Social Impact Bonds (SIBs) are effective financing mechanisms for social interventions in areas such as affordable housing, youth unemployment, homelessness, and lowering incarceration rates. Increasingly, local governments, philanthropic organizations and international development bodies are turning to SIBs in order to shift the financing risks involved in creating impact outcomes away from themselves and onto third-party private investors.
A typical SIB structure involves 3+1 parties:
- Impact Outcome Commissioner
- Private Investors
- Impact Creating Consortium (service providers), and the +1 is usually an Impact Verifier.
Social Finance pioneered the world’s first social impact bond in 2010 to reduce re-offending rates among short-sentenced prisoners leaving Peterborough prison in northern England. Criminal Justice was chosen due to the high re-offending rates (around 60%) among this group, with unclear statutory responsibility for their post-release support, leading to a cycle of re-entry into prison.
For example, the socio-economic value that can be achieved in cutting re-offense rates significantly can be an order of magnitude higher than the direct savings from reduced prison maintenance costs. In this scenario the local government (the Impact Outcome Commissioner / Impact Funder) is motivated to pay more for a de-risked outcome. In a SIB structure, instead of contracting with various service providers, who may or may not be successful in reducing re-offense rates, the Impact Commissioner contracts with private investors, who will only be paid if and when the agreed impact outcome has been achieved. In this structure the performance risk is borne by the private investors (foundations, impact investment funds, SPVs) and not by the local government.
From the perspective of the investors, they expect to hire a consortium of for-profit and nonprofit service providers in order to achieve the impact outcome. The investors calculate that the cost of creating the outcome will be less than the value of their contract with the local government, thus providing them an above-market return on their investment. Breakthroughs in reducing re-offense rates typically take years to realize and often require close cooperation between rehabilitation experts, professional mentors, affordable housing providers, mental health services, and specialist work placement programs. If the investors’ calculations are wrong or if the service providers fail to deliver the required impact outcomes there is no financial risk to the local government.
Introducing DIOM, the Decentralized Impact Outcomes Marketplace
At ImpactScope we believe that web3 building blocks can revolutionize the traditional Social Impact Bond model. With the right mix of tokenomics engineering and onchain impact verification tools, a decentralized treasury governed by economically incentivized token holders can take the place of centralized impact underwriters.
A Real-World Example
An international donor wishes to finance the construction of 50 public toilets in a low-income suburb of a city in Northern Tanzania. This donor, acting as the Impact Funder, calculates the economic value of the potential social and health benefits of the desired outcome. They set the Impact Bounty reward accordingly. The Impact Bounty is locked in an escrow account for an agreed duration and DIOM takes care of the rest.
Next, Impact Creators, in this case local Tanzanian companies, NGOs, social enterprises, bid on the Impact Bounty. They showcase their expertise and proposed solutions to Impact Stewards ($MPACT token holders) who govern the decentralized treasury. Once selected, the Impact Creator(s) gain access to funding from the treasury and they begin executing the project. Upon successful completion and verification of the impact by Impact Auditors, the Impact Bounty is released from escrow into the treasury. This model ensures that funds are used efficiently and that the desired impact is achieved.
Smart Contract Parameters
Smart contracts are used to define and automate the execution of Impact Bounties, promoting transparency and accountability. Key parameters include:
Value: Bounties can be deposited in a variety of forms, from stable tokens to fiat to other agreed upon tokens.
Duration: The time frame within which the desired impact outcome must be achieved.
Payout Structure: Whether the Impact Bounty is a lump-sum payout upon completion or distributed in partial payments as impact milestones are achieved.
Impact Auditor(s): The designated entity responsible for triggering payouts by verifying that the terms of the Impact Bounty have been met.
Return Deadline: The deadline for the return of the Impact Bounty to the Impact Funder if no Impact Creator is selected.
Arbitration Mechanisms: In cases where there is partial completion, non-completion or no sign-off by Impact Auditors.
These smart contract parameters ensure that the terms of the Impact Bounty are clearly defined, automatically enforceable, and tamper-proof, fostering trust and efficiency in the marketplace.
To read more about the evolution of DIOM, check out our white paper, listen to some of our X space recordings and stay tuned for Part II and III of this series.