Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems
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Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems
Social Impact Bonds (SIBs) are a private financing mechanism used to fund social programs. Also termed 'Pay For Success,' SIB financing involves private entities funding projects aimed at improving social outcomes. If by the end of the project period, 'success' metrics are met (according to third-party evaluators), investors then profit by being paid interest on top of the reimbursed government funds for the cost of the project. This page includes a collection of updates and critical perspectives on these profit structures and on Blockchain Identity systems, de-centralized online ledger programs, poised to be the data backbone that would provide 'proof' of 'program impact' for investors. For files related to Blockchain, see: For additional resources and related updates in education, visit EduResearcher at [Links to external site]
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The Promise and Realities of Pay for Success/Social Impact Bonds // Kenneth J. Saltman, Education Policy Analysis Archives


"This article considers proponents’ arguments for Pay for Success also known as Social Impact Bonds. Pay for Success allows banks to finance public services with potential profits tied to metrics. Pay for Success has received federal support through the Every Student Succeeds Act of 2016 and is predicted by 2020 to expand in the US to a trillion dollars. As school districts, cities, and states face debt and budget crises, Pay for Success has been advocated by philanthropists, corporate consulting firms, politicians, and investment banks on the grounds of improving accountability, cost savings, risk transfer, and market discipline. With its trailblazing history in neoliberal education, Chicago did an early experiment in Pay for Success. This article provides a conceptual analysis of the key underlying assumptions and ideologies of Pay for Success. It examines the claims of proponents and critics and sheds light on the financial and ideological motivations animating Pay for Success. The article contends that Pay for Success primarily financially benefits banks without providing the benefits that proponents promise. It concludes by considering Pay for Success in relation to broader structural economic considerations and the recent uses of public schooling to produce short-term profit for capitalists." 

Pay for Success; Social Impact Bonds; Chicago School Reform; Neoliberal Education; Corporate School Reform; Venture Philanthropy

For full text, click title above or here: PDF

Related Articles:

Saltman, K. (2007) Capitalizing on Disaster: Taking and Breaking Public Schools. New York: Routledge.


Saltman, K. (2012) The Failure of Corporate School Reform. New York: Routledge 2012.


Saltman, K. (2010) The Gift of Education: Public Education and Venture Philanthropy. New York: Palgrave Macmillan. 

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Eight Reasons To Be Skeptical About Blockchain // Forbes

Eight Reasons To Be Skeptical About Blockchain // Forbes | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Jason Bloomberg

"Given the turbulent, even frothy environment for disruptive digital technologies, one novel entrant promises to be among the frothiest: blockchain. The secure distributed ledger technology behind Bitcoin, blockchain has exploded out of the realm of the dubious cryptocurrency into a hype-driven category of its own.


VC money is pouring into numerous blockchain startups. IBM is betting the farm on the technology. Pundits around the globe are calling for blockchain to reinvent everything from equities trading to charitable giving.

And yet, aside from Bitcoin itself, real-world implementations of blockchain are few and far between. Has the hype exceeded the reality? Let’s see what a number of skeptics have to say."...


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Privatization as the New Normal in Higher Education // McClure, Barringer, and Brown (2019) 

Privatization as the New Normal in Higher Education // McClure, Barringer, and Brown (2019)  | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |


Privatization in US higher education has recently been framed as the new normal, or something scholars treat as the default state of affairs with little expectation of change in the foreseeable future. In this chapter we synthesize the literature on privatization, calling for a renewed research agenda that challenges this normalization and reinvigorates study of this important topic. More specifically, we analyze the conceptualizations, origins, catalysts, and manifestations of privatization in the literature. We advance five arguments about the privatization throughout the chapter, underscoring conceptual murkiness, fragmented lines of inquiry, unanswered questions, and methodological limitations. We propose a multilevel framework to understand the privatization literature and bring together disparate strands of inquiry.  We conclude by outlining a renewed research agenda on privatization, highlighting several directions for future research and advocating for improved data and research methods." 

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"The Application of Blockchain Technology in E-Government in China" // Hou, 2017

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"The purpose of this article is to discuss the application of blockchain technology in e-government, particularly in the Chinese context. Chancheng District, part of Foshan City in Guangdong Province, China, has undertaken a project called "The Comprehensive Experimental Area of Big Data in Guangdong Province" since 2016. Promoting the application of blockchain technology in e-government is an essential part of this undertaking, which is the first use of blockchain in government in China. Taking Chancheng's project as a case study, this article analyzes the framework, difficulties and challenges of applying blockchain to e-government at present, and discusses how blockchain technology can contribute to the development of e-government and public services in China. This article considers the practical realities in China and discusses the application of blockchain technology in Chinese e-government, finding that blockchain technology can bring the following benefits: (1) improvements in the quality and quantity of government services, (2) greater transparency and accessibility of government information, (3) development of information-sharing across different organizations, and (4) assistance in building an individual credit system in China. However, information security, cost and reliability are still major problems in application. Thus, establishing a general application platform of blockchain technology and developing management standards are crucial for promoting and applying blockchain in e-government. Blockchain provides an effective way of making government services more efficient, but standardizing the management system, processes and responsibility for the application is necessary for its further promotion. This article, by providing an analysis of the practice of blockchain in e-government in China, could serve as a foundation for further practical work and theoretical research in government services."

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George Kaiser’s Social Impact Philanthropy: How a Billionaire Transformed North Tulsa’s Misery into a Cash Cow [Part 1] // New Tulsa Star

George Kaiser’s Social Impact Philanthropy: How a Billionaire Transformed North Tulsa’s Misery into a Cash Cow [Part 1] // New Tulsa Star | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Contributing Writer Julianne M. Romanello, Ph.D.

In the elite circles of big philanthropy, Tulsa, Oklahoma has earned quite a reputation. Tulsa received the Readers’ Choice Award for “Best City for Philanthropy” in a 2018 poll conducted by The Chronicle of Philanthropy. This was not the first time Tulsa received national attention for its generosity. In 2012, local NPR-affiliate KWGS-Tulsa reported that Tulsa ranked in the top 20 cities for philanthropy. When one envisions charitable giving in Tulsa, a number of familiar names come to mind. However, none is more prominent than that of George Kaiser, the billionaire banker, tech-investor, oilman, and the man behind the George Kaiser Family Foundation (GKFF). Not only is GKFF a behemoth in its own right, it is also the major donor to the Tulsa Community Foundation (TCF), which, according to a 2016 report, was the second-largest community foundation in the country by assets.


Earlier this year, U.S. News and World Reports published an article entitled “Oklahoma Relies on Philanthropy for Basic Services”, which raised serious concerns about the magnitude of philanthropic influence in Oklahoma, a state that has seen “among the most significant [public] disinvestment” in the nation. “Without public oversight, [philanthropic] foundations can fund the work they care about without any of the decision-making power transferred to ordinary citizens.” In other words, when philanthropic foundations provide the financial or administrative resources for public programs in education, healthcare, the justice system, recreational offerings, or even records administration, they more or less get to establish the terms regarding the operation, delivery, and guiding principles of those services. The users of public services, the voting public, and taxpayers often find themselves with little choice but to accept the terms of service that have been set by the wealthy, politically-unaccountable philanthropists who fund them. In Tulsa, Mr. Kaiser’s GKFF funds a portfolio of public service initiatives that include focus areas in education, health and family well-being, criminal justice, and promoting a vibrant and inclusive Tulsa. TCF, which was established under Mr. Kaiser’s leadership and receives substantial support from GKFF, directly supports initiatives in the following areas: information technology services, emergency disaster relief, professional development and funding strategies, medical-related financial hardship assistance, planned giving services, regional affiliate programs, and education. TCF also supervises over 250 Partner-Agency Funds. Given the reach of GKFF and TCF, one can hardly underestimate the scope of Mr. Kaiser’s influence in Tulsa. Lindsay Jordan, a Tulsa philanthropic adviser, told U.S. News that, “Those of us in philanthropy call [Mr. Kaiser] the ‘benevolent overlord of Tulsa.’”  


In this series, I consider how Mr. Kaiser’s philanthropy affects the people of North Tulsa. In this first part, I examine Mr. Kaiser’s strategic approach: the social impact model of philanthropic giving. This approach aims at “social impacts”—benchmarks of success that are trackable, measureable, scaleable, and, ultimately, profitable. Importantly, these social impacts are discrete outcomes (for example, improved performance on a reading assessment) rather than a holistic vision of thriving that would render further philanthropic interventions in North Tulsa unnecessary. Mr. Kaiser’s social impact philanthropy benefits from relatively recent trends in public administration, especially “Social Innovation Finance” (SIF).  SIF combines “Pay for Success” (PFS) contracts, Public-Private-Partnerships (P3s), and a new financial instrument, the Social Impact Bond (SIB), which enables securities investors to speculate on the success, or failure, of programs designed to result in specific social change outcomes. These mechanisms set up a structure for transforming philanthropic investments in under-resourced communities into profits—into real, financial gains as well as valuable human data. Because profits are tied to specific outcomes, social impact programs have an added incentive to implement a system of nudges, or social controls, designed to ensure maximum program compliance. Mr. Kaiser’s social impact philanthropy sets up the conditions for a cycle of future wealth- and data-extraction from the residents of North Tulsa, the Black community in general, and the people living in poverty who rely on Kaiser-sponsored social services.


