In this blog post, we will discuss exactly why the predominant model of rewarding impact is broken and how funders can use hypercerts to have more impact.
Every funder wants to achieve more impact per dollar spent.
But most funders only have a loose sense of the overall impact they’re having via the projects they fund. It’s hard for funders to find data to answer questions like:
Which projects in our portfolio are under-valued and deserve more funding
Which projects should be phased out early, freeing up money to invest in more impactful projects
Which projects are most appreciated by beneficiaries or other external stakeholders
Part of the problem is that funders typically award grants prospectively, based on proposals for future work. Funders can have estimations of impact, some of which might even prove to be quite accurate, but they don’t know what impact their funding has had until the work is finished.
Although this model has been the norm for a long time, it has a number of flaws that limit the effectiveness and upside potential for impact.
The supply chain for traditional grant-making usually goes something like this.
First, a funder has a pool of capital they want to give away and a set of domains (e.g., education, AI alignment, clinical control trials) that they care about. Next, they issue a “request for proposals”, inviting organizations or individuals to submit work proposals and budgets that conform to the funder’s guidelines. Then, the funder selects the projects it wants to fund. Finally, the funder disperses the money. Only at this point — months if not years after allocating the money — does work actually begin.
The problems with this process of grant-making are well-documented. They include:
The application process can be time-consuming and tedious for projects.
The focus on specific outcomes and deliverables can stifle creativity and innovation. Similarly, funders may be slow to respond to emerging needs and changing circumstances.
The high level of competition can create a stressful and cut-throat environment. Newer, smaller, less sophisticated organizations often find themselves at a disadvantage.
Extensive reporting and monitoring can create a burden for grantees and funders alike.
Selection criteria often favor certain groups over others, leading to inequalities.
Organizations struggle to achieve long-term sustainability because most grants are short-term (not recurring). Chasing funding can lead to mission drift.
In addition to the above problems, there is very little interoperability or standardization in the grant-making supply chain. Every funder has their own selection process, grant agreement, and reporting requirements.
This lack of interoperability impedes innovation, stifles collaboration, and gets in the way of impact.
We believe it’s time for funders to start experimenting with different funding mechanisms. Practically speaking, there are two important changes we’d like to see.
First, we’d like to see more retrospective funding.
Retrospective funding means rewarding projects after they do good work. Retrospective funding removes much of the uncertainty about whether the project will have an impact or not. It also shifts the incentives of projects from being good at fundraising to being good at delivering impact.
Some of the more proven, retrospective funding mechanisms include inducement prizes, impact bonds, and assurance contracts. There is also a growing list of new funding mechanisms being developed on web3 rails, including quadratic funding and augmented bonding curves.
Second, we’d like to see greater interoperability among different funding mechanisms.
This requires developing protocols and standards for capturing work, evaluating impact, assigning rights, and of course keeping track of who funded what. It removes knowledge about all of these things from siloes. It results in more coordination and shared language among different types of funders. It can’t happen if every funder-project match is unique and every impact evaluation is highly domain specific.
Some worry that interoperability may commodify impact work. We feel the opposite is likely to occur. Greater interoperability should lead to greater specialization. Up to now, the vast majority of public goods have been funded using the sole, blunt instrument of prospective grant-making. Imagine a future where the impact funding mechanism is much more closely calibrated to the type of work and the impact domain the funder cares about.
We believe projects should have access to funding before, during, and after they’ve made an impact.
We want to help funders have more impact by providing a new approach to funding public goods that addresses many of the limitations of the current model.
At the foundational level, hypercerts can act as a single, open, shared, decentralized database for different impact funding mechanisms.
Using hypercerts reduces the documentation burden by providing a secure and efficient way to issue and verify digital certificates about impact claims. It promotes transparency and accountability. Moreover, by focusing on the impact of a project rather than specific deliverables, hypercerts can encourage creativity and risk-taking, leading to more innovative, high-risk/high-potential-upside solutions to public problems.
Prize competitions are one of the easiest ways to start using hypercerts. The basic idea is to run a prize competition that awards retrospective funding to projects that have already done good work.
Here’s what this might look like for a funder:
Create a funding pool (e.g., $2M) and a domain (e.g., work on AI Safety)
Create eligibility conditions for projects (eg, must be a research team or nonprofit, the work output must take the form of a paper or open source software)
Invite projects and teams to create hypercerts for work they’ve done
Allocate a small budget (e.g., 5-10% of the total pool) for impact evaluation
Invite a small pool of impact evaluators to assess the hypercerts (each evaluator is able to assess any project independently without requiring permission from the project)
Allocate the funding pool by purchasing hypercerts fractions
The funder is able to claim the impact arising from this work while at the same time creating a signal to the broader community about what type of contributions they find most valuable.
Hypercerts offer a range of benefits for funders, including transparency, trust, efficiency, cost savings, and accessibility. By leveraging this technology, funders can ensure that they are funding the right projects and individuals, streamline the funding process, and create a more inclusive and equitable funding ecosystem.
It's time for funders to start caring about hypercerts and the impact they can have on the world of funding.
We expect the transition away from traditional grant-making to take time. But it begins with a willingness to experiment and explore new funding mechanisms. If you are a funder who currently deploys 100% of your resources through traditional grants, start by considering what it might look like to spend 10% through a different mechanism.