DeFi proves that charities could be doing more with their money

DeFi is changing the way the sector operates by using onramps and integrations across blockchains to make giving to charities easier.

Most of the stories coming out of the crypto industry this past year have centered around enormous numbers flowing in and out of the space. From stablecoins topping over $100 billion, with Circle raising $440 million in private investment in the spring, to decentralized finance (DeFi) projects like Solana completing a $314 million fundraiser, people love to discuss the huge amounts of money being made in DeFi as new all-time highs break records across the board.

What we don’t see enough of are the use cases on how this technological innovation underpinning these new financial instruments can benefit important causes and impact organizations outside of the bullish and bearish markets.

Although blockchain technology has progressed rapidly over the past decade, the remaining high entry barrier to accessing this new world of finance is widely known, and there is still a long way to go before non-technology-focused organizations can participate and benefit from the industry. While we are seeing a strong positive movement in the crypto industry with many crypto projects donating their earnings to charities or claiming they will give billions away, there are still not many direct paths between blockchain and charities in need to benefit from this technology.

Charities can greatly benefit from understanding blockchain. In addition to the ease, transparency and speed of transactions, there are many benefits for charities to hold cryptocurrencies in their portfolios, and DeFi can crack open a new type of earning potential for charities.

Related: Digitizing charity: We can do better at doing good

Charities can greatly benefit from understanding blockchain

Most charities around the world are predominantly funded either by government grants or donations, and charities within a specific sector are all vying for the same grant money year after year. This has made fundraising more challenging, and after over a year of COVID-19-caused lockdowns, most organizations lost the ability to raise funds through their annual events and initiatives like in-person fundraising events or face-to-face donation drives.

It was reported that charity donations declined by 6% in 2020, experiencing a devastating loss of funds during a time when additional income was needed. Overall, the global COVID-19 pandemic reduced the amount of giving, but we also experienced a 17.2% increase in online fundraising, compared to the previous 12 months ending June 2020.

Integrating blockchain technology with fundraising opens up more avenues for charities to receive donations while providing transparent tools with embedded trust in both the donor and recipient alike.

Related: The future of philanthropy lies in blockchain technology

One of the biggest challenges facing charities is that people simply do not trust that the money gets there. Earlier last year, the Red Cross in Australia was under fire for not showing where $90 million dollars of the donated money was going, admitting that it may take years for all of the proceeds to be distributed. While the funds were appropriately managed, the lack of clarity left the organization under extra scrutiny, causing damage to the impact-led brand’s reputation.

There is a greater expectation today that charities should be able to prove where the donations are going, and get it to where it needs quickly in times of crisis. Using blockchain for charitable donations embeds trust so that situations like this do not occur, and that there is a transparent path from donor to recipient.

There is also a problem with our current donation system, with the actual process of donating full of hurdles. Most sites require users to fill out a form, prove their identity and link a payment device all before getting to the actual giving page. Most sites have third-party fees that can result in a user donating less or not donating altogether, and these roadblocks can deter a generous user.

Removing intermediaries ensures that more money can get to where it’s needed most. All donations, especially one-time donations, should be quick and transparent and allow for a user to donate from an already established crypto wallet.

In addition to the ease and the transparent nature of blockchain donations, receiving cryptocurrency donations in stablecoins like Tether (USDT) and USD Coin (USDC) can also help charities provide a hedge against volatile currencies. This is especially important for countries with high inflation rates that impacts individuals and communities. If a charity chooses to convert fiat-accepted assets or to accept a variety of cryptocurrency assets, the financial value of a donation can remain.

Blockchain and its current relationship with charities

There is also ample opportunity for reducing taxable income when using crypto for charity. In the United States, for example, cryptocurrency donations, similar to stock donations, offer a more tax-efficient way to donate because cryptocurrency is classified as property by the Internal Revenue Service back in 2014. For donors, that means no capital gains tax and a fair market value deduction. Yet, only a few hundred charities are set up to accept Bitcoin (BTC) as a donation.

Related: Your crypto taxes can be donated to charity instead

Organizations like UNICEF (United Nations International Children’s Emergency Fund) have embraced the charitable crypto movement. They are able to have an office in a local region and accept cryptocurrency donations, removing the need for wire or international transfer fees completely. You can immediately get the money to where it needs to go. This is a great example of why more charities should be set up to receive cryptocurrency donations.

Even if a charity doesn’t have a crypto wallet or accept crypto donations, many are still benefiting from the money being made in the space. With this recent nonfungible token (NFT) boom, we saw Coca-Cola release an NFT and donate the proceeds to charity, and many DeFi NFT projects donate a percentage of their sales to global and national charities.

It is great to see organizations and big figures in the space donating money made in crypto, but we hope to see more ways for charities to actually hold and accept cryptocurrency donations to receive the true value of digital assets, all while embodying the transparent and fair values of blockchain.

Related: Philanthropy: A missing catalyst of blockchain adoption

Direct paths to donate on the blockchain — Looking at DeFi and charities

Crypto donations and charities haven’t been commercialized, meaning that there is a huge gap in the market for players in the blockchain space to take action and implement more initiatives for charities to benefit from decentralized finance. Right now, there is essentially a level playing field for any blockchain or project to integrate with charitable causes. Moreover, charities have the ability to receive donations not just in Bitcoin or Ether (ETH), but in stablecoins and other currencies across multiple chains.

Apart from donating the money being made in crypto to charities, DeFi applications also are building direct paths to donation. With over $150 billion locked into DeFi, more projects are finding ways to progress the charitable crypto movement.

The Giving Block has been a pioneer in allowing charities to receive Bitcoin donations. ​​Back in April, The Giving Block launched the Crypto Giving Pledge, and they are constantly onboarding new projects so that users can donate to a charity of their choice directly from a DeFi project platform.

In the Solana ecosystem, Step Finance recently built a Charity Page which allows any charity with a Solana wallet address to receive donations in USDC. A charity just needs to register a Solana wallet and sign up to the Charity Page, and then any Solana user can donate USDC directly to that charity. The FTX Foundation has received 25K donations through the Step Finance Charity Page since launching in mid-July.

DeFi users, known as degens, are constantly farming and staking their crypto to earn huge yields on their portfolios. As a yield farmer myself, I saw how mechanisms like a charity button can encourage generous users to quickly make donations on the blockchain as they go about their everyday trading.

There has been great progress in the charitable crypto movement. Being able to donate in one click from your wallet opens up the door for charities to directly benefit from DeFi, and the decentralized manner of how blockchain works embodies many values of the charity sector including transparency, inclusion and a global mindset.

Looking ahead — DeFi’s growing TVL and cross-chain charities

Research shows that in 2020, $40 billion was raised online for charities. That may seem like a large number, but the cryptocurrency market itself holds over $2 trillion. We expect to see the total value locked (TVL) in crypto continue to skyrocket, and we hope to see an increase in charitable crypto donations alongside this.

It may be a few years before charities themselves are farming or staking their crypto to earn for themselves, but assisting charities with the ability to receive crypto donations is a good first step towards allowing them to access the lucrative world of DeFi. Receiving crypto donations opens up new earning potentials and allows charities to focus on their mission, rather than spending time writing grants and hosting fundraisers.

While progress is being made in finding ways to onboard charitable causes to the blockchain, there is still a long way to go in sending, receiving and storing crypto donations as a charity. We need to see more blockchain projects build actionable tools where charities can easily get onboarded and safely receive instant donations from users across all chains.

As blockchain wallets become more user-friendly and more tools are built to onboard charitable causes, we expect to see more global charities participating in the crypto economy.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.