Expand public goods funding beyond our immediate community

Translator's Preface

In this article, the author uses the concept of "Circles" as a starting point to progressively reveal that in our daily lives, we often only focus on the circle we are in, and often use distance as an excuse to ignore the funding of public goods outside the circle. The article also further explores how to expand the funding mechanism for public goods to a wider range of areas, beyond the circles we are directly in contact with, and create a truly effective public goods funding system. Through such an expansion, we can build a "diversified, civilization-scale public goods funding infrastructure."

Main content

This post was inspired by the work and thought leadership of the organizations explicitly mentioned in the article (such as Gitcoin, Optimism, Drips, Superfluid, Hypercerts, etc.), as well as many conversations with Juan Benet and Raymond Cheng about the characteristics of network capital vs. private capital.

Every funding ecosystem has core areas, as well as important but peripheral areas

Gitcoin did a great job visualizing the concept of Nested Scopes in a 2021 blog post. The original article describes a series of impact funding mechanisms, initially focused on the inner circle ("crypto"), then expanding to the next circle ("open source software"), and eventually affecting the entire world.

Owocki's illustration shows the evolution of crypto-native impact funding mechanisms, from "crypto funding crypto" to affecting the entire world

This is a good way to say it: Start by solving problems close to home, and then scale up.

Optimism also uses a similar perspective to explain its vision for retroactive public goods funding.

Optimism’s vision is to expand the scope of public goods it supports through retroactive funding

Optimism is within Ethereum, which is contained within “all Internet public goods”. “All Internet public goods” are contained within “global public goods”. Each outer domain is a superset of its inner domain.

Here is my generalized version of the four concentric circles meme.

I care about “everything”, but I don’t want to worry about how it’s funded

While I personally might not spend time thinking about deep-sea biodiversity or noise pollution in Kolkata, many people do care about these issues. Simply being aware of something often moves it from “everything” to “things I want other people to care about”.

Most of us don’t have the ability to assess what’s important outside of our immediate circle

We are usually able to reasonably assess the things that are most relevant to us in our daily lives. This is our inner circle, or the things we do care about.

In an organization, one’s inner circle might include your teammates, the projects you work closely on, the tools you use frequently, etc.

We can also evaluate some (but probably not all) things that are one degree upstream or one degree downstream of our daily sphere. These are things we sometimes care about.

In the case of software packages, the upstream might be your dependencies, and the downstream are the projects that depend on your packages. In an educational course, the upstream might include valuable lessons or resources that influenced the course, and the downstream might include students who recommend the course to their friends.

Whether they are software developers or educators, they can look further upstream to the research and the institutions responsible for that research, etc. Now we are entering the realm of caring about "everything".

However, most reasonable people stop caring too much about anything at this point. Once we go beyond one degree, things get fuzzy. These are things we want others to care about.

The risk is that we might use distance as an excuse not to fund these things, thus exacerbating the free-rider problem

While it’s true that everything in our inner circle depends on good funding from the outer circle, it’s hard to contribute more than our “fair share” (however one might try to calculate that share) to things that are one circle away from us. There are good reasons for this.

First, it’s hard to categorize things in large areas. A category like “all internet public goods” is so broad that if you look at it the other way around, you could argue that almost anything could be included in it and deserve funding.

Second, it’s hard to incentivize stakeholders to care about funding things outside their immediate circle, because the impact is so diffuse. I’d rather fund a whole person on a team I know than a faceless subset of a team I don’t know.

Finally, there are no immediate consequences for not funding these projects—assuming, of course, that others continue to fund them and don’t pull out.

So we have the classic free-rider problem.

Besides the fact that governments can print money, tax, and issue bonds to pay for long-term public goods projects, as a society we don’t have very good mechanisms for funding things outside our immediate circle. Most capital is being used for things that have short-term returns and more immediate impacts.

One ​​way to address this is to have people focus on funding things that are close to them (i.e., things they can personally evaluate), and to have mechanisms that continually push a portion of that money out to the periphery.

This, by the way, is exactly how private capital flows. We should try to emulate some of the properties of private capital.

The venture capital model for things without short/medium term returns works because private capital is composable and easily divisible

There is a model for funding hard tech with a payback period of 5-10+ years: it’s called venture capital. Of course, the amount of money that goes to long-term projects in any given year is more influenced by interest rates than by ultimate value. But venture capital is a proven model that has been able to attract and mobilize trillions of dollars over the past few decades.

The model works in large part because venture capital (and other sources of investment capital) are composable and easily divisible.

By composable, I mean that you can take venture capital money and also do an IPO, take a bank loan, issue bonds, raise capital through more exotic mechanisms, etc. In fact, this is expected. All of these funding mechanisms are interoperable.

These mechanisms are well composed because there are clear commitments about who owns what and how cash is distributed. In fact, most companies use a range of financing vehicles during their life cycle.

Investment capital is also easily fragmented. Many people pay into the same pension fund. Many pension funds (and other investors) invest as limited partners (LPs) in the same venture capital fund. Many venture capital funds invest in the same companies. All of these fragmentation events occur upstream of companies and the day-to-day affairs of companies.

These characteristics make the flow of private capital through complex network graphs very efficient. If a venture-backed company has a liquidity event (IPO, acquisition, etc.), the proceeds are efficiently distributed between the company and its venture capital firms, the venture capital firms and their limited partners, the pension funds and their retirees, and even from retirees to their children.

This is not the way public goods money flows through networks. We have a relatively small number of large water towers (governments, large foundations, high net worth individuals, etc.) compared to a large number of irrigation canals.

