Transcription: Vitalik Buterin on Funding Public Goods 

Protocol Labs
Protocol Labs
Transcription: Vitalik Buterin on Funding Public Goods

Funding the Commons | Vitalik Buterin | co-founder and inventor of Ethereum

What are the best ways to fund public goods – and what are the incentives to support the ecosystem?

For insights, we turn to Vitalik Buterin, co-founder and inventor of Ethereum, who also helps to lead the Ethereum Foundation. In this impactful talk before the Oct 2022 merge took place, he discusses mechanisms for funding public goods, giving his view of the latest thinking around novel public funding experiments and exciting new projects in the ecosystem.

Here are three key insights shared during the talk:

  • Public goods funding is essential to help build trust in the blockchain ecosystem. Open source code, clear documentation and meetups that encourage collaboration and problem solving contribute to building a solid foundation.
  • How exactly do we fund public goods? Vitalik outlines four main ways, including individual and corporate donations, one-time pre-mine and pre-sales, and ongoing issuance.
  • A long term and systemic solution to the problem of public goods funding may lie in apps and protocols. Funding can’t come from individuals alone.

Interested in the details? Dive into the full transcript of the talk below:

# Public goods funding in the Ethereum ecosystem - 0:26 (opens new window)

Thank you for having me. Let’s focus on public goods funding in the Ethereum ecosystem. Let’s look at some of the very specific experiments and warnings that the Ethereum ecosystem has had, from its attempts to fund public goods, that are necessary to survive and prosper. Let’s see how some of those earnings might be applicable to all public goods funding in the future.

“Blockchain communities are a very natural fit for public goods. This is interesting because a lot of the early ideology of blockchains was really focused on private goods. It's focused on things like creating really powerful and robust individual property rights, markets, systems for trade creation, decentralized exchanges and similar things, but public goods are actually hugely important to blockchain communities.”

So I’m just going to give a few examples of this: Public goods that are critical for things like the Bitcoin community, the Ethereum community and other blockchain communities to survive.

Open source client code is a very big one, it connects to the Ethereum network. It needs to have an Ethereum client, the Ethereum client interprets the Ethereum rules, it needs to be able to process transactions quickly, work needs to go into making the clients upgrade and support all of the latest protocol features that the community wants to add.  You need a lot of very hard work on optimization to increase the scalability.

Even Ethereum blockchain itself: the gas limit has increased by a factor of five since the and the platform launched in 2015. There's a lot of work that went into that and went into simultaneously making it safer. So open source client code is a public good.

“If you create a piece of software that someone can use to connect to the network, then you basically have to make it open source. Otherwise, people are not going to trust it.”

If you do make it open source, then anyone can go and copy it. So you either are offering it to the entire community or you're offering it to no one.

So let's say, as a classic example of public good – protocol research, the math cryptography, analysis, auditing – everything that goes into actually creating upgrades to the Ethereum protocol: 100 percent public good.

Documentation to help people understand what's going into Ethereum and things that help people actually get into Ethereum, understand what the different parts of the ecosystem are up to, how to use some different pieces of software. Also very much a public good.

In blockchain communities, there are more public goods than private goods

Also, community building, like running meetups, running online events and other activities to help people in the community link together and talk to each other.

There's definitely a private good component to that. If you run a meetup, then theoretically you could charge for it and people would be willing to pay because they want to listen, but there's also very large positive spillovers that happen as a result.  If someone starts understanding their ecosystem better, they're more likely to contribute.

If you just try to run all of that community building with private goods oriented mechanisms, like making people pay to attend everything, then you're going to end up getting much less community building work happening than the amount that actually makes sense for the community.

“In blockchain communities, public goods are hugely important, perhaps more so than private goods.”