Social Impact Investing and Pay For Success


The relationship between big philanthropy and social accountability is a topic that has become increasingly salient as the gap between America’s wealthiest individuals and the bottom 90% continues its rapid expansion. For those in the lower wealth percentiles, the gap has enormous consequences on the ability of individuals to provide for their most basic needs or, as Forbes put it, “the poorest 50% of Americans are literally getting crushed by the weight of rising inequalities.” Though 2019 confronts us with circumstances that make this question urgent, the question is not new. Even in the early days, the power of big philanthropy gave rise to concerns about the erosion of public oversight. One historical sketch cites a 1912 warning about the power of the Rockefeller Foundation, whose “domination” was “being rapidly extended to control the education and ‘social service’ of the Nation.” 


Thomas J. Tierney, an expert on philanthropic strategy and co-founder of the Bridgespan Group, explained that what is relatively new, however, is “social impact” philanthropy, a business-model approach that seeks to increase both “impact and financial returns by continuously striving to achieve better results with the same or fewer resources.” In 2007, he called on the philanthropy sector to appropriate practices widely used in business. This came after The Annenberg Foundation released a report in 2002 that showed only mixed results for its Annenberg Challenge, a landmark campaign to transform public schools across the country. The takeaway from the Challenge and the report was that the problems facing society are so massive that they must be addressed according to the business principle of “disciplined, quantifiable, and financially centered bottom-line thinking—crunching numbers and keeping score.” Data—lots of it—is key: “Mountains of solid data combined with thoughtful, rational decision-making are essential to achieving results. The right numbers, correctly crunched, provide a source of competitive advantage.”


Although results-based philanthropy might be more effective at tackling massive social challenges, it carries its own host of problems. One danger of a quantitative, outcomes-oriented approach to setting and evaluating social impact benchmarks is that the philanthropic organization becomes a business de facto, albeit one with tax-exempt status. Moreover, in an increasingly complex and connected world, the input-output effectiveness assessments of specific social interventions become valuable in their own right. Funded by the deep pockets of big philanthropy and capable of touching almost every aspect of clients’ lives, these assessments can achieve remarkable levels of precision and comprehensiveness in collecting the data used to develop the next round of “changemaking” strategies. When the assessment data becomes more valuable than the mission-specific outcome of the intervention, what is to prevent a service organization from dropping the philanthropy mantle altogether and wholly embracing the business model?


This brings us to the business of “impact investing,” which, in a 2016 article, Forbes Managing Editor Kerry A. Dolan describes as “leveraging private capital for social good” through decisions made on the basis of the growing body of research on the connections between social spending and specific outcomes. Dolan, who oversees the Forbes’ annual World’s Billionaires List as well as its 400 Richest Americans List, observed that impact investors look to fund initiatives that are aligned with their values and are well-managed, but that explains only part of their motivation.  In addition, she writes, “impact investors are motivated by double or even triple bottom-line opportunities to earn a financial return while also doing something good for society. Securing a financial return helps ensure that the organization generates measurable impact that is scalable and self-sustaining over time.” 


How is it that social impact investments generate a financial return for socially-conscious investors? In order to answer that question, one must look to the work of University of Chicago economist James Heckman, whose “Heckman Equation” is notable for demonstrating how investments in early childhood education programs may generate up to a 13% ROI, as a Center for High Impact Philanthropy whitepaper explains, or even up to 15%, as reported by Forbes. Alison McDowell, a respected blogger and public lecturer on the subject of impact investing, has extensively researched and written about this process in her blog, She explains that Professor Heckman’s insight into the financial benefits of targeted social interventions, pitched in combination with a business strategy for scaling developed by the tech-oriented venture capitalist and Illinois politician J.B. Pritzker, can persuade policy makers to replace traditional public services with private high-impact programs. In other words, strategic investments in social programs that have a proven record of meeting certain benchmarks yield substantial economic benefits for those served by the programs, for governments, for investors, and for society at large. This proven record of economic gains can serve as a selling point to government service providers who might be persuaded to outsource public services if a private service provider (backed by high-impact investors) can virtually guarantee a certain set of desirable outcomes. 


Goal-oriented philanthropic investors have seized upon the social impact investing model by forming large consortiums of like-minded, super-wealthy social “change-makers” in order to combine their investment resources and drive large-scale, innovative responses to pressing social concerns. One example of such a consortium is Blue Meridian Partners, a conglomerate of super-wealthy impact investors, including former New York mayor and founder of Bloomberg Philanthropies, Michael Bloomberg. Blue Meridian’s website states, “We make big bets, up to $200 million, on each of our investees. Scaling plans are at the heart of Blue Meridian’s large-scale investments.” To that end, Blue Meridian’s investees receive flexible, upfront growth capital and annual payments for successful completion of performance milestones. 


Blue Meridian only invests in programs that can demonstrate successful outcomes. Any program receiving Blue Meridian funding must carefully monitor its work and share the results with a Managing Director assigned to their sponsored programs. This investment gives Blue Meridian access to the stores of data about the populations who receive assistance from these sponsored programs as well as data linked to the success rates of specific interventions. This data may become a valuable source of information for developing commercial strategies in unrelated business ventures. In other words, impact investors, like Blue Meridian, receive a very valuable benefit from high-impact philanthropy: a virtual goldmine of “human data capital”—information about how people make choices, what external factors may be applied to individuals for the purposes of altering behaviors, how certain populations might differ from others in key respects — all of which provides high-impact philanthropists with the tools they need to effect the social change that they wish to see.


Social Innovation Finance and Surveillance Capitalism


In the past decade, economists and businessmen have figured out a way to monetize the success potential of social impact programs by analyzing the human behavioral data collected by social impact philanthropy and using it to speculate on social-innovation-finance-agreements futures.  The Social Innovation Finance (SIF) model is a new funding mechanism designed to facilitate the large-scale implementation of successful results-oriented social interventions in a way that poses little financial risk to taxpayers. SIF combines two instruments: 1) a performance, or “Pay for Success” (PFS), contract that stipulates the specific results that constitute program “success,” and 2) a privately-issued “Social Impact Bond” (SIB), or operating loan, to cover the upfront costs of delivering the service intervention. According to The National Conference of State Legislatures:

Social Impact Bonds (SIBs), a type of pay-for-success funding agreement, work by allowing private entities to provide upfront capital that government can repay later. This makes SIBs essentially a contract between a private entity and the public sector. The private party commits to pay for a program that leads to improved social results and public sector savings. The private investors are then repaid when contractually agreed upon objectives are achieved.

The SIF funding mechanism is often referred to simply as PFS financing or SIB financing and its popularity is growing. A 2019 report by Nonprofit Finance Fund, a leader in PFS program development and financing, states that, in 2018, 25 PFS were programs implemented across the country in multiple policy areas and supported by both state and federal legislation. Consistently, advocates highlight the potential of PFS projects to bring about necessary social innovations based on evidence-based practices that are effective and free of partisan or personal bias.

Because SIF pays for results achieved “outcomes” rather than “outputs,” the private funders who cover the up-front costs of service delivery have a financial incentive to ensure that social service providers know and employ the most effective methods for meeting performance expectations. One way to do this is to collect as much human behavioral data as possible in order to develop very accurate predictive algorithms. The SIF system encourages social impact investors to extract as much human data as possible–data about experiences, thoughts, choices, feelings, preferences, and any other factors that help investors predict and modify human behavior. This data may be collected from things like surveys, reports, camera and audio surveillance, access badges, web-based learning or record-keeping applications (such as educational technology and training programs), even video games. It is analyzed not simply to understand how or why people make the choices that they do, but also to determine how some choices may be encouraged and others discouraged. It has the potential to create a lucrative cycle of impact protocols that not only promote the mission-oriented outcomes that social impact investors support, but also generate an ROI for the social impact investors.


In her recent book, The Age of Surveillance Capitalism, Harvard professor Emerita Shoshana Zuboff explains how companies like Google and Facebook harvest data from users, often without their consent, in order to develop products that are able to predict and control behavior. In an interview with The Harvard Gazette, Zuboff stated: 


The competitive dynamics of surveillance capitalism have created some really powerful economic imperatives that are driving these firms to produce better and better behavioral-prediction products. Ultimately, they’ve discovered that this requires not only amassing huge volumes of data, but actually intervening in our behavior. The shift is from monitoring to what the data scientists call “actuating.” Surveillance capitalists now develop “economies of action,” as they learn to tune, herd, and condition our behavior with subtle and subliminal cues, rewards, and punishments that shunt us toward their most profitable outcomes.


Although she is referring to for-profit commercial activities, the dynamics of surveillance capitalism apply to social impact philanthropy as well. Quoting from Zuboff’s book, an article in The Guardian explains that “prediction products are traded in a new kind of marketplace that I call behavioural futures markets. Surveillance capitalists have grown immensely wealthy from these trading operations, for many companies are willing to lay bets on our future behaviour.” Social impact bonds, or pay-for-success contracts, become the stuff of behavioral futures markets for which investors and financial speculators may take a “short” or “long” position in the same way they would with any other type of financial instrument. Only in this case, the course of an individual’s life is the object of speculation. In this way, social impact philanthropy makes a commodity of the vulnerable people whom it claims to serve through their social programs. Program assessment data–the data harvested from the recipients of philanthropic social interventions and which is used to quantify impact–contributes to the development of more sophisticated and effective social interventions. It gives financial speculators a strategic advantage in selecting behavioral-futures investments positions (and these might be on the side of success or on the side of the failure of some interventions) that are most likely to generate maximum profits. 


