Forward

This document is an overview of a new concept of applying network state theory to third sector business models. It looks at the application of emerging technologies commonly used within network states and how they could be applied to give a new look at third sector business models. The document assumes the reader has a basic understanding of The Network State and emerging technologies such as DAOs, NFTs, blockchain, cryptocurrencies, and extended reality technologies. There will be links to resources provided but a small understanding of the aforementioned will help the reader.

Key words: Third Sector Organisations, Network State Theory, NFT, Blockchain, Decentralisation, Metaverse, DAO, Token Economics, Smart Contracts.

Introduction

Using network states to improve third sector business models seems like a match made in heaven. A network state is made up of a community of people who are connected online with a common alignment towards some form of change to standard societal principles of living with the aim for a better standard of life (Srinivasan, 2002).  Third sector organisations are created physically and have an online presence with an objective of improving wellbeing and wealth through supporting communities via service provision (Northern Bridge, 2023). They are basically created for the same purpose just across different mediums, one being physically initiated and the other digitally. 

This document first starts with a brief review of The Network State. Once the reader understands network state theory a comparison to similarities with third sector organisations is carried out. This is then followed by a review of third sector organisations which looks at how they are run and some of their operational strengths and weaknesses. The writer will then propose a new look at how third sector business models could be improved through application of network state theory and emerging technologies.The final section will look at some areas for future consideration.

Overview of The Network State

The concept of a network state is the possibility of like minded individuals forming an online community and then bringing that community offline through acquisition of properties, ultimately getting diplomatic recognition through the ability to scale, action and mobilise itself; characteristically like a state despite not being of a centralised manner.

Hypothetically it is not a bad idea, it has the potential to unite people from around the world under a common goal. There is scope for entrepreneurship and financial gain for the participants as is the case for nation states. Network states are not hard to start either. One could create a network state simply with a PC and an internet connection.

A network state is born in the cloud. It is an online community that connects users to each other irrespective of their actual physical location. From here the state is entrenched. Financial principles are designed (token economics), governance established (smart contracts), decision making processes integrated (DAO), a virtual capital is formed (metaverse) and consensus systems set up (blockchain). There are also physical aspects of a network state, but these are the online aspects and in principle the network state could exist in this manner, however it would be hard to get diplomatic recognition for a purely online entity. In order to give diplomatic recognition the best chance a physical footprint is required. To do this crowdfunding within the network takes place. Properties around the globe are then purchased on the back of this establishing a global physical footprint (Srinivasan, 2002). The idea is that, through scaling, this concept can become large enough to be self-sustaining, allowing for application to state status; much in the same way the Vatican did in 1924 although the Vatican did it for slightly different reasons (Klein, 2013).

Although a nice idea realistically there are several areas that would need to be considered. For one there would undoubtedly be push back from governing nation states on grounds such as how to control crime. The diversion of taxed income from members of the nation state when network state participants would undoubtedly need to use services paid for by general citizen taxes, even if only for the beginning stages of creation. The overriding reason to do so – the Vatican did so to end political and religious turmoil – there would need to be a huge beneficial reason to the nation states as to why they would want to recognise a new state that could act as competition.

Although this sounds bad it’s not to say these issues cannot be overcome rather one does not simply overcome them. But if they can be overcome then great! Who wouldn’t rather live in a society where accountability is at the forefront of the economy and connectedness and collaboration are driving factors of civilization.

However, if different network states started to, or tried to, appear all over the place it would likely lead to chaos, even if unintentionally. It would make more sense to concentrate the concept of the network state in areas that would feel the most benefit so as not to overpower reality with conflicting network and nation states. As aforementioned the core principle of a network state is to increase the quality of life for its members. It stands to reason then that if this concept has such a power it should be applied to the people in current nation states that have the lowest qualities of life. The current method of helping people in society who have the lowest quality of life is through third sector businesses, which surprisingly share many qualities with network states.

Qualities shared between network states and charities

A description of a network state is below, which when broken down has many similarities with third sector businesses:

“A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.” – (Srinivasan, 2002)

This can then be broken up into two parts. The first part could also be a description of a third sector organisation, as shown.

“A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility”

When changing the phrase network state to nonprofit it describes a third sector organisation. 