# How do we fund public goods initiatives? - 4:19 (opens new window)

If public goods are so important, then the next question is: how do we actually fund the public goods? The problem of funding public goods can be broken up into two major sub-problems:

  1. Where does the money come from?
  2. What mechanism decides who receives the money?

Let’s consider where the money comes from to start. In the crypto community in general, there's four major sources that we've seen:

  1. Individual donations: There have been plenty of cases of individuals donating money to core developers and teams.
  2. Corporate donations: This could happen through corporations giving donations of money directly or through hiring employees to work on public goods projects. For example, in the Bitcoin community, Blockstream hires Bitcoin core developers. In the Ethereum community, Consensus, for example, has hired a lot of people that do upwards of core development work on Ethereum.
  3. One-time pre-mines and/or one-time pre-sales: Ethereum is a good example of this concept. Take, for example, the initial issuance of Ethereum. 11.9 million of those coins were pre-mined. So they were given to the people that did a lot of the initial work in making Ethereum possible and also went into the Ethereum Foundation, which is still using them to fund ongoing expenses today.
  4. Ongoing issuance and/or redirected fees: Zcash is an example of a company that has ongoing issuance, which gets sent currently to the Zcash Foundation and the electric coin company. That process is continually iterated through basically the same off-chain governance that decides protocol upgrades.

# A closer look at corporate vs. individual donations - 7:36 (opens new window)

These are the four sources right now and they each have their different strengths and weaknesses. Let’s look at the details.

Corporate donations are definitely more scalable than individual donations, because with individual donations, you have this property. That means that every dollar donated to public goods is a dollar that's sacrificed by one individual person. So, either you need that one individual person to be very, very altruistic or you need them to benefit personally by more than one dollar from that public good. So the public good just has to be such an amazing, big deal in that one person's interest to support it with corporate donations. That allows you to get leverage because the corporation is not one person's money, the corporation is a lot of people's money.

With the individual decision makers, it's not like they personally lose ten thousand dollars if they give ten thousand dollars to some broad public good project. The corporation even benefits from social status in some way, so it's a step up, but still not sufficient. Also, if you rely on corporate donations, then one of the big negative externalities you end up receiving is you often end up getting a lot of centralized control over the public goods, which is something we want to avoid.

Individual donations are nice, but they're also insufficient. Corporate donations are somewhat more sufficient, but still not quite. If you rely on them too much, you get centralized control. One time pre-mines and pre-sales are nice in that you get an amount of money that's just directly dedicated to creating the public goods, but it's only one time.

With ongoing issuance, the problem is that you're basically giving money into a permanent thing and you have to think really hard about how it's governed and make sure that it's actually being governed well. You have to be prepared to deal with the risk of that governance being captured.

# Turning to apps and protocols to help fund public goods - 8:30 (opens new window)

So public goods funding needs to be long-term and systematic.

“Public goods are long-term problems, therefore they need long-term and systematic solutions. This means that we need funding to come from not just individuals and also not just companies, because companies, too, can disappear, but from applications and/or protocols.”

That addresses the first part of the question. When I say ‘applications and/or protocols,’  there are many possibilities. It doesn't need to be the Ethereum protocol itself. It could be Layer 2 protocols, like Optimism, for example, is doing retroactive funding rounds for the Ethereum ecosystem. For example, the Uniswap DAO has funded quite a few Ethereum-wide public goods. So there's a lot of different potential funding sources.

At the kind of application and Layer 2 protocol layer, there is an opportunity to be flexible that does not exist at Layer 1.

What mechanism decides the recipients?

One is a centralized small committee.  One example is the Ethereum Foundation Grants Committee. Another possibility is quadratic funding. Gitcoin has been doing some quadratic funding recently. Then, possibly, there could be other mechanisms as well.

# Once the funding is in, how exactly does it get distributed? - 9:50 (opens new window)

So then comes the question around giving a pool of money. How does that pool of money actually get distributed? Moloch DAO was an interesting experiment. It’s a DAO consisting of some major ETH holders and Ethereum contributors. They pool some of their money together using a type of assurance contract style. It's kind of a collective individual donation. Then, they basically have a DAO that votes on where the funding ends up going.

Moloch DAO has funded a lot of interesting things, including ecosystem reports. It’s funded Tornado Cash, as well as several other initiatives. The amount of funding is small, but still one of those alternative grant givers that's been punching above its weight.

