).

As a database platform, a blockchain can support a range of applications, of which bitcoin is only one. There are numerous blockchain types, both public and private, which can do much more than simply support digital currencies. Some offer faster and even more private recording of data, while others enable “smart contracts.” A smart contract is essentially a piece of code imbedded in a blockchain to require the execution of a particular action when certain conditions are met. For example, a smart contract to support charity donations might enable the automatic and instantaneous release of funds to a charity once the donor receives proof of a promised action by the charity. More specifically, if a homeless shelter agreed to provide 100 meals to clients for a donation of $1,000, once the 100th meal is served the $1,000 would be automatically moved to the homeless shelter bank account. The transaction would then be recorded in a secure and immutable database.

Bottom line: Blockchain is a database platform to support the secure, rapid, transparent, and immutable recording of information or transactions; all independent of any central authority.

Relevant Use Cases for Nonprofits

Much more interesting than blockchain technology itself are the ways in which nonprofits and other social sector organizations can benefit from it. The most common opportunity area is donations using bitcoin and other cryptocurrencies. 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.

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Author: Paul Lamb
Image: CC
Publication date: May 30, 2019

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