Let public goods funding go beyond the circles around us.

Translator's Preface

In this article, the author uses the concept of 'Circles' as a starting point to reveal layer by layer that we often only follow the circles we are in in our daily lives, often using distance as an excuse to ignore the support for public goods outside of our circles. The article also explores how to extend the mechanism of supporting public goods to a broader field, beyond the circles we directly encounter, and create a truly effective system for supporting public goods. Through such an extension, we can build a 'diverse and civilized scale infrastructure for supporting public goods'.

Main Content

*The inspiration for this article comes from the work and thought leadership of organizations explicitly mentioned in the text (such as Gitcoin, Optimism, Drips, Superfluid, Hypercerts, etc.), as well as multiple conversations with Juan Benet and Raymond Cheng about the characteristics of network capital and private capital.

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

In a blog post in 2021, Gitcoin visualized the concept of nested scopes. The original text described a series of impact funding mechanisms that initially focused on the inner circle ('encryption') and then expanded to the next circle ('Open Source software'), ultimately impacting the whole world.

Owocki's illustrations show the evolution of native funding mechanisms, from "encryption funding encryption" to gradually expanding to impact the entire world

This is a good saying: Start by solving problems near home, then scale up.

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

The vision of Optimism is to expand the scope of its support for public goods through retroactive funding

Optimism is within the Ethereum (ETH) network, which is included in the "all internet public goods". The "all internet public goods" is included in the "global public goods". Each outer domain is a superset of its inner domain.

Here is my summary version of the four concentric circle memes.

I care about "everything", but I don't want to worry about how they are funded

Although I personally may not spend time thinking about the biodiversity of deep-sea creatures or the noise pollution in Kolkata, there are indeed many people who care about these issues. Simply being aware of something often shifts it from the realm of 'everything' to 'something I hope others care about.'

Most of us do not have the ability to evaluate important affairs outside our surrounding circles

We are usually able to assess reasonably well the things that are closely related to us in our daily lives. This is our inner circle, or the things we truly care about.

In an organization, a person's inner circle may include your teammates, the projects you closely collaborate on, and the tools you frequently use.

We can also assess some (but maybe not all) of the things that are one degree upstream or downstream in our daily circle. These are things that we sometimes care about.

In the case of a software package, the upstream may be your dependency, and the downstream may be projects dependent on your package. In educational courses, the upstream may include valuable courses or resources that influence the course, while the downstream may include students who recommend the course to friends.

Whether it is software developers or educators, they can seek more upstream research and institutions responsible for these researches, etc. Now we are entering the field of caring about 'everything'.

However, most rational people will stop caring too much about anything at this point. Once we go beyond a certain range, the situation becomes blurred. These are things we hope others care about.

The risk is that we may use distance as an excuse and not support these things, thereby exacerbating the free riding problem.

Although all the affairs within our inner circle rely on the good financial support from the outer circle, which is a fact, it is difficult for those outside of our circle to contribute more than their "Fair Share" of funds to the affairs (although some may attempt to calculate this share). There are valid reasons for this.

First of all, it is very difficult to classify in a large domain. The category of "all Internet public goods" is too broad, so that if you change your perspective, you can advocate that almost anything can be included and worthy of financial support.

Secondly, it is also difficult to incentivize stakeholders to care about matters outside their immediate circle because the impact is so dispersed. I would rather support the entire team I know, rather than an unknown individual from a team I don't know.

Finally, not funding these projects does not have immediate consequences--of course, this is assuming that others continue to fund them and do not withdraw.

So we have encountered a typical free-rider problem.

In addition to the government being able to pay for the costs of long-term public goods projects through printing money, taxation, and issuance of bonds, as a society, we do not have a good mechanism to fund things outside of our most immediate circle. Most capital is used for things that have short-term returns and closer impact.

One way to solve this problem is to focus people on funding things that are close to them (things they can personally evaluate) and to establish mechanisms to continuously push some funds to the periphery.

By the way, this is exactly how private capital flows. We should try to emulate some of the characteristics of private capital.

The reason why the risk investment model of things without short-term/medium-term returns is effective is that private capital is combinable and easy to divide.

There is a model of funding hard tech with a return cycle of 5 to 10 years or more, which is called Venture Capital. Of course, in any given year, the scale of funds flowing into long-term projects is more influenced by the Interest Rate rather than the ultimate value. However, looking at the situation of attracting and mobilizing trillions of dollars of funds over the past few decades, venture capital is a proven effective model.

The reason why the model is effective is largely because venture capital (and other sources of investment capital) are composable and easy to separate.

The so-called combinable, what I mean is that you can accept venture capital at the same time, you can also conduct Initial Public Offering (IPO), obtain bank loans, issuance bonds, and raise capital through more peculiar mechanisms, etc. In fact, this is what people expect. All these financing mechanisms are interoperable.

These mechanisms are well composed, as there are clear commitments regarding who owns what and how cash is allocated. In fact, most companies use a range of financing instruments throughout their lifecycle.

Investment capital is also easily divided. Many people contribute to the same pension fund. Many pension funds (and other investors) invest in the same venture capital fund as limited partners (LPs). Many venture capital funds then invest in the same company. All of these divisional events occur upstream of the company's daily operations.