# A brief analysis of Gitcoin grants and quadratic funding - 10:52 (opens new window)

Gitcoin grants is an experiment in quadratic funding, which is a democratic approach to funding. This is a quadratic voting-inspired mechanism for choosing where public goods funding goes. It's a type of voting, except you basically vote by giving donations. The donations that individuals give are small, but then there is also this central matching pool. The matching pool gets allocated between the projects using a formula that takes into account how many donations each project received, from how many different people those donations came from, etc.

Gitcoin grants have been running in the Ethereum ecosystem for a few years. These include community grants. There are different sections for grants: there is one round roughly every two or three months. So we see a lot of interesting projects get funded on the community side, a lot of interesting projects get funded on the infrastructure side, and a lot of other projects have been funded lately.  It's has become a very stable source of revenue for at least some participants, like Bankless, for example that gets a significant amount of funding every round.

A lot of initiatives have already been funded by Gitcoin grants. These are interesting, because anyone can vote and it really does source this very wide and diverse community input. It ends up funding different projects. Those from centralized communities end up funding themselves.

# What is retroactive funding and what are the benefits? - 12:33 (opens new window)

Retroactive funding is a new idea that I have been working on with Optimism.  Optimism's retro funding round one recently finished and they released the results. The idea with retro funding is: instead of funding projects in anticipation of future work, you fund them in recognition of work that has already been done.

Retroactive Funding

Retro-funding mechanism removes the necessity of making predictions, which is hard and often relies on conformist voting mechanisms to make predictions, in turn leading them to miss important factors. Instead, you allow people to do whatever projects they want to do, and when/if something happens that turns out to have a really good impact, then they can vote. The vote rewards that project for the work that they did.

If there are projects that are considered long-shot bets at the beginning, but succeed at the end and they still need money to be funded, then you can combine retroactive funding with an investor ecosystem. Investors could invest in public good projects and then if that project succeeds, that project gets a retro award, then part of that retro reward could also go to the investors.

For this to work, there has to be a large, consistent retro funding pool, but this is one of the nice things about Optimism. They are doing this right: their roll-up is getting hundreds of thousands of dollars of transaction fees every day. Now, obviously most of that has to go to gas fees for the call data, but some of that still goes to excess profits for the sequencer. The plan is to take a lot of that revenue and put that into these retro rounds.

# Deploying retro funding in the right way: How does the funding actually happen? - 14:51 (opens new window)

Retro round one was one million dollars and it's likely that the retro rounds are going to be bigger in the future. With retro funding, there's still the question of what kind of voting mechanism decides how this funding actually happens? Let’s use Optimism as an example. With retro funding, the Optimism experiment is taking this interesting route using what we call badge holders.

Basically, a medium-sized set of technical experts are, at the beginning, hand-picked, but then over time, mechanisms can be added to choose. And you add new ones in a more decentralized way. So it's not coin voting, it’s like I've written in other contexts: I think cryptocurrency governance needs to move beyond this kind of constant this idea that pure coin voting is the only legitimate kind of decentralization.

“Badge holder concept is interesting as an alternative. It's not coins, but it's also a much bigger committee than you would get in pretty much any traditional centralized team.”

Where is this all going to go in the future? First of all, public goods funding in Ethereum is necessary. Public goods funding has to be systematic. In particular, I believe more public goods funding in Ethereum is going to be possible. We're going to see more large-scale application protocols and layer two protocols on Ethereum helping to fund public goods both within their own ecosystems and within the broader Ethereum ecosystem.

Thesis: Public goods funding needs to be long term & systematic

Once they are large enough within the ecosystems, going even far beyond Ethereum. I want to see Ethereum-based public goods funding and Filecoin-based public goods funding. Collaborative funding, a focus on the open source virtual reality ecosystem, funding open hardware or even funding life extension research.

“Once these public goods funding mechanisms get big enough, they'll be able to have a scope of concern far beyond the crypto ecosystems themselves. They're going to be a potentially significant part of how humanity ends up building the 21st century.”

