Why is Retroactive Public Goods Funding the Next Big Thing?

It was always challenging for ambitious yet risky projects to get funded. But, compared to startups – public goods projects, non-profits, and FOSS (Free and open-source software) don't have the possibility of an 'exit'. These types of projects are in desperate need of a business model. And that's precisely what Ethereum co-founder Vitalik Buterin has provided.
Want to know how these fantastic projects can have sustainable financing in the future? Read on to find out.

Reading Time: 4 minutes

retroactive public goods

Illustration: Milica Mijajlovic

There are many examples of how blockchain challenges traditional ways of working, whether it’s finance, agriculture, cybersecurity, or so on. The so-called democracy we thought we were living in is faced with an actual model of decentralized decision-making.

Some of the population dismissed it in advance, thinking it was only meant for the privileged few. But the more you understand it, the more you realize it’s developing with humanity and ownership in mind.

This community has decided to say no more about selling our data to third parties, questioning the integrity of central authorities, and providing alternative business models to those who have been struggling to find one for decades.

For those skeptical about the diversity and thoroughness of blockchain’s potential, we’ve already covered how Web 3.0 can transform philanthropy. This article will elaborate on Vitalik Buterin’s idea of funding public goods.

ethereum

Photo Illustration: Freepik

Why do We Need Retroactive Public Goods Funding?

Before we dive into what Retroactive Public Goods Funding (RPGF) is, let’s explain what is considered a public good:

It’s something that benefits a large and unselective group of people. So, no one who wants to be a part of that group cannot be excluded, nor can someone decide who gets to benefit from it. An excellent example of a public good would be scientific research. Compared to private interests, public goods don’t have a business model.

That’s not to say they don’t get funded at all. Many of them do, but the amount and the sustainability of that financing varies. A lot of public funding happens only because there was some centralized authority (Ministry, for example) with enough resources to fund a public good in their interest, for whichever reasons. In many cases, the project application was much better than the outcomes.

The main problem with traditional funding is that a small group decides on which projects get funded and how much. So, you can only hope you can have confidence in them.

image-1

Retroactive Public Goods Funding is decentralized voting based on deciding what to fund after the project has already shown value.

Additionally, even if all selected decision-making representatives are extraordinary experts, which is sometimes the case, what’s problematic is that any small group of people will miss important things. As Vitalik noticed, that happened even with the Ethereum Foundation.

“When Bitcoin grants started, they supported Ethereum cultural projects – podcasts, this big ecosystem that not even the Ethereum Foundation considered. Suppose you have a centralized body choosing public goods, especially those with cultural or intellectual output and media. That puts a lot of power in the hands of that tiny group of people. It would be nice to be able to distribute that power more widely“, he said during the ETHOnline 2021, a month-long virtual hackathon.

What’s Wrong with Traditional Public Goods Funding?

So far, we’ve had public goods funding ahead of time. A particular project looked good, so someone decided to give them funds and hoped it’ll result in something good. On the other hand, the retroactive alternative suggests that we should fund public goods that have already been shown to have an impact.

Vitalik is very clear about why he decided to advocate the idea of RPGF:

“The core reasoning behind this is there’s a huge amount of public goods that I call entrepreneurial public goods. You’ve probably heard of the saying – Being a good entrepreneur doesn’t mean building a faster horse. He explained that the best entrepreneurial public goods are things we didn’t even recognize as important until everyone was already using them and realized how important they are”.

He says we can continue making democratic decisions and vote on what we’ll fund. But that comes with the price of getting the same conformist and middle-of-the-road opinions because we’re financing many projects that roughly line up with people’s existing social desirability biases.

As a result, we cannot expect any radical and cool experiments.

“Sure, 90% of them will be a failure, but the other 10% will end up really succeeding in making enough of an impact and making the entire thing worth it”, Vitalik said.

What is Retroactive Public Goods Funding?

Let’s start by saying that Retroactive Public Goods Funding is decentralized voting based on deciding what to fund after the project has already shown value.

Additionally, this mechanism is considered a well-thought one because Vitalik has included the idea of so-called project tokens. The team working on a specific public good can create a token issued to whoever contributed to the project.

image-1

The next big leap of growth will come from us moving beyond relying on individuals to donate these funds and instead moving to mechanisms or projects directly donating these funds.

This allows the team to:

  • Pre-mine a large token share and distribute it to different team members.
  • Distribute it on Uniswap for people to buy it so the team can collect Ether or some other asset.
  • They can sell the collected Ether or use it to pay operational expenses or people unwilling to accept project tokens.

But not only that, the purpose is that, after these projects have provided value, the RPGF can decide to buy these project tokens to reward everyone who holds any quantity of these project tokens.

We Have a Business Model, What Now?

The idea of Retroactive Public Goods Funding has attracted a lot of attention within the community. Many are convinced that public goods, non-profits, and FOSS should adopt this business model as soon as possible or use it parallel to a traditional one.

crypto business plan

Photo Illustration: Freepik

So, now that the community is convinced and supports Vitalik’s idea, the only question he still doesn’t have an answer to is – What kind of money-earning capacity or institutions can we convince to start throwing fees into the pot?

“The only limit is our ability to come up with the cash to pay for the public goods funding pools. Like with Gitcoin, the next big leap of growth will come from us moving beyond relying on individuals to donate these funds and instead moving to mechanisms or projects directly donating these funds“, he believes.

A considerable advantage is that existing blockchain projects and Web 3.0 organizations already rely on the social consensus that we should support a particular project because it satisfies the community’s values. That gives a safe ground where RPGF can grow and be widely accepted.

Moreover, he clearly distinguishes between charity and the public good. However, he emphasizes that some projects can represent a mix of both.

“It’s not a charity. It’s paying people for the value they’re providing. Sometimes people don’t need you to fund them 100% to continue doing what they’re already doing. Sometimes all it takes is to fund them enough, so they feel like it’s a comfortable job. They would feel empowered and have the opportunity to make the public good they were always passionate about. Often the first dollar is what is valued the most”, he concluded.

A journalist by day and a podcaster by night. She's not writing to impress but to be understood.