What does this complicated system of high-impact social changemaking have to do with Tulsa? A lot, actually. Tulsa relies on Mr. Kaiser’s philanthropy for the provision of many basic social services, such as education, housing, and healthcare. Mr. Kaiser is one of the principal members of Blue Meridian Partners, which has a special regional initiative in Tulsa. Mr. Kaiser also serves on the Leadership Advisory Council of Too Small to Fail with J.B. Pritzker, whose work with Professor Heckman has contributed to the Social Impact Bond market and, as a result, to the hyper-growth of surveillance capitalism. Mr. Kaiser’s ties to the Silicon Valley Tech industry, the world of big philanthropy, and the human data capital markets touch the interests of all Tulsa residents.


One source reports that Mr. Kaiser has been called “the godfather of Tulsa philanthropy.” His influence is wide and deep and continues to expand. GKFF, in fact, was the major supporter of Oklahoma’s first PFS program, the Women In Recovery prison diversion program, which went into effect in 2017.  Moreover, the State of Oklahoma recently enacted the “Pay for Success Act” on November 1st of this year (Oklahoma Statutes, Section 9010.2 of Title 62), which encourages greater reliance on public-private-partnerships and PFS programs to tackle social policy issues. The ways in which this situation affects the lives of North Tulsans who depend on the public services administered by Mr. Kaiser’s social impact programs–and how this, in turn, affects the flourishing and political power of the larger North Tulsa community–will be the subject of my next piece in this series."


Illustration: Patrick Norman 

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What We Learned from the Failure of the Rikers Island Social Impact Bond // Non Profit Quarterly

What We Learned from the Failure of the Rikers Island Social Impact Bond // Non Profit Quarterly | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Donald Cohen and Jennifer Zelnick

"An experiment using a Social Impact Bond (SIB) to reduce the rate at which juvenile offenders return to jail—so-called “recidivism”—at the troubled Rikers Island prison didn’t work, despite being hailed as a success by some.

The concept of SIBs is for private investors to lend money to governments for the funding of programs that, if successfully delivered, will generate long-term savings. Repayment of upfront funds is triggered when an independent evaluator certifies that programs have achieved the promised results.

Proponents argue that SIBs should be used— at no cost to taxpayers—to test to see which innovative ideas can make a dent in intractable social problems.


The SIB at Rikers Island funded a cognitive behavioral therapy program for youths detained at the New York City prison, with the goal of “reducing the high recidivism rate for this population by focusing on personal responsibility education, training, and counseling,” according to the MDRC, an intermediary managing organization. Many eyes were on Rikers because SIBs are considered the new silver bullet for America’s failure to invest in social programs that address poverty, mental illness, and crime.

The failure of the Rikers experiment to achieve the project’s intended outcomes raises more questions than answers, particularly with regard to the potential of SIBs to address complex social problems and serve vulnerable communities. Goldman Sachs lent $7.2 million to New York City to fund the project to reduce recidivism among the 3,000 16- to 18-year-old males detained at Rikers Island, of whom half return to jail each year. An 8.5 percent reduction in the rate of recidivism would have triggered repayment, and greater than 10 percent reduction would have led to a profit for Goldman—between $500,000 and $2.1 million, depending on rate of reduction.


In addition to Goldman, the complex and potentially costly structure included an intermediary managing organization, an independent evaluator, and a service provider. Bloomberg Philanthropies guaranteed $6 million, or 83 percent, of the SIB loan, substantially reducing Goldman Sachs’s risk.

However, in July, the Vera Institute concluded that the intervention had failed to reduce recidivism. Consequently, the program will end in August.

In science, failure can still be deemed a kind of success, since data can be helpful in revising or shelving a working hypothesis. But did the Rikers SIB experiment provide that kind of clarity? The claims of success at Rikers hinge on the assertion that the program cost taxpayers nothing. Indeed, the city isn’t on the hook for any repayment, but we don’t know the true cost of the intervention.

According to MDRC, “the arrangement required considerable in-kind support from city government leaders and staff.” These are real costs—paid with taxpayer dollars—and should be part of the accounting equation.

A further claim by supporters, that the SIB will provide valuable data to help ascertain what is and is not effective for future experiments, remains to be seen; the Vera Institute’s full evaluation won’t be released until September, and the summary findings don’t provide sufficient details. That said, there are certain lessons we can take from this failed experiment:

  • When SIBs fail, social problems persist: Taxpayers avoided paying some costs for the program, but the underlying problems that contribute to recidivism remain.

  • The scope of SIBs is limited by the demand for short-term results: Most social problems are complex and require comprehensive programs and policies that stay the course. A bias toward programs that produce quick, measurable results narrows the public dialogue and waters down findings.

  • SIBs divert investments that could be used in other ways: Philanthropy plays an important role in funding social interventions. In light of the failure of this first-in-the-nation SIB-funded intervention, philanthropic organizations may be asked to bear more of the risk to keep SIBs attractive to investors. A 2013 report by MDRC notes that it “may be necessary for benevolent funders to step in to ‘smooth the curve’ for traditional investors.” Not only does this undermine a key claim of SIBs, that they shift responsibility to the private sector alone, but it suggests that philanthropic dollars might be diverted from directly funding other innovative programs, shouldering risk for private investors instead.

The range of factors needed to create meaningful change in the lives of young people who face multiple social and economic challenges is beyond the control of any one social intervention. There are far too many questions remaining to conclude that SIBs are an effective vehicle for funding social programs. Other approaches, such as reducing misdemeanor arrests, disrupting the school-to-prison pipeline, changes to the bail system, and raising the age of criminal responsibility would have significant impact on the numbers who cycle through Rikers. If the goal is to solve social problems, not privatize the public sector, we should consider a simpler solution—public investment in schools, jobs, social programs and innovative criminal justice."...


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Data-Mining and the "Data Race"​ for Gold in Texas // Lynn Davenport

Data-Mining and the "Data Race"​ for Gold in Texas // Lynn Davenport | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems | 

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God’s Work: How Goldman Sachs Scammed a Utah Program Meant to Help Preschool Children // Washington's Blog

God’s Work: How Goldman Sachs Scammed a Utah Program Meant to Help Preschool Children // Washington's Blog | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems | 

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Social Impact Bond Global Database // Social Finance

Social Impact Bond Global Database // Social Finance | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems | 

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The Cost of Success: How Letting Billionaires Shape Early Childhood Education Harms Kids – and Democracy // AlterNet

The Cost of Success: How Letting Billionaires Shape Early Childhood Education Harms Kids – and Democracy // AlterNet | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Susan Ochshorn

"Three weeks after New York City expanded its historic preschool initiative to three-year-olds, Richard Buery held forth on his signature achievement at the Puck Building, owned by Charles Kushner and his son, Jared, Donald Trump’s son-in-law.  Bill de Blasio’s deputy mayor of strategic policy initiatives, architect of “PreK for All,” exhaled.


Many had expected him to fail.  All eyes were on America’s largest school district. Critics predicted a train wreck, the inevitable result of a rapid scale-up—a sacrifice of quality for access.  I welcomed this bold experiment, a key element of the mayor’s agenda to combat inequality.  Here was a model of government as a force for change, confirming early childhood education as a public good.  


Yet I worried.  Wages for preschool teachers in community-based organizations, home for the majority of four-year-olds, hovered around the poverty level, thousands of dollars less than their public school peers.  Charter schools were grabbing up the city’s limited space, overcrowding a threat to the small class sizes in which young children thrive.  And how would they fare in the most segregated school district in the country?  


Something else gnawed at me.  Venture capitalists and hedge funders, their millions and billions already shaping toxic education policy, were beginning to encroach upon the precincts of early childhood.  Pay for Success contracts—known by the more genteel name of social impact bonds—were lurking, tantalizing a sector long starved for public investment."...


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"Beyond Trade-Offs: How Leading Commercial and Catalytic Investors are Managing for Impact, Risks and Returns" // Impact Alpha

"Beyond Trade-Offs: How Leading Commercial and Catalytic Investors are Managing for Impact, Risks and Returns" // Impact Alpha | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems | 

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Bonded Life: Technologies of Racial Finance From Slave Insurance to Philanthrocapital // Kish, Z., & Leroy, J., 2015 [Cultural Studies]


Amid public critiques of Wall Street’s amorality and protests against sharpening inequality since the financial crisis of 2008, the emergent discourse of philanthrocapitalism—philanthropic capitalism—has sought to recuperate a moral center for finance capitalism. Philanthrocapitalism seeks to marry finance capital with a moral commitment to do good. 

These strategies require new financial instruments to make poverty reduction and other forms of social welfare profitable business ventures. Social impact bonds (SIBs)—which offer private investors competitive returns on public sector investments—and related instruments have galvanized the financialization of both public services and the life possibilities of poor communities in the United States and the Global South. 

This article maps new intrusions of credit and debt into previously unmarketable spheres of life, such as prison recidivism outcomes, and argues that contemporary social finance practices such as SIBs are inextricable from histories of race—that financialization has been and continues to be a deeply racialized process. Intervening in debates about the social life of financial practices and the coercive creation of new debtor publics, we chart technologies meant to transform subjects considered valueless into appropriate, even laudable, objects of financial investment. 