This big vision is very dependent on crypto and blockchains continuing to succeed in order to be able to actually have the funding to realize these ambitions. Also, as these funding projects get bigger, ecosystems are going to form around these funding mechanisms.

Very soon, there's going to be what I call the first ‘quadratic freelancer.’ These are the first people who actually make enough money off of these quadratic funding rewards that they rely solely on it as their source of income. Bankless might even be very, very close to there already. They're basically there, although they also have some other revenue from sponsorships.

Eventually we're going to see people creating second layer infrastructure around these funding mechanisms, so things like quadratic funding block explorers and then those projects themselves would get funded through quadratic funding or through retroactive funding. Eventually, we're going to see investors invest in early stage public good fund projects, early stage individuals or teams, partially in the hopes of getting rewarded through retroactive rewards. As these projects get bigger and more sustainable, hopefully we're going to start seeing these ecosystems form. Then, we are going to see this very large and systematic ecosystem-level wide effort to secure funding.

# What does an exit look like in this structure? - 19:32 (opens new window)

In general, measuring impact is an incredibly complicated problem. I don't claim to have very good solutions. I think, ultimately, any mechanism that does get developed is going to have to be what we call some kind of DAO with some kind of governance.  But then, that's if it needs to be a part of the protocol, but otherwise, these rounds and the results are all completely open processes, they are transparent, so they're definitely fully available for anyone who wants to study and try to make conclusions off of the results to do that.

I don't think that there is one correct way to measure. I believe the only thing that we need is a larger ecosystem of people analyzing and discussing what's going on and trying to make conclusions about how to improve these mechanisms going forward into the future.

# How does retroactive public goods funding scale? Is there a model? - 20:35 (opens new window)

The main scaling problems with all of these mechanisms are:

  • Where to get more money?
  • How do we actually get into a future where, instead of these rounds being a million dollars, they're 100 million dollars?

That way, we can seriously talk about big parts of entire communities getting their money from them. The most realistic route to get to that point, I personally think is these applications and Layer 2 protocols. I'm talking about really succeeding and actually getting an amount of revenue that can pay for those things. It's happening already. If you just look at Ethereum itself, the amount of fees that it's getting are on the order of 80 million dollars a day right now.

So, as the Ethereum ecosystem in particular moves to layer two in order to scale and have lower transaction fees, the layer two protocols at some points are going to start getting levels of fees that are of similar orders of magnitude to that. So when that happens and when other blockchains like Filecoin succeeds, I think it's going to have a large amount of fees collected as well.

So if those critical fees can go into these and decentralize the public goods funding landscape, then that's already an improvement. That can get us to the next level.

The second scaling problem relates to governance. With quadratic funding, it's easier because the whole mechanism is just very democratic and so the more money there is, the more people care and the more voters you have. With retro funding, with the current badge holder system, there's a little more challenge because of the way the batch holder system is currently structured. As it stands, it expects every batch holder to have an opinion about every project.

Even after round one, we already recognize that that's completely unsustainable. So how would that evolve in the future – would there be some kind of two-level system? Would badge holders have to delegate their badges? They are specialists in particular categories – would something else happen?

That's a discussion that would have to happen. Specifically within the Optimism retro funding community, these are, in general, early stage experiments. As we grow, we'll see challenges and learn how to adapt.

# Is retroactive public goods funding applicable in the future?

Absolutely! In order for this to work, people need to have confidence that this retroactive funding ecosystem actually will exist 50 years in the future. That itself is a big legitimacy hump.

“Five years ago, people were not convinced that crypto would be here. Five years in the future – and a lot has changed over the last five years already – crypto is increasingly establishing itself as a major player of this new world that we're coming into.”

I personally am more convinced than ever that crypto will be around in 10 years and 20 years. What will it be like in 50 years? Will crypto in 50 years be committed to making retroactive rewards? Again, it's an open problem. Creating the institutions that give people comfort, that such things actually will happen, is probably one of the big challenges of the whole thing.

I don't think there's a good answer now. I just think we have to be aware of this as a problem and just work toward creating these structures and then stabilizing them so people can be confident that they'll continue to exist further in the future.

Thank you.