Over the past year, getting away from the NFT-blockchain craze has seemed almost impossible. There was inevitably always someone bringing it up, either in a recanting of a story they heard or some brand new phenomenon. While some media has moved on from the biggest of stories, you might still be left wondering what it was all about. Specifically, what is this thing known as the blockchain, and how does it tie into all of this?

To start, this won’t be an overtly technical piece about blockchain but rather aims to give an understanding of what it is, alongside what it could be used for by nonprofits and community-based organizations.

Definition of a blockchain

The best definition of a blockchain is that of a distributed ledger technology storing encrypted information or data, making it incredibly difficult to hack or change. What is written and coded onto the blockchain becomes attached to the blockchain forever – it is a ledger that tracks transactions, making them available for anyone to see (if public), and also makes them immutable: forever living on the blockchain, even as continual changes and transactions are made or even reversed. Every single blockchain-based transaction for an asset – whether a single token of cryptocurrency, a whole album of NFTs, or even a physical house or car – is recorded with the key information and then permanently fixed together. Transactions are grouped into blocks, and blocks are connected onto a chain – thus, the blockchain.

How a blockchain works

As with everything else these days, the blockchain works entirely on the internet – no physical paperwork required. When someone is moving something, anything (digital or even physical) from one digital wallet to another, the blockchain records it as a transaction – similar to that of a sales transaction printing a receipt or keeping a log in a database of what was sold, for how much, and to whom from whom. Miners then pull together a group of transactions – individuals working on the internet whose job it is to create these groups of transactions into blocks and add them onto the specific blockchain where the transaction took place. That data block keeps all the core information for each transaction – the who, what, and when of the information being shared or moved – although that information is not often written out in textual language but rather encoded through identifying numbers and keys. Those information data blocks are then linked to prior blocks on the respective blockchain through a cryptographic validation process known as the hashing function.

Essentially the miner creates a block from a group of transactions, and then those blocks are given a unique hash number, which includes a sequence that relates it back to the block immediately prior. These blocks are immutable themselves once they are on the blockchain, and are linked in this way to always remain in the same order. This then creates the chain of blocks– “blockchain” – as information distributed across multiple servers and not stored in a centralized location. Other miners then double-check the work of the original miner of the block in a process called “proof of work,” and when it is confirmed to be correct, the original miner is rewarded for their work, often through cryptocurrency tokens.

Fundamentally, maybe this makes sense to you – but sometimes seeing it can really put it into perspective. While we can’t see into the miners’ work of creating the data blocks, we can see an example of a blockchain ledger. Here is a view into what the blockchain ledger looks like for Bitcoin, where a continuous tracking of purchases of Bitcoins (BTC) is happening at a dizzying pace below. If you were to click through to follow any one of those transactions, the transaction will show the hash ID, the amount of BTC being sold, the fee for the transaction, and the public-facing keys of who sold the BTC and who purchased it. Those keys are the identification numbers for the individuals who participated in the transaction. If the key was followed, anyone can see all transactions conducted by and for this individual, with a direct link to their digital wallet.

What this leaves is a secure, programmable database ledger, connecting all the time-stamped information you need about each transaction anonymously, but distributed across a unanimous network on the blockchain so the ability to change or hack any part of it is near impossible.

Setting up a blockchain

Blockchains are connected via networks of computer servers, creating a decentralized technology. Decentralization is core to the structure of a blockchain, making it stronger and much more difficult to hack. This strength is the profound innovation of the blockchain, as other ledger systems are able to be manipulated and changed much more easily, leading to a host of issues. However, not every blockchain is built with exactly the same structure.

While decentralized among servers and networks, the controls and permissions of a blockchain can vary. There are two main types of blockchain technologies – public or private, which can both be further developed into permissioned, hybrid, or consortium blockchains. Public blockchains work similar to most social media accounts – anyone can see them, as well as join in and participate with limited holdbacks. Privacy is more limited, but transparency is high. Bitcoin and Ethereum work as public blockchains. Private blockchains involve one organization holding ownership over the blockchain itself, controlling who can join. Transparency might become more limited, but there is a clearer hierarchy and control, which can allow users to feel more confident in how it is managed. However, this network might become more centrally located and eliminate some core decentralized features. IBM currently runs its own blockchain.

Within both public and private blockchains, further developments can be added. Permissioned blockchains can be a variation of either type, although most often takes the shape of a private, permissioned blockchain, allowing for further control over who can join and what types of transactions they can access. These blockchains require permission to join and what access they will have, requiring there be a level of hierarchy to control the permissions of the users. Some blockchains might be a hybrid form between public and private, in which one entity controls the blockchain, but makes certain features permissionless, so therefore more public-facing. These entities could either be a single individual or organization, or collection of organizations, which are called consortium blockchains. Consortium blockchains involve groups of organizations or businesses who all aim to access the same data and have shared responsibility and values, and can pre-determine how they collectively want to provide permissions and usage of the blockchain.

Benefits of a blockchain

Blockchains are still coming to terms with how they can be used beyond the unregulated environment of cryptocurrency. While some nonprofits have begun to explore how to accept cryptocurrencies as donations, the volatility of these markets are still highly fluctuating and can be difficult to discern without significant effort. Because crypto lives on the blockchain, the two are consistently talked about together. And while crypto might not be the best move for your organization, the blockchain can do more than just handle transactions related to cryptocurrencies – they can be used as a way to manage many administrative tasks and keep a ledger of financial transactions for physical or off-blockchain assets and funding.

1. Greater Transparency: Nonprofits consistently face the challenge of transparency and increased calls to know where their funds are being used, and how they are working specifically with the populations they aim to be servicing. Blockchains can be helpful because everything on the blockchain is viewable by everyone (albeit coded behind certain keys) and can show what transactions are going in and out of the organization without the organization needing to build additional reports. The automation of setting up transactions and records on the blockchain does require some initial work, but once it is set and going, it remains and an easy task to keep all your donors, supporters, and even employees in the know at all times. In turn, this record-keeping will increase trust with the greater public.
2. Greater Security: While cryptocurrency has been known for its issues, the blockchain itself is a technology that cannot be changed or altered once the transaction is completed. Every transaction is also time-stamped and dated, ensuring a permanent chronology of what happened when. Additionally, all transactions cannot be copied or moved, ensuring that they will remain exactly how and when they happened. This is hugely beneficial for organizations that have difficulty keeping accurate records of actions and projects.
3. Greater Efficiencies: One of the biggest drawbacks of the nonprofit sector can be this focus on transparency and accurate record keeping, often without much capacity. Blockchains are built to not only be secure, but be automatic, in which transactions can be created using smart contracts, which are mechanisms put into place that become automatically executed when all the conditions within the contract are met. The use of smart contracts can allow for different pieces of a project or initiative to be laid out on the blockchain. When each is completed, they are confirmed and executed through the contract and displayed onto the blockchain. These contracts reduce the need for human interaction as well as the potential for human error or manipulation and can help to automate many repetitive administrative tasks or processes.

The benefits of blockchain are far-ranging, especially for nonprofit organizations that are hoping to build more effective systems both internally and externally. However, blockchains are certainly not without their challenges, and diligent research should be conducted before implementation to ensure they are the best fit for any organization.