Because their proponents frame SIBs as philanthropic endeavors, the violence required to financialize human life becomes obfuscated. We aim to historicize the violence of financialization by drawing out links between financial capitalism as it developed during the height of the Atlantic slave trade, and the more subtle violence of philanthropic financial capitalism. Though the notion that slaves could be a good investment—both in the profitable and moral sense of the word—seems far removed from our contemporary sensibilities, the shadow of slavery haunts SIBs; despite their many differences, both required black bodies to be made available for investment. Both also represent an expansion to the limits of financialization."


Kish, Z., & Leroy, J. (2015). Bonded Life: Technologies of Racial Finance From Slave Insurance to Philanthrocapital. Cultural Studies, 29, (5), 630–651

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The next wave of the ‘Wall Streetification’ of education and public services in America [Perspective] // Washington Post 

The next wave of the ‘Wall Streetification’ of education and public services in America [Perspective] // Washington Post  | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

Valerie Strauss
"There is an emerging financial phenomenon in the education and social service world that could change the way social services are delivered in the United States — and who gets them. The term that describes a number of different programs in this arena are social impact bonds, and if you have managed not hear about them in recent years as they have been developed, now’s a good time to learn. What are these bonds?

They basically are a way of financing social services by bringing together social service providers with private funders and nonprofit organizations that want to expand social services committed to expanding social services to Americans.


Those who support these bond programs see them as a great way to get private entities to invest in schools and districts that are strapped for resources. Critics say they essentially are a way for the private sector to make money off investments in public education and are more likely to enrich the private entities than help children. They also see this financing technique as the next step in the privatization of education and social services, which they find troubling.


The following piece, written by scholars Martin Carnoy and Roxana Marachi, explain this new world in depth.

Carnoy is a professor of education and economics at Stanford University, where he chairs the International and Comparative Education program in the School of Education. His research explores educational policy and practice in the United States as part of the Consortium for Policy Research in Education.


Roxana Marachi is an associate professor of education at San Jose State University, where she teaches courses in the Department of Teacher Education and the Doctoral Program in Educational Leadership. Her current research interests are focused on strengthening systemic strategies for the prevention of data harms and bridging research-to-practice gaps in the integration of emerging technologies in education. 

By Martin Carnoy and Roxana Marachi

Does Goldman Sachs’ investing in desperately needed preschools in your state sound too good to be true?


No surprise, there’s more to this funding than meets the eye. And at worst, it may mean that much of today’s philanthropic giving for public services may end up as profit-making investments and the privatization of the public sector.


In the past decade, new funding structures have emerged within the social services and education arenas, with accompanying legislation poised to transform how services are delivered and who delivers them. The umbrella term for these new financial arrangements is the Social Impact Bond (SIB), although Pay For Success (PFS) and Results-Based Financing (RBF) are also often used interchangeably to refer to the same basic structures.


SIBs have been widely promoted as innovative funding approaches that allow private investors to fund public projects in health care, homelessness, early education, workforce development, and prison reform. These investors can then be repaid with interest, providing a profit to funders if the project meets predetermined success criteria with accompanying cost savings to the public. A key feature of SIB projects involves third-party evaluators whose job it is to measure whether certain “success” metrics are met by the end of the project period.


On the surface, social impact bonds may appear great for all involved.  Local governments using the approach may be viewed by the public as more prudent in their use of tax revenue, since they can scale up programs to address recidivism reduction, homelessness, education, and other public services without immediate risk to taxpayer money. Elected officials tout such investments as innovations in public service delivery.


Private financial institutions, such as Goldman Sachs, get to make profits off their upfront investments provided that final success metrics are achieved. These same financial institutions also get favorable public relations for helping fund projects intended to support underserved communities.


And SIBs appeal to the nonprofit sector, since they allow higher levels of funding for their social projects than would otherwise be available in current resource-stressed environments.


As attractive and straightforward as the basic rationale for bringing private funding into social programs may seem, there are many troubling aspects of these financing structures.


  • They shift public monies to private investor profits for what are actually low-risk, tried-and-true, cost-saving interventions that the public sector could just as well have financed and directly managed itself. To date, almost no SIB projects have failed to meet performance metrics, largely because their interventions have worked before on similar populations. In addition, the U.S. Department of Education has funded ($3 million in 2016) what are essentially eight pre-studies, or feasibility studies, to establish whether preschool education PFS projects could be made attractive for private investors — in the IES’s words, “to test the viability of using Pay for Success as a way to pay for preschool services.”
  • Social Impact Bonds and Pay For Success structures are expensive to set up and administer, even apart from the premium that they pay private investors. While taxpayer dollars do not immediately fund these projects, taxpayers must ultimately foot the bill in order to pay back the original investments along with the added profits, evaluation costs, and administrative expenses. As an example, according to estimates from the OECD, contracts for a Massachusetts Juvenile Justice related SIB involved over 1,100 hours of consultant time and required coordination among multiple investors and delivery partners.

  • Private investors are interested in short-term returns, so the kinds of projects that attract SIB funding will necessarily avoid and undermine attention to more complex, deeper structural inequities that fuel continuing disparities at the root of social problems. Reducing youth recidivism by a certain percentage, for instance, may save local government money but has only a marginal effect on the underlying causes of youth crime.

  • A final concern related to these privatized projects is that they involve extensive data gathering from youth/participants in evaluation studies designed to demonstrate so called impacts of the interventions. Shifts in governance of these projects and evaluations to the private sector eliminate opportunities for public oversight and remove participant protections that would have otherwise been required by publicly governed processes. Just two examples: in the Chicago Parent Child Study, student mobility and retention, social-emotional learning, parent engagement, and school attendance were all tracked even though they were not involved in the investors’ payout metrics. And in the Utah Preschool Project, twelve years of longitudinal data are being gathered. What are the plans for how these data are to be used, by whom, and to what end?

One indication of how quickly we can expect SIBs to expand in the United States is the passage of the 2018 Federal Social Impact Partnerships to Pay for Results Act (SIPPRA), within the Social Security Act. That set aside $100 million in funding over 10 years to support outcome payments for Pay for Success projects, feasibility studies, and project evaluations.


SIPPRA stipulates that the Treasury Department will accept applications for a variety of different kinds of projects, from increasing reducing recidivism rates, improving rates of high school graduation, and reducing teen pregnancies, to reducing homelessness and reducing the incidence of preventable diseases — in sum, many of America’s most serious social and economic challenges. In addition to SIPPRA funding, Pay for Success initiatives are also embedded directly into federal education legislation through the 2015 Every Student Succeeds Act.


In our full policy brief published by the National Education Policy Center at the University of Colorado at Boulder, we conclude that policymakers and others should be skeptical of the hype that SIBs are a win-win for all concerned and without downsides. Such claims are often made by private investors and by non-governmental organizations seeking more funding to engage in social interventions. We urge caution in bringing the private sector further into the areas of social services and education and reveal several layers of potential exploitation that appear to be tethered to such financial structures.

We agree with David Macdonald, senior economist with the Canadian Center for Policy Alternatives, who refers to SIBs as “anti-philanthropy."


He suggests that at the core, they are profit-driven, government-funded business deals that eventually will lead to the Wall Streetification of public services. Public agencies are encouraged to take a “thanks, but no thanks” approach to middleman markups that would allow intermediaries and investors to profit off projects funded by the public. No matter how well-intentioned private investors may appear to be, they are ultimately governed by private interests, which can diverge from the public interest behind these policies."

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Social Impact Bonds: The Anti-Philanthropy

Social Impact Bonds: The Anti-Philanthropy | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By David McDonald Interest in Canadian “Social impact Bonds” has spiked following HRSDC Minster Finley announcement that the federal government is investigating them for use in Canada. I’ve already commented on the story in The Toronto Star and on The Current (min 16) but I wanted to write my thoughts up in a fuller blog post for readers.

So what is a “Social Impact Bond”? The idea is that a banker or foundation decides to fund a particular service or program. When (you’ll see why I say “when” and not “if” below) the program hits its goals, the government pays the funder back all they invested and includes a profit margin of somewhere in the neighbourhood of 7%-15% on top of the initial investment.

For example, in New York City there is a youth recidivism program. In NYC, half of all youth released from prison will re-offend within a year. This is obviously bad for society and the kids, but it’s also expensive for the government to pay for these kids to be in prison. So a social service agency and the government convinced Goldman Sachs to spend $5 million on a youth recidivism program. The program will take in a portion of the kids released and give them an intensive program. If the program manages to reduce the re-offence rate by 10% compared to the average, then the government pays Goldman back their original $5 million and an additional 13% profit of $650,000, in total paying them $5,650,000.

This stands in stark contrast to actual philanthropy of say a company donating $20,000 to the local food bank at Christmas. They get a tax break for the donation to be sure, but they don’t expect to get their $20,000 back from the government with interest after homeless folks get their Christmas meal.  But that is what happens with social impact bonds—they get the entire donation/investment back with interest once the program is delivered. If anything, social impact bonds are anti-philanthropy.