Private Capital vs. Public Capital Flows

To be clear, I am not advocating that public goods should receive venture capital funding. I am simply pointing out two important characteristics of private capital that do not have a counterpart in public capital.

How can we get more public goods funding flowing beyond our immediate circle

Optimism recently announced new initiatives for retroactive funding within its ecosystem.

In the last retroactive grant from Optimism, the range of projects that could be funded was very broad. For the foreseeable future, funding will be much narrower in scope, focusing on the closer upstream and downstream links in their value chain.

How Optimism currently considers upstream and downstream impacts

Feedback on these changes has been mixed, not surprisingly, with many projects that were once in scope now excluded from upcoming rounds.

Where 10 million tokens were earmarked for “on-chain builders” in the newly announced first round, on-chain builders received a disproportionately smaller share of funding in the third round — only about 1.5 million out of the 30 million available to compete. If these projects are receiving 2-5 times the retroactive funding compared to 1.5 million, what will they do with it?

One ​​thing they could do is put some of their tokens into their own retroactive funding or grant rounds.

Specifically, if Optimism funds DeFi apps that drive volume on the network, then those apps can fund frontends, portfolio trackers, and other apps that serve the impact they care about.

If Optimism funds dependencies on the core of the OP stack, then those teams can fund their own dependencies, research contributions, and so on.

What if projects take the retroactive funding they feel they deserve and put the rest back into circulation?

This is already happening in various forms. The Ethereum Attestation Service now has a scholarship program for teams building on its protocol. Pokt just announced its own retroactive funding round, integrating all tokens received from Optimism (and Arbitrum) into this round. Even Kiwi News, which received less than the median funding in round three, has implemented its own version of retroactive funding for community contributions.

Meanwhile, Degen Chain has pioneered a more radical concept of giving community members token allocations, requiring them to give those tokens away to other community members in the form of “tips.”

All of these experiments are directing public goods funding from central pools (like OP or the Degen Treasury) to the margins, expanding their reach.

The next step is to make these commitments explicit and verifiable.

One ​​way to do this might be for projects to determine a Floor Value and a Percentage Above The Floor they are willing to commit to their own pool.

For example, maybe my floor is 50 tokens, and the percentage I’m willing to invest above my floor is 20%. If I receive 100 tokens total, then I’ll allocate 10 tokens (20% of the 50 tokens above my floor) to funding the edge of my network. If I only receive 40 tokens, then I’ll keep all 40.

(My project did something similar in the last Optimism grant, by the way.)

In addition to pushing more money to the edge, this also serves the critical function of helping public goods projects build a cost base. In the long run, the message to projects that consistently receive less funding than expected is that they are mispricing their work or are undervalued in the ecosystem where they receive funding.

Projects with surpluses will be evaluated in subsequent rounds not only on their own impact, but also on the broader impact they create through good capital allocation. Projects that don’t want to take on the burden of running their own grant programs can choose to park their surpluses somewhere else productive, like the Gitcoin matching pool, the Protocol Guild, or even choose to burn them!

In my opinion, these two values ​​determined by projects before they receive funding should be kept private. If a project receives 100 tokens and donates 10, no one else should know if their values ​​are (50, 20%) or (90, 100%).

The final step is to connect these systems.

The examples of EAS, Pokt, and Kiwi News are inspiring, but they all require setting up new projects, then applying/exchanging/transferring grant tokens to new wallets, and ultimately transferring funds to new beneficiaries.

Protocols like Drips, Allo, Superfluid, and Hypercerts provide the underlying infrastructure for more composable funding flows — now we need to connect these pipes, like this pilot project of Geo Web.

The mission of this cycle is to create a public goods funding system that really works. Then we start to promote it

In crypto, we are still in the stage of experimenting with various mechanisms to decide which projects to fund and allocate funds. Compared with decentralized finance (DeFi), the infrastructure of public goods funding is still immature, less composable, and less battle-tested.

To get this beyond the experimental stage and to scale, we need to solve two problems:

1. Measurement to prove that these mechanisms not only work, but that they work better than traditional public goods funding models (see this post [1] for why this is an important problem worth working on, and another post [2] for an analysis of Gitcoin’s long-term impact);

2. Explicit commitments: Explicit commitments about how “profits” or surplus funds flow to external circles.

In venture capital, there is always an investor behind the investor—ultimately, this could be your grandmother (or, more accurately, all of our grandmothers). Each of these investors is incentivized to allocate capital efficiently so that they can be trusted to control more capital allocations in the future.

For public goods, there is always a group of closely related actors that you rely on, both upstream and downstream of your work. But there is currently no commitment to share this surplus with these entities. Until such commitments become the norm, it will be difficult for public goods funding to scale beyond our immediate circle.

We haven’t yet reached a stage where we are better than the traditional model (image from the Gitcoin whitepaper)

I don’t think it’s enough to just promise “we’ll fund these projects when we reach a certain scale.” It’s too easy to move the goalposts. Instead, these commitments need to be established early and baked into the funding mechanisms and grant programs that are built as foundational elements.

I don’t think it’s reasonable to expect the coffers of a few whales to fund everything. This is the water tower model we have in traditional governments and large foundations.

But if we are small, the more we make explicit commitments to fund our dependencies, the more we demonstrate that there is indeed a market for public goods, thereby expanding the total addressable market (TAM) and changing incentives.

Only then can we have something truly scalable that can gather its own momentum and create the "diverse, civilization-scale public goods funding infrastructure" we dream of.