Maximizing Donor Impact: Web3 and Donor-Advised Funds (DAFs)
By: Alexis Miller (Endaoment), Dae Moyer (Endaoment), Drew Simon (Crypto Altruism)
*The content in this article is not intended to be taken as financial advice. Please consult your financial advisor or CPA regarding your specific tax obligation.
One of the most exciting developments in the Web3 space in recent years has been the emergence of the crypto philanthropy movement. Driven by the core values of transparency and decentralization, crypto philanthropy has introduced new tools that have fundamentally altered how donors contribute to causes they care about.
Within the crypto philanthropy movement, there has been a focus on evaluating and understanding the impact of donor contributions. In an era where every dollar counts, individuals and organizations are increasingly looking for ways to ensure that their donations have the maximum possible effect. This shift in mindset is driven by a desire to create meaningful, lasting change in the communities and causes they support, and has been associated with the introduction of new tools and mechanisms to maximize donor impact, including quadratic funding, onchain evaluation tools, and of course, Web3-powered Donor-Advised Funds.
Donor-Advised Funds (DAFs) have emerged as a vital tool for maximizing donor impact, and are even the fastest growing option in charitable giving. DAFs offer a unique combination of flexibility, convenience, and strategic planning, allowing donors to manage their charitable giving more effectively. By leveraging these funds, donors can optimize their contributions, ensuring that each donation not only supports their values but also achieves the greatest possible benefit for those in need. While this all sounds great, DAFs in their traditional form are often inaccessible to all donors, having large minimums and certain asset classes. This creates a unique opportunity to leverage blockchain technology to create more accessible, transparent, and efficient DAFs.
In this article we dive into the intersection of Web3 and DAFs, starting with an explanation of what DAFs are and how Web3 can improve traditional DAFs, and finish by highlighting a case study of Endaoment’s approach to Donor-Advised Funds.
What is a Donor-Advised Fund?
As donors look to maximize the impact of their donations, many are turning to innovative giving tools like Donor-Advised Funds (DAFs). In essence, a DAF functions like a “charitable checking account”, serving as a place where a donor can give immediately, grow the assets that they’ve donated to the DAF, and grant them out over time to the nonprofits they care about.
The beauty of a DAF lies in its flexibility and efficiency. Donors can contribute highly appreciated assets, such as cryptocurrency or stock, potentially mitigating capital gains taxes and offering a possible deduction on their itemized tax return. Once donated, these assets can be allocated to various tax-exempt portfolios, including index funds, ETFs, and money markets, to expand their philanthropic potential before being distributed to nonprofit organizations.
When contributing to a DAF, each donation is irrevocably transferred to a public charity which manages the fund, typically a community foundation, or the charitable arm of a bank. In exchange, they provide a single receipt for the gift. This eliminates the hassle of managing multiple receipts at tax time, and offers donors the flexibility to plan and strategize when distributing funds to various charitable organizations.
How Web3 Improves Donor-Advised Funds
While DAFs have been around for quite some time, they are still widely underused and underappreciated as a philanthropic tool, with many donors choosing monthly donations or one-time contributions as their preferred giving method. Web3 technology offers a unique opportunity to improve traditional DAFs, making them more accessible and transparent to the average donor, hopefully leading to more wide scale adoption.
Accessibility
The decentralized finance (DeFi) movement is driven by a vision of financial inclusion by offering access to financial tools and services to traditionally underserved populations. In a similar vein, the crypto philanthropy movement is rooted in the belief that modern philanthropic tools should be accessible to all nonprofits and donors, irrespective of the nonprofit's size and budget, or the donor's financial status.
A common criticism of DAFs, is how they can be inaccessible to those without a large amount of capital due to high minimum contribution levels, which in some cases can be upwards of $10,000. By leveraging smart contracts and automating key processes of DAFs, Web3-powered DAFs can operate much more efficiently, without the need for minimum contribution levels, ensuring they are accessible to everyone.