It’s no surprise why some social service agencies are open to social impact bonds. The backdrop, in Canada and elsewhere, has been a decade of tax cuts and reduced expenditures on social services, leaving social service agencies stuck between a rock and a hard place. On the one hand, they see a growing need for their services and, on the other, governments are cutting back resources to deal with the need. If the government is offering them the opportunity to raise new money for social services, its pretty hard to look a gift horse in the mouth.

But this new way of funding social services is a significant departure from how Canadian governments have done it in the past.  en years ago, if a social service agency had a good idea that had been tested elsewhere or tested on a small scale and worked, they’d pitch it to a government granting committee and get it funded. Governments used to just fund new ideas: social service agencies could help kids who’d run afoul with the law, governments would save on prison expenditures and importantly, no one would make a profit.

Social Impact Bonds are a very different approach as they insert a middle man into social service delivery, someone like Goldman Sachs. The bankers are there because they smell an opportunity to make large, government-guaranteed profits. We have to remember that the same industry that took down the world economy not four years ago is the one interested in becoming social services middle men. Whenever there is a middle man, there is always a middle man mark-up.

Often times, these Social Impact Bonds are pitched as if they transfer risk to the private sector. That is, if the project doesn’t hit its 10% reduction in recidivism for example, then the government pays them nothing. In the real world it is quite a different story.

First of all, the projects that would make it to the funding stage are not experimental. They need to have been proven on a smaller scale and in other places. There is no way that Goldman and others are going to put up $5 million with a 50/50 chance of losing it all. Instead they are much more likely to back projects that have a proven track record. Experimentation is almost always going to be on a smaller scale and funded by government money because of the high risk of failure.

But if by some fluke, the project still doesn’t work as expected, say they only get an 8% instead of a 10% reduction in recidivism; it’s highly unlikely that the government will not pay Goldman Sachs the $5 million. If Goldman Sachs loses $5 million, they aren’t going to come back next year and neither are any of the other bankers and foundations. The investor demands to be paid…with interest. If the government allows project backers to lose their investment, the money to back these projects is going to dry up very quickly.

In either the traditional model or the social impact bond model, it is always the government that pays. However, for social impact bond, the government now has to pay a middle man mark-up. Not only that, but they also have to make sure that Goldman Sachs’ shareholders are happy. If the shareholders aren’t happy with their returns, they aren’t going to pony up the cash next time around.

It is this change of who government serves that really concerns me. People pay their taxes (and expect corporations to as well) in part because they want the government to deliver good services to the people that need them. However, social impact bonds direct tax dollars to bank profits instead of to a homeless person trying to get off the street. This dramatically changes who is being served by the government: from those who need a helping hand to the shareholders of a bank.

There is an alternative. Since the government is going to pay either way, let’s say “thanks but no thanks” to a middle man mark-up. Instead, the government could create its own fund to push forward ideas that have been proven elsewhere. Again, since the government is going to pay either way, why not borrow at historically low rates of 1% instead the of 7%-15% offered by a middle man? When these projects succeed, we can provide them to more people instead of lining the pockets of a bank."..


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Blockchain for Early Childhood Development: iO2’s Pilot Blockchain Project in Brazil // Shanzhai City Holdings

[Re-sharing does not indicate endorsement]. The proposed solutions in the accompanying article are untested, unproven, and poised to do more harm than good for the vulnerable communities whose data will be placed  on to  Blockchain platforms. 


"By Shanzhai City Holdings

"The Brazilian government is implementing a nation-wide early child development program to conduct weekly home visits to vulnerable children and their families in order to identify risks and opportunities for child development. In the city of Boa Vista, the program is named Survive and Thrive Boa Vista Early Childhood Program (the “STBV”) and aims to tackle the continued high rates of neonatal mortality and the large disparities in early childhood development. Targeting children between 0 and 3 years old living in deprived and low-income families who have already participated in income transfer programs such as bolsa familia, the Boa Vista Municipality Government expects the STBV can eventually eliminate neonatal mortality in the city, and in longer term education inequality."...


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The Controversy Behind ESSA's Pay for Success Initiative" Critics of the provision see a for-profit 'money-making scheme' // Education Dive

The Controversy Behind ESSA's Pay for Success Initiative" Critics of the provision see a for-profit 'money-making scheme' // Education Dive | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Erin McIntyre

"With the newly-signed Every Student Succeeds Act (ESSA) becoming the K-12 law of the land, some critics are decrying one particular clause: the “Pay for Success” initiative. It's a program that allows for private investors to profit from returns on the upfront financing of educational programs, for example, with social impact bonds.

In layman’s terms, Pay for Success means that private firms can step up to pay for public services. They’re then repaid with interest, subsequently turning a profit, if the services funded result in cost savings for the state.

Within the new ESSA package, the Pay for Success initiative can be found on page 797, within a section describing Title II funds. It reads:


PAY FOR SUCCESS INITIATIVE.— The term ‘pay for success initiative’ means a performance-based grant, contract, or cooperative agreement awarded by a public entity in which a commitment is made to pay for improved outcomes that result in social benefit and direct cost savings or cost avoidance to the public sector. Such an initiative shall include—

(A) a feasibility study on the initiative describing how the proposed intervention is based on evidence of effectiveness;

(B) a rigorous, third-party evaluation that uses experimental or quasi-experimental design or other research methodologies that allow for the strongest possible causal inferences to determine whether the initiative has met its proposed outcomes;

(C) an annual, publicly available report on the progress of the initiative; and

(D) a requirement that payments are made to the recipient of a grant, contract, or cooperative agreement only when agreed upon outcomes are achieved, except that the entity may make payments to the third party conducting the evaluation described in subparagraph (B).

Sen. Orin Hatch (R-UT) takes credit for the inclusion of the initiative.

“With Pay for Success, state and local leaders will be empowered to fund initiatives that deliver real results for their communities and schools,” Hatch said in a release on his website. “Rather than being limited by what federal bureaucrats at the Department of Education think best, funding should be more connected to local innovation and successful outcomes.”


He pointed out that specific interventions “are not spelled out… allowing providers the flexibility to adopt whatever strategies they determine will be most effective,” noting also that, in some cases, “private investment provides upfront financing, taking on the risk that the intervention won’t succeed and recovering the investment if it does.”


On her blog, Deutsh29, teacher and statistician Dr. Mercedes Schneider, author of the book "A Chronicle of Echoes: Who's Who in the Implosion of American Public Education," noted that pay-for-success initiatives are also found within Title I, Part D, (“Prevention and Intervention Programs for Children and Youth Who Are Neglected, Delinquent, or At Risk”) and in Title IV, Part A, (“Student Support and Academic Enrichment Grants,” section 4108, “Activities to Support Safe and Healthy Students”) of the new bill.

Dr. Schneider is a staunch critic of Pay for Success' inclusion.


“The lure of Pay for Success is the money,” she said. “So, in states where market-based education reform has taken hold, Pay for Success is more likely to be heralded as benevolence and the profit motive downplayed-- and it will likely lead to scandal.”

Some other education advocates agree.

Former assistant U.S. education secretary and New York University education historian Diane Ravitch called the initiative an outright “threat,” telling readers of her blog to phone lawmakers "at once to stop this money-making scheme.”

Some parents, teachers, and education activists have already created an online petition calling for the initiative’s removal from the ESSA."...


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Success Metrics Questioned in School Program Funded by Goldman // The New York Times

Success Metrics Questioned in School Program Funded by Goldman // The New York Times | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

"It was, in the vernacular of corporate America, a win-win: a bond that paid for preschool for underprivileged children in Utah while also making money for investors.

Goldman Sachs announced last month that its investment in a Utah preschool program had helped 109 “at-risk” kindergartners avoid special education. The investment also resulted in a $260,000 payout for the Wall Street firm, the first of many payments that is expected from the investment.


Gov. Gary R. Herbert of Utah hailed the program as a model for a new way of financing public projects. Such so-called social impact bonds are a new kind of public-private partnership, promising financing from Wall Street and imposing a goal on local governments.


Yet since the Utah results were disclosed, questions have emerged about whether the program achieved the success that was claimed. Nine early-education experts who reviewed the program for The New York Times quickly identified a number of irregularities in how the program’s success was measured, which seem to have led Goldman and the state to significantly overstate the effect that the investment had achieved in helping young children avoid special education. 


Goldman said its investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten. The bank received a payment for each of those children.


The big problem, researchers say, is that even well-funded preschool programs — and the Utah program was not well funded — have been found to reduce the number of students needing special education by, at most, 50 percent. Most programs yield a reduction of closer to 10 or 20 percent.


The program’s unusual success — and the payments to Goldman that were in direct proportion to that success — were based on what researchers say was a faulty assumption that many of the children in the program would have needed special education without the preschool, despite there being little evidence or previous research to indicate that this was the case.


“We’re all happy if Goldman Sachs makes money as long as they are making it with smart investments that make a real difference,” said Clive Belfield, an economics professor at Queens College in New York, who studies early childhood education. “Here they seem to have either performed a miracle, or these kids weren’t in line for special education in the first place.”


The concerns about the program are a reminder of how hard it is to properly structure public-private partnerships like social impact bonds, which depend on easily verifiable and commonly agreed-upon methods of measuring success for goals that can be hard to define, such as student success."...


Finding such measurements is increasingly important as government programs face cutbacks, and public officials look to find private investors willing to address the funding gap. Social impact bonds have been described as one of the most promising ways to harness this money.


