Is there a solution to the free-riding problem in improving the efficiency of public goods development?

Crypto community member Carl Cervone has shared his views on the funding allocation mechanism for public goods infrastructure, suggesting that the solution to the free-rider problem may not be continuously encouraging everyone to focus on larger issues, but rather to encourage individuals to focus on what they care about most, in order to maximize market efficiency. He cites the case of Optimism as an example.

In general, people tend to worry about things that directly affect them and are within their immediate circle. Most people can reasonably assess things they encounter in their daily lives, such as personal matters, work projects, and frequently used tools. However, when it comes to focusing on matters beyond their scope, their attention becomes scattered, and in most cases, people can only focus on things within their own sphere of life.

This also applies to funding, as it is difficult to motivate stakeholders to care about things outside their immediate circle. People prefer to fund someone they know rather than an unfamiliar organization or team. This creates the classic free-rider problem, where people avoid funding public goods due to the perceived risk and as a result, the problem persists in the long term.

Apart from governments, which have the ability to finance long-term public goods projects through printing money, taxation, and issuing bonds, most societies lack effective mechanisms for providing funding for things beyond their immediate circle. Capital tends to flow towards short-term returns and things 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 matters outside their core life circle, but rather to encourage individuals to focus on what they care about and provide funding for that. Then, the funded projects can continue to channel some of the funds towards matters outside their immediate circle, mirroring the flow of private goods mechanisms.

The venture capital model has been established and verified over the years, providing a 5 to 10-year return on investment for specific technologies. This model is effective because the capital is composable and divisible. Composability means that entrepreneurs can obtain venture capital funding, conduct IPOs, obtain bank loans, issue bonds, and raise funds through other unique mechanisms. All these funding mechanisms are interoperable.

Because there are clear commitments regarding what one owns and how cash is allocated in different situations, these mechanisms can be combined and work well together. Most companies use a series 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 one company, making it easier to reach upstream and downstream beyond one’s life circle.

How can funding be provided for things without short- and medium-term returns? The model of venture capital funding, which allows resources to be freely combined and divided and flow to the most efficient places, can be applied to the distribution of funding for public goods.

Optimism’s “Retroactive Public Goods Funding” (RetroPGF) and subsequent discussions may provide a feasible model for the distribution of funding for public goods. The community believes that future Optimism RetroPGF funding should focus on upstream and downstream areas, such as research on OP Stack or ecosystem project funding, rather than just core Optimism functionality.

Optimism further focuses its funding scope by targeting specific areas in each round of RetroPGF, allowing the funded rewards to be more concentrated. For example, the upcoming fourth round of funding will mainly focus on downstream on-chain developers, 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.

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

The community has mixed opinions on this. Opponents argue that many important projects are outside these areas, and excessive focus and division may cause these projects to miss opportunities.

Specifically, if Optimism provides more funding to DeFi applications on its own network, these DeFi applications can further fund front-end development and portfolio tracking products within their core circle, or even initiate their own external funding programs, ultimately expanding the scope of funding as much as possible.

This has already happened in various forms. For example, EAS recently started its first scholarship program, POKT Network and Kiwi News have also launched their own RetroPGF programs.

Degen Chain even asks its community members to donate token distributions as tips to other communities.

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

All of these experiments have successfully expanded the impact circle of funded public goods funding beyond the central funding pool (such as the Optimism treasury).

The next step is to make these commitments clear and verifiable.

One potential method is to have projects publicly determine a threshold and distribution percentage for distributing tokens externally. The threshold refers to the minimum amount of tokens a project must receive before distributing externally, and the distribution percentage refers to how many tokens should be distributed externally.

For example, if a project sets a threshold of 500,000 OP tokens and a distribution percentage of 80%, and the project ultimately receives 1 million OP tokens, it would distribute (100-50)*80% = 400,000 tokens to other projects.

Public commitments, combined with transparent token circulation on the blockchain, can provide a more complete reference for Optimism when redistributing funding tokens.

Projects that consistently receive less than expected funding will start to question 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 impact externally.

It is not enough to provide funding for things outside the attention circle only when a project reaches a certain scale or success, nor should less successful projects and whales be expected to provide funding for all public goods.

A better approach is to make clear commitments to provide funding for public goods even before a project becomes strong, and to establish effective and proactive operational mechanisms to promote the efficient development of public resources.

Optimism and public goods.