These features make the flow of private capital in complex network graphs very efficient. If a venture capital-backed company experiences a Liquidity event (such as an Initial Public Offering, acquisition, etc.), profits will be efficiently distributed between the company and its venture capital firms, venture capital firms and their limited partners, pension funds and their retirees, and even transferred from retirees to their children.

This is not the way public goods funds flow on the network. Compared to a large number of irrigation channels, we have relatively few large water towers (such as governments, large foundations, high-net-worth individuals, etc.).

Private Capital VS Public Capital Flow

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 correspond to public capital.

How can we enable more public product funds to flow beyond our immediate circle

Optimism recently announced a new program for retroactive funding within its ecosystem.

In the previous retroactive funding of Optimism, the scope of projects that could be funded was very wide. In the foreseeable future, the scope of funding will be much narrower, focusing on the upstream and downstream links closer to its value chain.

How does optimism currently consider the impact of upstream and downstream

It is not surprising that there are different feedback opinions about these changes, as many projects that were once within the funding scope are now excluded from the upcoming rounds.

In the newly announced first round of financing, 10 million Tokens were designated for 'on-chain builders', while in the third round of financing, the funding share for on-chain builders disproportionately decreased - out of the available 30 million Tokens, only about 1.5 million were allocated. If these projects were to receive retroactive funding 2-5 times more than the 1.5 million, how would they utilize these funds?

One thing they can do is to allocate some tokens to their own retrospective funding or allocation rounds.

Specifically, if Optimism funds Decentralized Finance applications that drive network volume, these applications can fund front-end, portfolio trackers, and other services that serve the applications they follow.

If Optimism funds the dependencies of the OP stack core, these teams can fund their own dependencies, research contributions, etc.

What if the project uses the retrospective funds they believe they deserve and invests the rest in circulation?

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

At the same time, Degen Chain has pioneered a more radical concept, giving community members Token allocations and requiring them to give away these Tokens to other community members in the form of 'tips'.

All these experiments are about redirecting public good funding from central pools (such as OP or Degen treasuries) to the edge, expanding their reach.

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

One possible implementation is for the project to determine a Floor Value and a Percentage Above The Floor that they are willing to contribute to their own funding pool. For example, my Floor Value may be 50 Tokens, and I am willing to contribute 20% above the Floor Value. If I receive a total of 100 Tokens, I will allocate 10 Tokens (20% of 50 Tokens above the Floor Value) to fund the edges of my network. If I only receive 40 Tokens, I will keep all 40 Tokens.

(By the way, my project also did something similar in the last Optimism funding round.)

In addition to pushing more funds towards the edge, this also serves a critical role in helping public goods projects establish a cost basis. In the long run, for projects that continue to receive less funding than expected, the message conveyed is that they have priced themselves incorrectly or are undervalued in the funding ecosystem.

Projects with surplus will not only be evaluated based on their own influence in subsequent rounds, but also consider the broader impact they create through good capital allocation. Projects that do not want to operate their own funding program can choose to park the surplus in other productive places, such as the Gitcoin matching pool, Protocol Guild, or even choose to destroy the surplus!

In my opinion, the two values determined before the project raises funds should be kept confidential. If a project receives 100 Tokens and donates 10 Tokens, others should not know whether their values are (50, 20%) or (90, 100%).

The final step is to connect these systems together.

The examples of EAS, POKT, and Kiwi News are inspiring, but they all require establishing new projects, and then applying / redeeming / transferring funding tokens to new wallets, and ultimately transferring the 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, just like this pilot project from Geo Web.

The task of this cycle is to create a truly effective public goods funding system. Then, we will start promoting it

In the field of encryption, we are still in the stage of experimenting with various mechanisms to determine funding for which projects and the allocation of funds. Compared to Decentralized Finance (DeFi), the infrastructure for public product funding is still immature, with poor composability and a lack of practical testing.

To take all of this beyond the experimental stage and scale it up, we need to address two issues:

1. The measurement should not only prove the effectiveness of these mechanisms, but also demonstrate that they are more effective than the traditional public goods funding model (see this post [1][2], understand why this is an important issue worth people's efforts, as well as another postAnalysis of the long-term impact of Gitcoin）;

2. Clear commitment: Clear commitment on how 'profits' or surplus funds flow to external circles.

In venture capital, there is always an investor behind the investor - ultimately, it could be your grandmother (or more accurately, all of our grandmothers). Each of these investors is motivated to allocate capital efficiently, so as to be trusted in the future and have more control over capital allocation.

For public goods, there is always a closely related group of participants, whether upstream or downstream of your work, you rely on them. But there is currently no commitment to share these surpluses with these entities. Until such commitments become the norm, it will be difficult for public goods funding to surpass our direct circles and achieve scale.

We have not yet reached a stage where we are better than traditional models (picture from Gitcoin White Paper).

I believe that just promising "when we reach a certain scale, we will fund these projects" is not enough. This can easily change goals. Instead, these commitments need to be established early on as foundational elements integrated into the funding mechanism and allocation projects.

I think it's unreasonable to expect the Whale treasury to finance everything. This is the water tower model we use in traditional governments and large foundations.

But if we are still small in scale, the more specific the commitment to provide support for our dependencies, the more it can demonstrate the existence of a public good market, thereby expanding the Total Addressable Market (TAM) and changing the incentive mechanism.

Only in this way can we have something truly worth promoting that can accumulate its own power and create the "diverse, civilized and large-scale public goods funding infrastructure" that we dream of.