An explanation of Quadratic Funding for public goods.
In this short piece I will help the reader understand the concept of Quadratic Funding (QF), a mechanism that encourages funding from small donors, in a more democratic way as the number of contributors matters more than the amount funded.
In the final portion I will go over the example of open source software as a public good that can benefit from the implementation of quadratic funding.
The concept was adapted from a paper written by Vitalik Buterin, Zoë Hitzig and Glen Weyl of liberal radicalism fame.
In Quadratic Funding the objective is to take capital constraints and use them to apply funding to a group of projects according to a formula where the amount received by a project is proportional to the square of the sum of the square roots of the contributions received:
Quadratic Funding is commonly described as a mathematically optimal way to democratically fund public goods that the community really cares about. QF optimizes matching funds by prioritizing projects based on the number of people who contributed. This way, funds meant to benefit the public go towards projects that really benefit a broad public, instead of things that only have a few wealthy backers
The cool thing about the formula is that individual donations get matched by a higher amount:
As Kevin Owocki, founder and CEO at Gitcoin, explains in this video, Quadratic Funding is about incentives. People are subject to conflicted influences all the time. The ideal situation would be to live in a world in which the incentives that are governing our behavior are in line with each other and not taking away from each other.
To describe that, he uses a term called Bentoism.
Bentoism is a theory that self-interest is multi-dimensional. Bentoism (an acronym for BEyond Near Term Orientation) is a wider lens for what’s valuable and in our self-interest. This includes what I as an individual want and need right now (Present Me). But it also makes space for the considerations of our future selves (Future Me), the people we rely on and who rely on us (Present Us), and the next generation (Future Us).
As mentioned previously, Quadratic Funding is a more democratic and scalable form of matching funding for public goods. For any agent participating in an economic system there is the idea that public goods are non rivalrous and non excludable. This would apply to things that we really rely on as a society or as economic actors (clean air, clean water, national defense, security, public infrastructure, digital privacy, open source software).
In some cases, governments and other organizations (such as charitable foundations) take over their production, but the lack of complete information about the preferences of consumers of public goods and other problems associated with centralized decision-making lead to inefficient spending. In such cases, it would be more expedient to create a system where consumers of public goods would have the opportunity to directly vote for certain options for their provision. However, when voting on the principle of “one person — one vote”, the votes of all participants are equal and they cannot show how important this or that option is for them, which can also lead to sub-optimal production of public goods.
A really important public good in this current information age is open source software. Open source software provides $400 billion worth of value every year to the economic system. Open source software developers are continuously working without getting fairly compensated for their contributions. The value captured by open source developers should be much closer tho the value created. We’re lucky that now in the blockchain ecosystem there are billions of dollars of capital that can potentially be captured by open source software developers instead of the back office of a large Wall St corporation. Gitcoin, is trying to build an ecosystem allowing developers to live from that capital. Gitcoin has a mission of growing open source software as it brings a lot of value to the world and one of the things it aims to do is change the incentives of open source software so that the people who are building open source software are being supported.
*This article is provided as general information only and is in no way intended as investment advice, investment research, a research report, or a recommendation. Any decision to invest or take any other action with respect to the digital assets discussed in this writing may involve risks not discussed herein and such decisions should not be based solely on the information contained in this article.
