Could blockchain be the key that unlocks the SDGs?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Rodney Prescott, Strategy Consultant, IO Global & Leon Molchanovsky, Managing Director, IO Global & Kaj Burchardi, Managing Director and Head of Platinion Netherlands, BCG Platinion

• Although much effort has gone into meeting the SDGs, significant barriers remain – not least that the goals can come into conflict.
• Good governance has been identified as a way to address these challenges.
• Blockchain technology can be the key that underpins the improved governance we need to meet the SDGs by 2030.

Governments and organizations have applied considerable resources in trying to achieve the 17 Sustainable Development Goals (SDGs) set out by the UN. However, barriers to progress have been identified, particularly the fact that the goals can often conflict with each other.

One example is that of the Aral Sea between Kazakhstan and Uzbekistan. The rivers that feed the lake have been diverted, causing it to shrink by 90% since the 1960s.

As Hongbo Yang of the Smithsonian Conservation Biology Institute, has put it: ‘The irrigation of the farmland helped to achieve one SDG goal, number two, that aims to enhance food security … But that progress is achieved as a sacrifice of another goal which is SDG number 14, which aims to protect aquatic wildlife.’

Research published by the World Economic Forum has identified governance as a way to address such challenges, and posed three questions:

● How can we bring together the right stakeholders?

● How do we make difficult trade-offs?

● How do we build in accountability?

Many globally distributed parties and local groups are involved in SDG projects, including governments, aid agencies, local people, local authorities and NGOs. To address these challenges in a decentralized and global manner, we have to find new ways of coordination and collective decision-making.

Blockchain technologies offer the opportunity to build such a governance model. A blockchain is a decentralized platform that enables a common view of information based on an agreed set of values, and it can allow for self-executing activities based on those values.

To ensure effective execution, goals have to be agreed – in this case, the SDGs – followed by the objectives and measures associated with the goals. Transparency, ownership and accountability are important in achieving the goals. At the execution stage, once funded, proper governance is the key to delivery. To ensure that things get done, a process of execution needs to be developed, because the manner of execution matters. Hence, execution cannot be ensured without proper governance. Inappropriate governance leads to misaligned incentives, power imbalances and conflicts of interest, undermining the tenets of blockchain platforms: decentralization, democracy and transparency.

To address this need, Boston Consulting Group, Input Output, the Blockchain Research Institute, University of Wyoming and other contributors have developed the Decentralized Consortium Funding (DCF) model. It is a new model of engagement, execution and governance (see figure 1, above). The aim is to support the effective use of funding and assure achievement of strategic objectives. This model can apply to any process involving funds and resource allocation. DCF is a programme-execution machine – both technology and processes, with built-in governance components. It is intended to limit power concentration by design through the use of inherent blockchain capabilities.

The DCF model reduces friction between funding stakeholders (who could be represented by delegates in cases of decentralized funding) and consortium members (who do the work to meet the objectives). It also facilitates alignment of goals and collaboration among participants within and outside the consortium, so enabling diversity and inclusion. Collaboration is enabled through an incentivization model, referred to as ‘proof-of-merit’.

By combining decentralized governance and execution (operating) components, DCF aims to eliminate principal-agent challenges, a conflict in priorities between funding stakeholders and the consortium (see figure 2). Such conflicting priorities frequently lead to project failure. Furthermore, moral hazard and other factors that hinder efficiency and success are addressed. The process can be broken into five phases:

1. Setting objectives, a clear vision, and shared values

2. Forming the consortium

3. Drawing funds from the treasury

4. Managing the consortium during execution

5. Achieving objectives to be accepted by funding stakeholders or their delegates.

The DCF framework

A white paper, currently under development, aims to introduce the concept of decentralized governance and execution for large-capital projects. First, this aims to ensure the success of execution. As a concept, this paper will pose the challenge, raise issues, outline principles, and propose a novel high-level approach to the topic by introducing the DCF framework. This is not a ‘how-to’ handbook that solves every conceivable issue, but it is a starting point that is future-proof in the new world of decentralized governance enabled by blockchain.

There are five phases with 16 protocols defined across the phases. The DCF framework is a hybrid, meaning it combines blockchain-based and off-chain elements (traditional systems and processes). The framework is modular, meaning each implementation can have different combinations of on-chain and off-chain elements (see figure 3, below). The modular framework was built with progressive decentralization in mind, meaning that off-chain tools can be replaced by on-chain tools as they are developed.

The DCF innovates via two main mechanisms: governance over the funding raised, and the execution and operating model.

1. Governance over the funding raised

Governance is a way of holding a consortium accountable for the execution of projects and protecting stakeholder value. The traditional process for establishing governance, especially commercial, involves managers and reporting lines with ultimate accountability to a board of directors, often resulting in a concentration of power.

DCF conducts this process via a mechanism of functional protocols for setting rules, resolving disputes, intervention, supervision, auditing, and information infrastructure (see figure 4, above). The mechanism operates throughout each of the DCF’s five phases, with the functional protocols executed by code or with human contribution. Following analysis of on- and off-chain governance practices, the DCF mechanism was designed to operate with characteristics of both.

Through blockchain-enabled decision-making, the DCF maintains decentralized governance, which is resistant to power concentration and imbalance. The mechanism also provides incentives for improving stakeholder engagement, which is critical for sustainability.

2. Execution and operating model

Effective governance demands an operating model to ensure successful execution, consortium members’ fair remuneration, dispute resolution and protection of ownership and rights. A legal framework in the DCF design covers areas such as a manifesto, project charter, master agreement, member agreement, arbitration, and information and privacy policies. A key concept is a ‘work package’. This is a unit of work involving the completion of specific objectives within a larger set of goals that DCF sets out to achieve in a decentralized, but ‘directed’ fashion. Work packages are defined before the consortium begins its work, and are reviewed during the project.

Conclusion

Trust and shared values are tenets of any collective effort, including consortia. This is even more important for a decentralized model such as DCF, whereby, for effective democratic decision-making, members must be able to collaborate without the fear of misconduct. The design of DCF’s consortium network generates requisite information for low-cost, efficient monitoring and stewardship when delivering projects that involve large capital sums and aim to achieve strategic objectives. In this way, the DCF provides a vehicle to help deliver the SDGs, enabling transparency and collaborative decision-making, and designed to be enacted in a timely manner.