The Future of Impact Investing, the DeFi Way
What do 30,000 Slack messages, 10,000 meeting hours, and 200 liters of coffee over 1.5 years have in common? The public announcement we’ve been waiting to make.
We’re proud to introduce Social Impact Network, a decentralized impact investing ecosystem connecting investors with impact projects in frontier and less developed markets. The system provides high liquidity green loans to impact projects, and above-average returns to investors due to Decentralized Finance (DeFi) protocol integration.
Bridging Binary Win-Lose Choices
Many people grew up hearing that you have to choose between making a profit and doing good. As adults, we might grow to realize it’s a fallacy, but it’s easy to see how this confirmation bias has stuck around generation after generation. There are innumerous real-world problems for charities and philanthropists to throw money at, but few win-win solutions that offer two-in-one solutions.
The intent behind impact investing is to generate a social impact besides generating profits. A $715 billion asset class that grew by 42.4% between 2019 and 2020 alone, it’s projected to grow at an average of 17% compound annual growth rate (CAGR). Small wonder that calling it the investment opportunity of the century.
DeFi is the rising star that promises to take the finance world by storm. An overnight success, after only 3 years, it’s already a $100 billion industry. To those in the know, it’s clear that the future of finance is decentralized.
However, this is no honeymoon phase.
Impact investing might be the next big investment asset class there is, but evidently, it’s not enough. There’s a $2.5 trillion annual shortfall between the UN’s 2030 Sustainable Development Goals targets and how much cash is flowing into the developing nations that need it most. It’s clear that efforts focusing on impact creation are no longer charitable or aid problems.
BlackRock CEO, billionaire Larry Fink, has said that as billions of dollars continue to be injected into socially responsible investing, this “tectonic shift” of capital is “just the beginning.” He predicts that over the next five years, Environmental, Social, and Governance (ESG) will be integrated into “every asset class.”
DeFi — like the broader cryptocurrency market — has its own set of problems. Sustainability issues run rife. Advocates dream about #whenmainstreamadoption, but in reality, the industry has a PR problem.
Bitcoin is villainized in the mainstream media as a sizable contributor to climate change and a silent weapon in the criminal world. I saw cryptocurrencies as pump-and-dump money grabs, with many saying increased regulatory crackdowns are a blessing. And DeFi — with an already substantially high knowledge barrier that prevents mainstream adoption — is being eclipsed by rug pulls and nihilist internet culture.
In the digital world, these technologies are changing the world. Out in the real world, not so much. Not yet. There’s a growing opportunity for crypto investors to invest in real-world assets, expanding digital portfolios to include tangible asset investments. However, this still leaves a gap between the social impact that’s rapidly becoming everyone’s problem as humanity attempts to achieve a 1.5°C pathway to prevent global warming.
Social Impact Network’s vision is to bridge these seemingly incompatible worlds to create a new paradigm in impact investing. Not only does SI Network aim to evolve the future of traditional impact investing by introducing it to DeFi. DeFi investors have an easily accessible pathway to becoming impact investors in a native environment. In the process, they contribute to positive social change by investing in real-world asset projects with measurable impact, while maintaining the attractive DeFi APYs they’re used to.
The Landscape that SI Network is Improving
Impact Investing is Broken
Impact investing is part of the $12 trillion ESG industry. ESG investing prioritizes environmental, social, and governance factors by investing in socially responsible companies. The problem is that ESG in general, and impact investing specifically, suffers from several challenges, some of them terminal:
- Having to choose between generating social impact and investment flexibility:
- Flexible investments but low transparency and low social impact (e.g. impact ETFs (Exchange-Traded Funds), impact stock funds)
- Less flexibility (an average of 10–15 years per investment) but high social impact (e.g. real-asset funds, crowdfunding projects)
2. Uncertainty about how funds are being used:
- Some of the top impact ETF portfolios in the world list companies on the top 20 list of carbon emissions producers, or companies against which there are ongoing human rights abuse legal action
3. No foolproof way to determine how much impact is being created:
- The social impact created by traditional impact investing funds relies on accurate impact measurement and honest reporting. Enough said.
- Lengthy lock-in periods, inadequate impact measurement, and top-down approaches disempower investors, and this has left a significant gap in the market.
Borrowers are Being Underserved
Project coordinators in frontier markets looking to implement impact projects often face an uphill battle due to limited access to, or eligibility for, below-market-rate loans (also known as soft loans or concessional funds). This inaccessibility hampers a nation or region’s ability to ease or even address its social and environmental issues. When such loans are granted, it’s mired in lengthy bureaucratic decision-making processes that may take as long as a few years to gain final approval and fund allocation.
What borrowers need is easier access to liquidity and an agile governance process that optimizes loan approval and project implementation.
DeFi isn’t Living Up to Its Potential
To date, DeFi has failed to create much of a real-world impact. The innovative projects and protocols launched so far are rapidly revolutionizing the digisphere, but lack an influential presence in the real world. This leaves investor portfolios extra vulnerable, as there’s no diversification beyond their crypto portfolios. In a time when governments, industry, and the general population are mobilizing toward climate change action, environmental restoration, and an overall focus on social welfare, DeFi’s absence from this much-needed agenda is not only alarming, but in fact dangerous rhetoric in the hands of regulators.
While DeFi investors are minting impressive APY gains, there’s an underlying yearning to be part of something that’s more impactful, more meaningful, than mere profit-making. This weltschmerz, or ‘world pain’ at the state of the world and society having failed humanity and the planet, is experienced by people of all industries and walks of life. But in the blockchain space, the technology has already proven capable of disrupting outdated hierarchies and paradigms in favor of greater personal and social change, freedom, and liberty.
Most DeFi projects, with the industry still in its infancy, center on purely profit-driven ventures. There’s thus a genuine need for a project that can offer investors typical high returns that are funneled through an effortless real-world impact creation mechanism.
That’s why we created Social Impact Network.