Crypto community member Carl Cervone has shared his views on the funding allocation mechanism for public goods infrastructure. He believes that to solve the free-rider problem, it is not necessarily about constantly encouraging everyone to focus on major issues, but rather to have individuals concentrate on what they care about most so that market efficiency can be maximized. He cites the case of Optimism as an example.
In general, people tend to worry about things that directly affect themselves, as they may directly impact their lives. Most people can reasonably evaluate things they encounter in their daily lives, including matters concerning family and friends, work projects, and frequently used tools.
However, when a person has to focus on matters beyond their scope, their attention becomes diluted. Therefore, in most cases, people can only focus on things within their own perspective.
This also applies to funding. It is difficult to motivate stakeholders to care about things beyond their immediate circle. People would rather fund someone they know than an unfamiliar institution or team. This results in the classic free-rider problem.
Apart from governments that have the ability to finance long-term public goods projects through printing money, taxation, and issuing bonds, most societies lack effective mechanisms for people to provide funding for issues outside their circle of concern. Capital flows towards short-term returns and matters that have a more direct impact on individuals.
Cervone believes that the most effective way to solve the free-rider problem for public goods is not to force everyone to focus on issues beyond their core circle, but to encourage people to focus on what they care about and provide funding. Then, projects that receive funding can actively push some of the funds towards areas beyond their own circle. This is essentially emulating the fluidity of private goods mechanisms.
The risk is that people use distance as an excuse not to fund these public goods and perpetuate the free-rider problem. Therefore, it is important to construct an effective system for allocating public goods funding.
Cervone suggests that by allowing resources to be freely combined and separated, similar to the model of venture capital, funding for public goods can be facilitated. The venture capital model has been in use for many years and has been proven to provide returns for specific technologies over a period of 5 to 10 years. This model is effective because the capital is composable and divisible.
Composability means that entrepreneurs can obtain venture capital and also conduct IPOs, bank loans, issue bonds, and raise funds through other mechanisms. All these funding mechanisms are interoperable.
By having clear commitments on what they have and how cash is allocated in different situations, these mechanisms combine well together, and most companies use a range of financing tools throughout their lifecycle.
Investment capital can also be easily divided. For example, many people invest in the same fund, and the liquidity in these funds is reinvested in diversified portfolios rather than individual companies, making it easier to reach upstream and downstream beyond their circle of life.
To provide funding for things without short- to medium-term returns, it is possible to emulate the model of venture capital, allowing resources to be freely combined and separated, flowing to the most efficient places.
Optimism’s Retroactive Public Goods Funding (RetroPGF) and subsequent discussions may provide a possible model for the allocation of public goods funding in the future. The community believes that RetroPGF should focus on upstream and downstream areas, such as research on the OP Stack or funding for ecological projects, rather than just staying within the core functionality of Optimism.
Optimism further focuses on funding in specific areas, with each round of RetroPGF focusing on a particular domain to concentrate and maximize the rewards for funded projects. For example, the fourth round of funding will primarily focus on developers on the chain, funding teams that drive important projects on the chain. The fifth round will focus on upstream OP Stack development, the sixth round on upstream governance ecology, and the seventh round on downstream developer tools.
By consciously segmenting and focusing, Optimism RetroPGF allows resources to flow to important areas beyond the core functionality circle.
There are differing opinions within the community. Opponents argue that many important projects are outside these areas, and excessive focus and division may cause these projects to miss opportunities.
In specific terms, if Optimism provides more funding to DeFi applications on its own network, these DeFi applications can further fund front-end development within their core circle, portfolio tracking products, and even initiate their own funding programs, ultimately expanding the scope of funding as much as possible.
This has already happened in various forms. For example, EAS recently launched its first scholarship program. POKT Network and Kiwi News have also started their own RetroPGF initiatives. Degen Chain even requests its community members to distribute tokens to other communities as tips.
Funds received from funding can be split among other projects according to their needs or combined with other funds, applying the private goods mechanism to the allocation of public goods funding to enhance market efficiency.
All these experiments have successfully moved public goods funding from central funding pools (such as the Optimism treasury) to areas outside the core circle, effectively expanding the impact of funding.
The next step is to make these commitments clear and verifiable. One potential method is to have projects publicly establish a threshold and allocation percentage. The threshold refers to the minimum number of tokens a project needs to distribute externally, and if it is not exceeded, no distribution will be made. The allocation percentage indicates how many tokens should be distributed externally.
For example, if a project sets a threshold of 500,000 OP tokens and an allocation percentage of 80%, and the project ultimately receives 1 million OP tokens, it will distribute (100-50)*80% = 400,000 tokens to other projects.
With public commitments and transparent token circulation on the blockchain, Optimism can have a more complete reference when redistributing funding tokens.
Projects that consistently receive less than expected funding will start to consider whether their pricing is incorrect or if the ecosystem undervalues their worth. Profitable projects will consider not only their own impact but also how they can have a broader influence externally.
It is not enough for projects to provide funding for matters beyond their circle only when they reach a certain scale and success. Nor should less successful projects and whales be relied upon to fund all public goods.
A better approach is to make clear commitments to provide funding for public goods from the early stages of a project and establish an effective and proactive mechanism for the development of public resources.
Optimism and public goods