Transparency
One of the biggest selling points of blockchain, is how the immutable decentralized ledger underlying the technology will usher in an era of radical transparency. In the context of philanthropy, this could include storing all donation records onchain, creating an easily auditable record of all transactions. With a Web3-powered DAF, all donations and grants can be stored onchain, allowing donors to see exactly how funds are being donated to the nonprofit in real time, and how much has been granted out. This can also be a helpful tool for donors to better understand the impact of their donations, allowing them to see the impact in real-time.
Donor Engagement
Web3-powered DAFs enable diverse assets to be stored in the fund, including securities and cryptocurrency, helping nonprofits reach a broader audience of donors. At a time when nonprofits are struggling to onboard younger donors, crypto philanthropy presents an exciting opportunity to connect with a new donor base that is distinct from traditional donor populations. The average donor in the United States is 65 years old, putting nonprofits at risk as traditional donor populations begin to age out of the giving pool. In Web3, millennials and Gen Z are at the forefront, with 53% of crypto holders in the US being between the ages of 18 and 34. By embracing Web3-powered DAFs, nonprofits can connect with an entirely new donor demographic, helping to build a robust supporter base for the future.
Case Study: Endaoment’s Approach to Donor-Advised Funds
Endaoment is a 501(c)(3) community foundation, originally built as a philanthropic platform for the crypto space. By accepting digital assets and NFTs, converting them into fiat, and delivering the donations as grants to a nonprofits’ bank account, Endaoment provides a practical solution for donors with appreciated crypto assets who wish to turn their gains into support for their favorite nonprofits – without requiring those nonprofits to learn about crypto. Recently, however, Endaoment has broadened its platform’s accessibility through the “Endaoment for Everyone” campaign. Now, those without crypto wallets can sign in with social accounts like Google, Facebook, or Discord, and donate a broader spectrum of assets including stock and cash.
To kick off Giving Season 2023, we’re rolling out Endaoment for Everyone.
— Endaoment 🛡️ (@endaomentdotorg) October 10, 2023
These new features extend our platform beyond the crypto domain to upgrade users from all financial backgrounds to the benefits of onchain giving. ✨ pic.twitter.com/aBiFKLZu9k
Compared to traditional donor-advised funds, which often involve extensive paperwork and minimum contribution requirements, Endaoment offers the ability to open a DAF in just a few clicks, with no minimums. This streamlined, user-friendly approach, empowers donors to quickly mobilize their charitable funds and immediately receive a tax receipt. They offer a variety of crypto-based portfolios for allocation of donated funds, and will soon be introducing traditional investment options to further amplify charitable growth.
A particularly groundbreaking addition to Endaoment's offerings is the Universal Impact Pool, developed in partnership with Gitcoin and powered by their Allo Protocol. This tool uses quadratic funding algorithms to equitably boost every gift made on Endaoment, making an additional quarterly grant directly to every recipient organization’s bank account. This innovative matching mechanism has transformed fundraising strategies for nonprofits, encouraging donors to channel their contributions through Endaoment for greater impact.
Though Endaoment has recently expanded its donation capabilities beyond just digital assets, “traditional” gifts like stock and cash are still supported by their onchain infrastructure, bringing increased transparency and efficiency to the donation process. By combining emerging technologies with diverse giving options, the platform reflects a growing trend in meeting the evolving needs of today's philanthropic donors.
Overall, Endaoment serves as a great example of how Web3 tools can improve traditional DAFs, and philanthropy more broadly, by increasing access, transparency, and donor impact through unique Web3 mechanisms such as Quadratic Funding.
Conclusion
As the fastest growing donation tool in the world, donor-advised funds offer a way for donors to maximize the impact of their contributions while achieving favorable tax outcomes. With the advent of Web3, and the growth of platforms like Endaoment, DAFs are now more accessible than ever.
As the Giving Season nears its close, those looking to enhance their charitable giving and take advantage of possible tax benefits might consider opening a donor-advised fund with Endaoment. In the words of Endaoment’s Founder Robbie Heeger, “giving is good for the soul”, so we hope you take an opportunity to give this Giving Season!
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