“A nonprofit is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility”

The final part of the description pays homage to the more technical areas involved with network states. It mentions the use of an integrated cryptocurrency, smart contracts used to create consensual governments and virtual capitals. Although nonprofits do not readily make use of these types of technologies they do have alternative functions in place that do much the same thing. For example a nonprofit has a board of directors which acts like a consensual government, most have a central digital presence in the form of a website, all use a financial asset in the form of fiat currency and some have a form of real estate footprint, usually in the form of an office building. 

It is possible then to see the similarities between both. Through the characteristics of each entity comparisons can be made. Even though charities don’t make use of technology to fulfil operations in the same way a network state does, it doesn’t mean web3 technologies couldn’t be used to help address some of the issues that are common in third sector business, of which there seem to be many.

Research on Charities

There are several areas in which charities and charitable collecting harbour inefficiencies. This could be in the form of high commissions taken on donations, theft of donations at various levels or other deceitful activities. 

The Charity Commission shared several examples of insider fraud serving as good examples of the types of issues happening at the highest level of nonprofits (Charity Commission , 2018). In total these examples led to a loss of over £1 million with the crimes spanning multiple years, in one case over 7 years. The employees who carried out these events were all individuals of trust who abused their positions. In most cases the crimes were only discovered due to a change in human resource, without such a change who knows how long they could have gone on. In these cases blockchain would have been able to help discover the instances of fraud due to the transparent and immutable ledger capabilities it offers. Adding blockchain to financial transactions adds a layer of accountability since one can follow transactions on chain to see where all finances in and out end up.

Other instances of inefficiencies can be seen in social giving platforms or commissions on donations received through social media. Tik Tok is under pressure due to being accused of taking 70% of donations, in the form of a handling charge, from natural disaster victims (Cybleinc, 2023). Although well within Tik Tok’s rights to charge what it wants to collect donations it is unethical to do so, especially without letting users know.  There have also been instances of fake accounts being set up claiming to be charities or collecting on behalf of disaster victims while in actual fact they are scammers self profiteering (Gelbart, 2023), this is not a new practice either, it is something that has been happening for years (Osborne , 2010). It would be useful for all registered charities to have a digital wallet address, or something like an eth domain. That way the nonprofits could share this address across marketing outlets so that donors are able to send donations directly to the organisation confidently knowing that it is going where it should.

There are examples of issues at government level but not directly related to charity. Nadhim Zahawi is an example of an English politician who was investigated and fined by the HMRC for tax related issues (Forrest, 2023). Although not an example of fraud within a charity it is an example of how inefficiencies and lack of transparency in the current financial system can allow for errors which can be abused by people in the highest levels of power, potentially to suit the needs of the select few. Similar to how those at the very top level of third sector organisations can manipulate operations and financial reporting for personal gain as we have seen in the aforementioned examples.

It will come as no surprise then that 69% of charities asked in the charity fraud report experienced a financial loss, 58% said they expected the risk of fraud to increase over 12 months, with 52% saying that an over reliance on trust, something blockchain is known to address, as a common obstacle to fraud prevention. Interestingly 15% of charities said their investment in fraud prevention was insufficient, despite thinking the threat is likely to increase (FAP, 2022).

Aside from fraud impacting charities there are also several other types of issues that impact charities. These are listed here:

• Limited government funding for nonprofit organisations
• Stable income and accurate budgeting issues
• Pressure on nonprofits to show results and strategic solutions
• Not running nonprofits like a business and ignoring the bottom line
• Attracting and retaining the right talent over other sectors
• A significant increase in the need for nonprofit services
• Decreasing demand for nonprofits due to their increased success becoming an issue
• Managing digital transformation and demographic shifts

 (Communications, 2023)

Some of these issues can be addressed through the use of the advanced technology that is common within network states. For instance funding options could be widened through things like NFTs, the capacity to adopt strategic solutions would also increase due to the opportunities such technologies present.

The point about demand decreasing for nonprofits is not something the writer considers an issue. If demand for nonprofits is decreasing then their social mission must be being achieved. The combination of network state theory and nonprofits is designed to increase the success of third sector operations and reduce the overall need for multiple nonprofits working towards the same aim.

The next section will look at how aspects of a network state could be applied to a third sector business model. It will do this on a micro level by looking at the key components of the business model and how they relate to the primary elements of a network state, emphasising how the network state principles could improve current processes.