Indeed, these bonds will be the focus of a conference hosted by the Federal Reserve Bank of Philadelphia on Wednesday, when the mayor of Philadelphia, Michael Nutter, and a representative from the White House will speak, along with the Goldman executive who oversaw the Utah program.


But the criticism of the Utah program points to issues that could hinder the wider adoption of the concept of social impact bonds. Kenneth A. Dodge, a professor at the Sanford School of Public Policy at Duke, who has been an advocate for the pay-for-success model, said that if the model was to succeed it would have to be done differently than it was in Utah.


“It is a step in the right direction, but this is not the criteria I hope we hold ourselves to ultimately,” he said.


More immediately, the apparent overstatement of the Utah program’s results mean that the payments that Goldman — and a philanthropic partner, the  J.B. & M.K. Pritzker Family Foundation — recently received from the state of Utah and the local United Way were probably also higher than they should have been.


A spokeswoman for Goldman, Leslie Shribman, deferred questions about the methods used to determine the payments it had received to Utah officials, who she said had developed the methodology.


“To just assume that all these children would have gone to special education is kind of ridiculous,” said Ellen S. Peisner-Feinberg, a senior scientist at the Frank Porter Graham Child Development Institute.


Mr. Innocenti, who administered the tests in Utah, said that from 30 to 50 percent of the children in the preschool program come from homes where English is not the only language. He said the school decided to test the children in English, despite the many non-English-speaking children, because the preschool program is conducted in English.


Before Goldman executives made the investment, they could see that the Utah school district’s methodology was leading large numbers of children to be identified as at-risk, thus elevating the number of children whom the school district could later say were avoiding special education. From 2006 to 2009, 30 to 40 percent of the children in the preschool program scored below 70 on the P.P.V.T., even though typically just 3 percent of 4-year-olds score this low. Almost none of the children ended up needing special education.


When Goldman negotiated its investment, it adopted the school district’s methodology as the basis for its payments. It also gave itself a generous leeway to be paid pack. As long as 50 percent of the children in the program avoid special education, Goldman will earn back its money and 5 percent interest — more than Utah would have paid if it had borrowed the money through the bond market. If the current rate of success continues, it will easily make more than that.


Ms. Peisner-Feinberg said that before these sorts of investment are considered again, investors and schools needed better ways to measure them. “You have to be sure you have very rigorous ways of measuring the impact to make sure that it’s legitimate in terms of the outcome you get,” she said. “That didn’t happen here.”...


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Goldman Sachs Explains: Social Impact Bonds are Socially Bankrupt // Cathy O'Neill

Goldman Sachs Explains: Social Impact Bonds are Socially Bankrupt // Cathy O'Neill | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Cathy O'Neill

"Have you ever heard of a social impact bond? It’s a kooky financial instrument – a bond that “pays off” when some socially desirable outcome is reached.

The idea is that people with money put that money to some “positive” purpose, and if it works out they get their money back with a bonus for a job well done. It’s meant to incentivize socially positive change in the market. Instead of only caring about profit, the reasoning goes, social impact bonds will give rich people and companies a reason to care about healthy communities.


So, for example, New York City issued a social impact bond in 2012 around recidivism for jails. Recidivism, which is the tendency for people to return to prison, has to go down for the bond to pay off. So Goldman Sachs made a bet that they could lower the recidivism rate for certain jails in the NYC area.


Or who knows, maybe they sold that bond three times over to their clients, and they are left short the bond. Maybe they are actually, internally, making a bet that more people are going to jail in the future. That’s the thing about financial instruments, they are flexible little doodads.


Also, and here’s a crucial element to look for when you hear about social impact bonds: the city of New York didn’t actually put up any money to issue the bonds. That was done instead by Goldman Sachs and MDRC, a local nonprofit. However, NYC might be on the hook if recidivism rates actually go down. On the other hand fewer people would be in jail in that case, so maybe the numbers would work out overall, I’m not sure. Theoretically, in that best case scenario, the city would also have the knowledge of how to reduce recidivism rates, so they’d be happy for that as well.


Which is how we get to the underlying goal of the social impact bond: namely, looking for privately financed “solutions” to social problems. The reasoning is that governments are inefficient and cannot be expected to solve deep problems associated to jails or homelessness, but private companies and possibly innovative non-profits might have the answers.


As another example, there’s a Massachusetts anti-homelessness social impact bond initiative, set up in 2014 with $1 million in philanthropic funding and $2.5 million in private capital investments, with the following description: “the investors assume project risk by financing services up front with the promise of Commonwealth repayment only in the event of success”.


There are actually a ton of examples. This is the new, hot way to create social experiments. Take a look here for an incomplete list. It’s international, as well; it’s done mostly in the US and the UK, but New Zealand is throwing its hat into the ring as well.


It’s a good idea to try things out and see what works for the big problems like homelessness and recidivism. That’s not up for debate. However, it’s not clear that social impact bonds are the best approach to this. There’s a real danger that it’s going end up being a lot like the charter school movement: they juice their numbers by weeding out problematic students, they are unaccountable, and even when they tout success their “solutions” don’t scale.


Here’s a big red flag on the whole social impact bond parade: Goldman Sachs was caught rigging the definition of success for a social impact bond in Utah. It revolved around a preschool program that was supposed to keep kids out of special ed. Again, it was hailed by the Utah Governor as “a model for a new way of financing public projects.” But when enormous success was claimed, it seemed like the books had been cooked.

Basically, Goldman Sachs got paid back, and rewarded, if enough kids who were expected to go into special ed actually didn’t. But the problems started with how find the kids “expected to go into special ed.”


Namely, they administered a test known as the PPVT, and if the kid got a score lower than 70, they were deemed “headed to special ed.” But the test was administered in English, when up to half of the preschoolers didn’t speak English at home. And also, the PPVT was never meant to measure kids for special ed needs in the first place. In fact, it’s a vocabulary test. Kids are shown a picture and a word or two of description – in English – is spoken, and the kid is supposed to say the number of the picture associated with the description. Here’s a sample:


Weirdly, non-native speakers didn’t do so well. Lo and behold, after a couple of years where the kids learned English, most of them headed to normal classrooms, and Goldman Sachs got paid back. From the article:


"From 2006 to 2009, 30 to 40 percent of the children in the preschool program scored below 70 on the P.P.V.T., even though typically just 3 percent of 4-year-olds score this low. Almost none of the children ended up needing special education."


Let’s take a step back. We’re asking for help from private finance companies to solve big hard societal problems, and we’re putting huge money on the line. There’s a problem with this approach. We are asking for gaming such as the above. We should expect to see more of it.


Worst case scenario: financiers are betting against the “socially beneficial” outcomes. It’s possible, we saw it happen in the housing crisis. From their perspective, it doesn’t make sense to have a market where you can’t bet against something, and if they think the chances of a positive outcome are overblown, they’d be stupid not to. And of course, if they can influence the result directly, then why not. It could get ugly.


Here’s my hope: that we soon realize that engaging like this doesn’t solve any problems, and moreover it wastes time and money. Financial incentives are not compatible with the scientific approach, and basic research depends on money not being directly involved. When private financiers want to get involved in this stuff, it’s because they can profit off of it, not because they want to help."


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"The Rise of Impact Investing in Early Childhood" // SXSW 2019 

"The Rise of Impact Investing in Early Childhood" // SXSW 2019  | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

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"We know that investing in early childhood has one of the highest returns on investment for society, but it has historically not attracted the same levels of early stage capital as other age groups. Now, early childhood innovation and investment are increasing. Hear from impact investors who are investing in this market. What are the most exciting areas for innovation and which problems need to be solved? What does the future of this market hold for investors and for children and families?"

Programming descriptions are generated by participants and do not necessarily reflect the opinions of SXSW."

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Test Scores and Child Hunger: The Cold Calculus of Pay for Success Predators 

Test Scores and Child Hunger: The Cold Calculus of Pay for Success Predators  | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Alison McDowell

"Wrench in the Gears is primarily a blog about education, and the dehumanizing influence technology wields over classroom instruction. In doing this work, I’ve come to understand that, at its root, the shift to digital “education” is about aggregating vast datasets on children than can be mined for profit in the impact-investing sector. This tactic is not limited to education. In fact, it threatens to engulf ALL public services.

Through outsourcing and the imposition of hard metrics, “what works” lobbyists intend to push the poor, and those teetering on the brink of poverty, into an abyss of impact-driven digital slavery. They’ll pull the non-profits in, along with their clients, since “what works” government hinges on their complicity. Moving forward, non-profits will increasingly run outsourced programs and will be required to deliver the data demanded by outcomes-based contracts. Services will be reengineered to fit the constraints of data dashboards-human life reduced to numbers to meet the demands of global capital.

The Bipartisan Budget Act of 2018, signed into law this February, created a new $100 million Pay for Success Fund at the US Department of the Treasury. Merchant banking firms like Ridge-Lane have marshaled teams of advisors to get in on the action. Financiers and tech billionaires are grooming candidates across the country, hoping their chosen ones will usher in a wave of Pay for Success initiatives that will rival the stock market.


At its core, the new theory of “economic thinking” promoted by INET is riddled with rot. While George Soros, James Heckman, and Robert Dugger attempt to cast social impact investment programs as socially conscious and “progressive,” the public deserves to know the truth. That truth is that these predators will NOT feed hungry children UNLESS they can profit from it."...


