How to improve the efficiency of public goods development? Is there a solution to the free rider problem?

Cryptocurrency community member Carl Cervone has proposed his own views on the funding allocation mechanism for public goods infrastructure, suggesting that to address the free-rider problem, it may not necessarily involve continuously encouraging everyone to focus on major issues, but rather to have everyone concentrate more on what they care about, in order to maximize market efficiency. He cited the Optimism case as an example.

This article is compiled and translated. For any uncertainties, please refer to the original text.

There are Different Levels in the Circle of Life

Everyone's focus varies in terms of importance, usually starting from things closest to oneself. The financial market is no different. Each financial ecosystem has core areas and important but secondary areas.

Generally, people are often concerned about things that may directly impact themselves, such as the lack of funds.

Most People Lack the Ability to Think Beyond Their Surroundings

Most people can reasonably evaluate things they encounter daily, which may include personal matters, work projects, and frequently used tools.

Of course, some may also evaluate, but perhaps not all, the upstream or downstream aspects of their daily lives. For example, the upstream of software could be code and development tools, while the downstream could be valuable courses or promotional resources.

However, when a person's focus extends beyond one category, their attention becomes scattered, and in most cases, people can only focus on things within their scope of life.

Risk is used as an excuse by people to not fund public goods beyond their reach, allowing free riders to persist in the long term.

Aside from governments capable of printing money, levying taxes, and issuing bonds to fund long-term public goods projects, most societies lack effective mechanisms for people to provide funding beyond their scope of attention. Capital flows towards short-term returns and things more directly relevant to oneself.

Cervone believes that the most effective way to address the free rider problem of public goods is not to force everyone to focus on matters outside their core life circle but to let people focus more on what they care about and provide funding, allowing the funded projects to continue channeling some funds towards areas beyond the focus circle, essentially mimicking the flow of private goods.

How Private Goods Operate

The venture capital model has been around for years and proven to provide a return on investment for a specific technology over 5 to 10 years. This model's effectiveness largely stems from the capital being combinable and divisible.

Combinability means that entrepreneurs can not only receive venture capital but also go public, obtain bank loans, issue bonds, or raise funds through more exotic mechanisms. All these funding mechanisms are interoperable.

Because there are clear commitments on what is owned and how cash is allocated in different scenarios, these mechanisms combine well, 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 can be reinvested in diversified portfolios rather than a single company, making it easier to reach upstream and downstream areas beyond the life circle.

How can funding be provided for things without short to medium-term returns? By emulating the long-standing model of venture capital, allowing resources to freely combine and separate, flow to the most efficient places.

Although this prioritizes self-interest, it can enhance market efficiency. The way capital flows in public goods may be emulated.

Optimism Experiment Cases

In the "Retroactive Public Goods Funding RetroPGF" initiated by Optimism and subsequent discussions, a potential model for the future allocation of public goods funding may be seen.

Abusing public goods? How should Web3 public goods be sustainably operated through Optimism-funded projects?

Optimism Directing More Public Goods Funding Outside the Circle

The community believes that future Optimism RetroPGF funding should lean towards upstream and downstream, such as research on OP Stack or ecosystem project funding, rather than staying within the core functionality of Optimism.

Optimism further focuses on the funding scope, with each round of RetroPGF focusing on specific areas to concentrate rewards more heavily. For example, the upcoming fourth round of funding will primarily focus on on-chain developers, funding teams driving important on-chain projects. The fifth round is for upstream OP Stack development, the sixth round for governance ecosystem upstream, and the seventh round for downstream developer tools.

Through conscious segregation and focus, Optimism RetroPGF allows resources to flow to important areas outside the core function circle.

The community has mixed opinions on this; opponents believe that many significant projects lie beyond these areas, and excessive focus and division may cause these projects to miss opportunities.

Projects Receiving Funding Actively Spread Funds Outward

Specifically, if Optimism funds more of its network's DeFi applications, these DeFi apps can further fund front-end, portfolio tracking products within their core circle, or even launch their own external funding programs, ultimately expanding the funded scope as much as possible.

This scenario has already taken various forms. For example, EAS recently started its first fellowship program; POKT Network and Kiwi News have also begun rolling out their retroactive public goods funding projects. Degen Chain even requests its community members to tip other communities with token distributions.

Funds received from funding sources can be split among other projects based on their needs, or combined with other funds, applying the mechanism of private goods to public goods funding allocation to enhance market efficiency.

All these experiments have successfully shifted public goods funding from central pools, such as the Optimism treasury, to areas outside the core circle, significantly expanding the impact of funding.

Verifying the Effectiveness of Funding

The next step is to start making these commitments explicit and verifiable.

One potentially viable method is for projects to publicly set a baseline and allocation percentage. The baseline refers to the threshold at which the project distributes tokens externally; if not exceeded, no distribution occurs. The allocation percentage indicates how many tokens should be distributed externally.

For example, if a project sets a baseline of 500,000 OP tokens and an 80% allocation percentage, and the project receives 1 million OP tokens, it will distribute 100,000 tokens (1,000,000 - 500,000 * 80% = 400,000 tokens) to other projects.

Public commitments combined with token circulation on the blockchain are transparent, allowing Optimism to have a more comprehensive reference when redistributing funding tokens.

Projects continuously receiving lower than expected funds will begin to question whether their pricing is incorrect, or if the ecosystem undervalues their worth; profitable projects will not only consider their own impact but also how they can generate a broader impact externally.

It's Time to Build an Effective Public Goods Funding Allocation System

Providing funding for matters beyond the focus circle only when a project reaches a certain scale and success is insufficient. Also, relying on a few successful projects and whales to fund all public goods is not ideal.

A better approach is to make clear commitments to fund public goods when projects are still growing, establish an effective and proactive operating mechanism, and allow public resources to develop effectively.