Application of Network State Theory to Third Sector Business Operations

All third sector businesses have certain aspects to them which must exist for them to be classed as nonprofits, for example they all have a social mission that is the focus of operations. Here some of these features and possible enhancements are considered.

All nonprofits must have a board of trustees. This is usually a group of people, minimum of three, that make decisions for the good of the organisation and inform the CEO as to expectations. They help and advise the CEO in operations and often the CEO will need to seek approval from the trustees when making critical decisions. The decision making process that is going on here is similar to how decentralised autonomous organisations work in terms of collective decision making. A DAO could in theory achieve the same as a board of directors.

Keeping records in third sector organisations is essential to make sure resources are tracked and accounted for, the impact the organisation is having towards its social aim also needs to be tracked. Blockchain is a key part of network states with one use being for census taking as the community grows. It could be applied in a similar way in third sector businesses by keeping a census of service users in a private and confidential way. It could also be used to improve accountability of financial transactions through application with a cryptocurrency, this way all capital in and out could be transparent, trackable and indisputable.

The ability to communicate effectively is essential for all business types, not just third sector ones. However, third sector organisations often have a specific need for effective communication. For example they have to be able to contact service users which can be difficult due to the distances sometimes needing to be covered. Digital collaboration and communication tools are the backbone of network state theory. Network states rely heavily on being able to energise people remotely through efficient communication. If third sector organisations put network state level communication practices in place it would likely lead to a greater service level output due to ease of communication increasing.

Third sector organisations rely heavily on their community fundraising abilities to generate a source of revenue, alongside things such as government grants and private donations. This is also a key characteristic of a network state. Establishment of a network state in the physical world depends on its ability to monetise the network and buy physical world assets. The focus of growing a connected network with established lines of communication allows a network state to be effective in community fundraising due to the capacity of mobilising the network nodes. This ability to mobilise the network in such a manner would also be beneficial towards activities such as gathering public awareness, lobbying and advocacy which are all also third sector operations.

An overriding factor to the success of a combination of third sector organisations and network state theory is the strength of the network. A network that is large, connected, able to communicate and mobilise itself can build momentum. Momentum is key to facilitating change; it means that persistence and perseverance can be achieved which will be essential to moving forward against barriers. Third sector organisations spend a lot of resources creating a strong and connected community as they rely on it in order to be effective at tasks such as fundraising and spreading of their social missions. This means that the initial part of embracing network state characteristics, the creation of a connected network, is most likely present in most nonprofits.

Areas for further consideration 

Looking at third sector organisations as network states is certainly an interesting and ambitious idea. It presents several solutions to some common issues faced by third sector organisations most notably the ability to drastically reduce fraud and increase trust. It also offers the ability to improve the everyday operations of third sector businesses by adoption of network state principles.

For all the benefits that exist there are also barriers that could make it difficult for network state theories to be adopted by third sector businesses. Areas such as capacity for digital transformation, human resource skill set and capabilities, scalability in order for the network to reach its potential, and the financial costs of technology.

Consideration should be put to the ethics of a combination of network state theory and third sector organisations. It could be hard to maintain direction on the social mission as the size of the network increases. There should be some form of mechanism in place to ensure mission drift does not occur.

There could be several regulatory challenges with this concept. In most cases third sector organisations have a slightly more complex regulatory environment than for profits. This combined with the uncertain regulatory environment of advanced technology is likely to present barriers in some shape or form in the future for nonprofits adopting this concept.

Looking at the application of network state theory over the entire third sector could be interesting. This article looks at how it could be applied individually to singular nonprofits but looking at what the third sector would be like if all nonprofits operated in this manner and how this could impact their abilities to address social issues would help understand the concepts macro application.

Applying the concept outlined in this paper to an actual use case would allow a more indepth look at how the technology and operations would work in a third sector organisation that is harnessing network state theories and concepts.

Conclusion

The use of network state theory and emerging technologies to reinvent third sector business models presents a promising approach to addressing social challenges. By leveraging the principles of network states, third sector organisations can adopt new approaches to fundraising, governance, and service delivery. However, this approach requires careful consideration of regulatory, ethical, and resource related challenges as well as a strong focus on community engagement and scalability. With the right strategy and execution, network state theory and emerging technologies have the potential to transform the third sector and create a more just and equitable society.

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