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Ethereum’s "Smart Contracts" Run on Blockchain are Full of Holes // Technology Review

Ethereum’s "Smart Contracts" Run on Blockchain are Full of Holes // Technology Review | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Mike Orcutt


"Blockchain-powered computer programs promise to revolutionize the digital economy, but new research suggests they’re far from secure.


Computer programs that run on blockchains are shaking up the financial system. But much of the hype around what are called smart contracts is just that. It’s a brand-new field. Technologists are just beginning to figure out how to design them so they can be relied on not to lose people’s money, and—as a new survey of Ethereum smart contracts illustrates—security researchers are only now coming to terms with what a smart-contract vulnerability even looks like.


Digital vending machines: The term “smart contract” comes from digital currency pioneer Nick Szabo, who coined it more than 20 years ago (and who may or may not be Satoshi Nakamoto). The basic idea, he wrote, is that “many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make a breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.” Szabo called physical vending machines a “primitive ancestor of smart contracts,” since they take coins and dispense a product and the correct change according to the displayed price.


Enter the blockchain: Today, the most common conception of a smart contract is a computer program stored on a blockchain. A blockchain is essentially a shared accounting ledger that uses cryptography and a network of computers to track assets and secure the ledger from tampering. For Bitcoin, that gives two parties who don’t know each other an ironclad guarantee that an agreed upon transfer of funds will happen as expected—that is, no one will get cheated.


Smart contracts are where things get interesting. Using a smart contract, two people could create a system that withdraws funds from one person’s account—a parent’s, let’s say—and deposits them into a child’s account if and when the child’s balance falls below a certain level. And that’s just the simplest example—in theory, smart contracts can be used to program all kinds of financial agreements, from derivatives contracts to auctions to blockchain-powered escrow accounts.


ICOs everywhere: One of the most popular applications of smart contracts has been to create new cryptocurrencies. A few of them have provided glimpses of a new kind of economy in which a purpose-made digital currency  can be used for a “decentralized” service, like data storage or digital currency trading. Investor excitement over the promise of such applications has helped fuel the ICO craze, which has raised over $5 billion. (What the hell is an ICO? ← Here’s a primer)


But hold your horses: Technologists still don’t have a full picture of what a security hole in a smart contract looks like, says Ilya Sergey, a computer scientist at University College London, who coauthored a study on the topic published last week.

Users learned this the hard way in 2016 when a hacker stole $50 million from the so-called Decentralized Autonomous Organization, which was based on the Ethereum blockchain. And in November around $150 million suddenly became inaccessible to users of the wallet service Parity, which is also rooted in Ethereum.


Sergey and colleagues used a novel tool to analyze a sample of nearly one million Ethereum smart contracts, flagging around 34,000 as vulnerable—including the one that led to the Parity mishap. Sergey compares the team’s work to interacting with a vending machine, as though the researchers randomly pushed buttons and recorded the conditions that made the machine act in unintended ways. “I believe that a large number of vulnerabilities are still to be discovered and formally specified,” Sergey says."...


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'Social Impact Bonds/Pay for Success' [Chapter published in “The Swindle of Innovative Educational Finance"] by Dr. Kenneth Saltman, Professor of Educational Leadership, University of Massachusetts 

'Social Impact Bonds/Pay for Success' [Chapter published in “The Swindle of Innovative Educational Finance"] by Dr. Kenneth Saltman, Professor of Educational Leadership, University of Massachusetts  | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Kenneth Saltman
"Investment banks such as Goldman Sachs, Bank of America, and J. P. Morgan; philanthropies such as the Rockefeller Foundation; politicians such as Chicago Mayor Rahm Emanuel and Massachusetts former governor and now Bain Capital managing director Deval Patrick; and elite universities such as Harvard have been aggressively promoting Pay for Success (also known as social impact bonds) as a solution to intractable financial and political problems facing public education and other public services. In these schemes, investment banks pay for public services to be contracted out to private providers and stand to earn much more money than the cost of the service. For example, Goldman Sachs put up $16.6 million to fund an early childhood education program in Chicago, yet it is getting more than $30 million[1] from the city. While Pay for Success is only at its early stages in the United States, the Rockefeller Foundation and Merrill Lynch estimate that by 2020, the market size for impact investing will reach between $400 billion and $1 trillion.[2] The Every Student Succeeds Act of 2016, the latest iteration of the Elementary and Secondary Education Act of 1965, directs federal dollars to incentivize these for-profit educational endeavors significantly, legitimizing and institutionalizing them.

 Success is promoted by proponents as an innovative financing technique that brings together social service providers with private funders and nonprofit organizations committed to expanding social service provision. In theory, Pay for Success expands accountability because programs are independently evaluated for their success and the government only pays the funder (the bank) if the program meets the metrics. If the program exceeds the metrics, then the investor can receive bonus money, making the program much more expensive for the public and highly lucrative for the banks.


Banks love Pay for Success because they can profit massively from it and invest money with high returns at a time of a glut of capital and historically low interest rates. Politicians (especially rightist democrats) love Pay for Success because they can claim to be expanding public services without raising taxes or issuing bonds and will only have the public pay for “what works.” Elite universities and corporate philanthropies love Pay for Success because they support “innovation” and share an ethos that only the prime beneficiaries of the current economy, the rich, can save the poor.


Pay for Success began as social impact bonds and were imported into the United States from the United Kingdom around 2010. They were promoted by the leading consultancy advocate of neoliberal education, McKinsey Consulting; the neoliberal think tank Center for American Progress, which was founded by former Clinton chief of staff and Democratic Party leader John Podesta (who also led Obama’s transition); and the Rockefeller Foundation. Pay for Success expansion is now the central agenda of the Rockefeller Foundation. Shortly before championing Pay for Success for Chicago, Rahm Emanuel served as Obama’s chief of staff, having had a long career as a hard-driving Democratic congressman and political money raiser and also an investment banker. Certain other key figures lobbied to expand the use of Pay for Success. Most notably, Jeffrey Liebman went from Obama’s Office of Management and Budget to a large center at Harvard, the Government Performance Lab in the Kennedy School of Government, dedicated to expanding Pay for Success. Liebman is a leader of the Center for American Progress and was a key economic advisor to Obama in his 2008 campaign. Other key influencers of Pay for Success include the Rockefeller Foundation and Third Sector Capital.


Advocates explain that the value of a Pay for Success program is allegedly that it creates a “market incentive” for a bank or investor to fund a social program when there is not the political will to support the expansion of public services, and second, by injecting “market discipline” into the bureaucratically encumbered public sector, Pay for Success will make the public sector “accountable” through investment in “what works,” and it will avoid funding public programs for which the public has “little to show,” as Liebman and Third Sector Capital Partners are fond of suggesting (Wallace, 2014).[3] The value of any public spending in this view must be measurable through quantitative metrics to be of social value. Third, it consequently saves money by not funding programs that cannot be shown to be effective, and fourth, it shifts risk away from the public and onto the private sector while retaining only the potential social benefit for the public. Last, it mobilizes beneficent corporations, banks, powerful nonprofit companies, and philanthropic foundations to save the poor, the powerless, and the public from themselves. Here Goldman Sachs frames its profit-seeking activities as corporate social responsibility, charity, and good works that define its image in the public mind. In fact, all five of these positions that advocates claim explicitly or implicitly to support the expansion of Pay for Success are baseless.

The Myths of Pay for Success

Myth 1: Market Discipline

Repeating a long-standing neoliberal mantra of private-sector efficiency and public-sector bloat, advocates of Pay for Success claim that the programs are necessary because they inject a healthy dose of market discipline into the bureaucratically encumbered and unaccountable public sphere. According to the leading proponent of Pay for Success, Jeffrey Liebman, private-sector finance produces this market discipline because governments do not monitor and measure the services contractors provide. Says Liebman, “[Government] programs that don’t produce results continue to be financed year after year, something that would not happen in the business world.”[4] This is an odd claim from one of Obama’s leading economic advisors at the time that Obama was sworn in as president and who proceeded to have the public sector bail out the private sector. The 2008 financial bailout of the banks by the U.S. federal government represents a repudiation of the neoliberal logic of the natural discipline of markets and of deregulation. The private sector, including banks, insurance companies, and the automotive industry, needed the public sector to step in and save unprofitable businesses and businesses that had invested in the deregulated mortgage-backed securities market. More broadly, some of the largest sectors of the economy, such as defense, agriculture, and entertainment, rely on massive public-sector subsidies to function. Specifically, the financial crisis and consequent recession were a result first of neoliberal bank deregulation and a faith in markets to regulate themselves, but also they demonstrated the illegal activity, fraud, and lies of the same banks that now seek profit through Pay for Success, including Goldman Sachs, Bank of America, Merrill Lynch, and J. P. Morgan.


Pay for Success proponents claim that the financing scheme is necessary because there would otherwise not be the political will to do projects like early childhood education in Chicago for a couple of thousand children or recidivism reduction programs in Massachusetts. Third Sector Capital Partners, a nonprofit that relies on Pay for Success expansion as a cornerstone of its business, claims that Americans do not support state spending and hence Pay for Success is necessary.[5] However, Gallup shows that 75 percent of Americans favor expanded public spending on infrastructure, and 58 percent support replacing the Affordable Care Act with a universal federal health care system.[6] Indeed, as long-standing studies and, more recently, the Bernie Sanders presidential campaign of 2016 indicate, a large percentage of Americans support a range of increased spending on progressive social programs.


A mantra found in the literature that advocates Pay for Success is that it “allow[s] the government to avoid paying for programs that don’t make a difference.”[7] For working-class and poor citizens, many of whom are working two or three low-paying jobs, the cost of private early childcare and education is a major financial burden. The fact that early childcare and education have become corporatized by national companies who pay superexploitative wages to workers only worsens the situation. The fact that early childcare and education are vital economic needs raises a question about whose political will is in question when Pay for Success proponents claim that the only way to provide early child educational services is with the involvement of banks, and that without banks, it should not be provided. The parents and community members are not the ones who lack the political will. Political and financial elites do not want to pay for other people’s children—without a cut."...


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“Winners Take All”: Anand Giridharadas on the Elite Charade of Changing the World

“Winners Take All”: Anand Giridharadas on the Elite Charade of Changing the World | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

AMY GOODMAN: This is Democracy Now!,, The War and Peace Report. I’m Amy Goodman. Winners Take All: The Elite Charade of Changing the World. That’s the new book by Anand Giridharadas, editor-at-large at Time magazine, former correspondent and columnist at The New York Times. This is Democracy Now!, with Part 2 of our conversation.


In Part 1 of our conversation, Anand, we talked about the college entrance scandal. I’m wondering if you can tie that in to your overall thesis of Winners Take All.


ANAND GIRIDHARADAS: You know, Amy, we live in—I would guarantee you that a lot of the people, a lot of the parents, ensnared in this college bribery scandal embody what I talk about when I say—


AMY GOODMAN: Forty-nine people arrested.


ANAND GIRIDHARADAS: —”the elite charade of changing the world,” which is, both of the actresses, whom I checked out online, do a bunch of philanthropy. Right?


This Bill McGlashan guy from TPG literally ran the biggest impact investing fund in the world, to help people through the power of investing. And so, in many ways, those—while they were rigging the system. Right?


So, let’s zoom out from those parents and think about that duality, which I think applies in many ways to our age and plutocracy in our age. A lot of the—it is hard to walk down the street these days without running into a billionaire who says they’re changing the world. Right? Mark Zuckerberg is changing the world. Jeff Bezos is transforming people through charity. And the Google people are organizing all the world’s information and trying to do this and that. Elon Musk is going to space—which, actually, would be great for everybody. And you really have more money being given away than has ever been given away. Social everything, social venture, social enterprise, social this, impact this, impact that. Every young person—I go to campuses, where I spend a lot of time. Every young person on these elite campuses, they don’t say they want to be bankers anymore. It’s not the '80s. They say, “You know, I want to sort of go to Africa, sort of help the Africans.” They've never been to Africa. And the Africans are getting tired of, actually, all these people coming there to help them and just collecting bracelets. But there is this tendency among the rich and powerful to want to make change and actually do these real activities. And to be clear, some of that activity is really good and does help and save lives. Some of it’s more marketing.


But the uncomfortable fact is that when you actually look at any of the data—these people claim to love data—the data is that the very same people who are giving and doing philanthropy, and doing social this and impact that, are actually also the great hoarders of opportunity in our time. Right? Their share of the world’s wealth increases, not decreases, every year. They’re grabbing more of the pie every year, even as they help. Their share of the nation’s income has doubled since the middle of the 20th century, the 1 percent’s has. And, you know, you know all the things you’ve covered in the show. Half of this country, the bottom half of this country, has not basically seen a pay rise since 1979. You’ve had a tremendous age of innovation that has failed to translate into progress, if progress means most people’s lives getting better.


And the unmistakable fact that I learned through my reporting—I started the reporting with a question: What’s the relationship between the two halves of this paradox? On the one hand, you got all these generous rich people; on the other hand, you have the fact that it’s a age of inequality, an age of anger. America feels rigged to people. The American dream is elusive. What’s the relationship? Is it just that this charity, this philanthropy, this do-gooding is not working? It’s not working fast enough? Or is it actually that this charity and philanthropy and elite do-gooding is part of how they maintain the system that allows them to keep taking all?


And what I found through my reporting was that when these elites get involved in social change, what they do is they change change. They take leadership of change. They Columbus social change. They declare themselves now the people, the CEO of Change Inc. And they edit out, in their capacity as board members, trustees, leaders of organizations, donors to causes—they edit out forms of change they don’t want to—they don’t really like." 


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Investing for Social Impact Is Complicated. Here Are 4 Ways to Simplify It. // The New York Times

Investing for Social Impact Is Complicated. Here Are 4 Ways to Simplify It. // The New York Times | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |
Many organizations measure the effect of investments meant to spur positive change, but the metrics they use, and their results, vary. Several are trying to make it easier. 

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Smart Contracts Make Slow Blockchains // MultiChain

Smart Contracts Make Slow Blockchains // MultiChain | Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems |

By Gideon Greenspan

"I’m not a fan of the term “smart contracts”. For a start, it has been used by so many people for so many different things, that we should probably just ban it completely. For example, the first known reference is from 1997, when Nick Szabo used it to describe physical objects that change their behavior based on some data. More recently, the term has been used for the exact opposite: to describe computation on a blockchain which is influenced by external events such as the weather. For now let’s put both of these meanings aside.


I want to focus here on “smart contracts” in the sense of general purpose computation that takes place on a blockchain. This meaning was popularized by Ethereum, whose white paper is subtitled “A Next-Generation Smart Contract and Decentralized Application Platform”. As a result of the attention that Ethereum has received, this meaning has become the dominant one, with banks (and others) working away on smart contract proofs-of-concept. Of course, since we’re talking about regulated financial institutions, this is mostly in the context of private or permissioned blockchains, which have a limited set of identified participants. For reasons that are now well understood, public blockchains, for all of their genius, are not yet suited for enterprise purposes.


So is the future bright for smart contracts in private blockchains? Well, kind of, but not really. You see:


Smart contracts make for slow and clunky blockchains.


If you know about the halting problem and understand how data dependencies prevent concurrency then you may already be convinced. But if not, make yourself a coffee, take a deep breath, and follow me down the rabbit hole…

Understanding smart contracts

In order to understand Ethereum-style smart contracts, we need to start with bitcoin, the first (and still most popular) public blockchain. The bitcoin blockchain was originally designed for one thing only: moving the bitcoin currency from one owner to another. But once it was up and running, people started embedding “metadata” in transactions to serve other purposes, such as digital assets and document notarization. While some bitcoiners fought these applications, an official mechanism for metadata was introduced in March 2014, with usage growing exponentially ever since.


As well as projects built on the bitcoin blockchain, many next-generation public blockchains were developed and launched, including NxtBitsharesRipple and Stellar. These were designed from the ground up to support a broader range of activities, such as user-created assets, decentralized exchange and collateralized borrowing. Each of these blockchains has a different set of features, as decided upon by its developers, and each must be upgraded by all of its users when a new feature is added. Things started to get rather messy.


Having been involved in some of these projects, Vitalik Buterin posed a simple but brilliant question: Instead of lots of application-specific blockchains, why not have a single public blockchain that can be programmed to do whatever we might want? This über-blockchain would be infinitely extendible, limited only by the imagination of those using it. The world of crypto-enthusiasts was almost unanimously convinced by this powerful idea. And so, with $18 million in crowd funding and to great excitement, Ethereum was born.


Ethereum is a new public blockchain with an associated cryptocurrency called “ether”, like hundreds which came before it. But unlike other blockchains, Ethereum enables anybody to create a “contract” inside the blockchain. A contract is a computer program with an associated miniature database, which can only be modified by the program that owns it. If a blockchain user wants to change a database, they must send a digitally signed message to its contract. The code in the contract examines this message to decide whether and how to react.


Ethereum contracts can be written in one of several new programming languages, such as Solidity and Serpent. Like most programming languages, these are Turing complete, meaning that they can express any general purpose computation. A key feature of Turing complete languages is the loop structure, which performs an operation repeatedly until some condition is fulfilled. For example, a loop might be used to print the numbers from one to a million, without requiring a million lines of code. For the sake of efficiency, programs written for Ethereum are compiled (i.e. converted) into more compact bytecode before being stored on the chain. Ethereum nodes then execute this bytecode within a virtual machine, which is essentially a simulated computer running inside a real one.


When an Ethereum contract is created on the blockchain, it sets up the initial state of its database. Then it stops, waiting politely until it’s called upon. When a user of the blockchain (or another contract) sends it a message in a transaction, the contract leaps into action. Depending on the code within, it can identify the source of the message, trigger other contracts, modify its database and/or send back a response to the caller. All of these steps are performed independently on every node in the network, with identical results.


To give an example, a simple Ethereum subcurrency contract maintains a database of user balances for a particular asset. If it receives a message to transfer funds from Alice to Bob, it will (a) check the message was signed by Alice, (b) check that Alice has sufficient funds, (c) transfer funds from Alice’s to Bob’s account in the database and (d) respond that the operation was successful. Of course, we don’t need Ethereum for that, because a simple bitcoin-style blockchain with native asset support can do the same thing. Ethereum really comes into its own for complex multi-stage business logic, such as crowdfunding, decentralized exchanges, and hierarchical governance structures. Or so, at least, the promise goes."...


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