The Synthetix grantsDAO Retroactive Public Goods Grants Program

Written by SNXweave, in partnership with the grantsDAO.

Synthetix introduces Retroactive Public Goods Funding as part of the grantsDAO mandate to reward developers of projects and services that have benefited the protocol and the greater community.

“A true community is not just about being geographically close to someone or being part of the same social web network. It’s about feeling connected and responsible for what happens. Humanity is our ultimate community, and everyone plays a crucial role.” -Yehuda Berg

“Humanity is our ultimate community, and everyone plays a crucial role.” Let that sink in.

When thinking about communities, we have to consider what role we play in our own. We are all part of the Synthetix community, but we’re also more than that. We’re part of the ever-growing, global DeFi community, united to create a transparent and decentralized system that people can trust. A deep-rooted kind of trust that continues to be forged through this worldwide network of individuals who can collectively play a crucial role in the advancement of public good initiatives, and are ultimately responsible for the development and success of the blockchain ecosystem.

But what do we still need? Some say humanity is facing more problems than ever…and that money is at the root of all of them. But all we really need to do is adjust our thinking to focus on value. Naturally, we are at the service of the economy, as workers and consumers of goods and services. In contrast, if we realign our motives to focus on the value that we bring to society through public goods, we are then at the service of humanity and its needs.

What Constitutes a Public Good?

In economics, this definition is simple: a public good is anything that is available to all members of a community or society that is non-excludable and non-rivalrous. Basically, this means that nobody is prevented from using the public good, and any use of the good does not deplete its availability for future use. So we can all agree that we want to do good for the public, right? Easier said than done. More often than not, there are things that we all agree we want, but that nevertheless go unfunded. The reason comes down to a simple term frequently discussed in the blockchain space: value capture.

Consider a slice of pizza, for example. Recalling our definition of a public good, pizza definitely wouldn’t meet the requirements. If you buy and eat a slice of pizza, your friend is excluded from also eating that slice of pizza and it’s no longer available for future purchase. So pizza, like all private goods, is therefore excludable and rivalrous. And whether or not someone buys pizza is dependent on the value they assign to it being higher than the price, which means pizza is priced according to how much value the market assigns to it.

The value capture mechanism in our pizza scenario is strong: if people want more pizza, they buy more, which raises the price and encourages restaurants to make more pizza. Boom. Value = captured. Businesses like our pizza example that provide private goods also have an important advantage over nonprofits and public good providers: the opportunity of an exit for those involved.

Exits allow business owners and investors to make substantial profit if the business is successful, or limit losses if not. In startups especially, having an exit creates more opportunity for funding, hiring, and better-aligned motivation through a share in the exit.

However, not only do public goods have weak value capture mechanisms, but they also lack this opportunity of an exit. Even though they may provide immense value to a community, allocating capital to public goods projects with no “light at the end of the tunnel” is sometimes difficult to justify, which reduces the appeal of funding projects like these proactively.

But what if this were not the case? What if we said that now we have the opportunity to contribute to humanity by focusing our attention on the amount of value brought to the community, all the while having an exit that is simply determined by how much public good has been created. This is the proposition of Retroactive Public Goods Grants (RPGG).

By encouraging transparency and community involvement, prioritizing value over profit, and providing a sustainable way to fund DeFi projects, the Synthetix grantsDAO believes RPGG to be a promising approach to fund public goods. I’m sure you have a lot of questions though, so let’s get into it.

A Little Background on Retroactive Funding

First proposed by Vitalik Buterin, retroactive funding of public goods operates under the principle that it’s easier to agree on what was useful, rather than what might be useful. At the July EthCC in Paris, Buterin took to the stage to share the goal of RPGG with the world: to encourage quality work and funding of entrepreneurial public goods, which are often only widely seen as important after they are built.

Unfortunately, markets tend to fail at these types of public goods because of what is known as the “free rider problem”

— a form of market failure that occurs when consumers take advantage of a public good without paying for it. Government institutions also tend to fail at these types of public goods because you either have centralized institutions that are too exclusionary, or decentralized ones that are too conformist.

So, we lack an adequate funding channel to reward people who build things that are only recognized as important after everyone can see the benefit. In decentralized organizations especially, wouldn’t decision-making be so much easier if it were done retrospectively rather than prospectively?

Partnering with the Optimism team, Buterin laid out an elegant new way to encourage public goods that can also be applied in the DeFi space. Equating it to the way people create and invest in startups throughout the for-profit sector, he explains that RPGG creates a “public-goods-oriented version of the exact same mechanism.” So in the same way that startups have clear exits based on the amount of profit generated, retroactive funding will create exits to work backwards from that are clearly determined by how much public good a project did.

So now that we’ve got that down, let’s talk about how RPGG will contribute to our ecosystem.

Unparalleled Transparency

Even in organizations that are solely dedicated to public goods, lack of transparency for how funding is allocated still leaves room for potential exploitation of philanthropic intentions. Some charities have been found to be culprits of this. Hiding behind a veneer of altruism, the worst offenders prey on well-meaning donors by allocating a substantial portion of funding to for-profit entities, rather than directing it towards the advertised cause.

Such examples have proven this need for transparency in public goods funding, especially in today’s digital world. After all, the primary motivation for contributing to any cause is the promise that the contribution will make a real difference. We are on the cusp of an efficient world where effective action and responsible stewardship can help to build back the confidence and trust that communities have the right to expect in social causes.

With retroactive funding, everybody can see what projects are being funded and exactly what good they did.

Not only would this provide nearly unquestionable transparency, but it also gives everyone a way to participate and have verifiable proof of impact. With RPGG, communities can now leverage public ledger technology as a system for tracking impact – what money was spent, where and why it was spent, and exactly what value it contributed.

Value Motives > Profit Motives

And speaking of value, our ultimate goal in funding projects is to produce beneficial, good-quality work, right? In some cases, the focus on profit margins can make us lose sight of that goal. Money may seem like the ideal motivator in private goods – “I’ll give you $X if you give me Y” – however, the idea of funding people over profit is on the rise.

But how do you apply that to public goods? Rather than money being the sole motivator, retroactive public goods grants seek to put the emphasis on value and quality of work. This provides three key things for anyone involved:

• 1. The ability to see the fruits of your labor and have clear appreciation for your work.
• 2. Autonomy to work in a way that is most efficient.
• 3. A sense of belonging and responsibility in the community.

Essentially, retroactive funding preserves a role for leadership and individual vision, and rewards quality. And this all comes back to the idea of having an exit – but instead, putting the focus on value to create superior quality work. This in turn motivates individuals to contribute to the public good and community betterment, thereby allowing open source public good projects to now be rewarded. Or as Kain Warwick put it, this mechanism “realigns the incentives such that you will have an objectively better experience within that ecosystem due to this funding.”

A Sustainable Way of Doing Things

The last pillar that retroactive funding brings to an ecosystem is sustainability. The reason public goods programs exist in the first place is to fund projects that provide public benefit, but that are generally not profitable. This brings us back to the tug of war we discussed between profit motives and value motives. Goods can easily be seen as extremely valuable to a community, but still lack funding due to the common financial incentive structure that is characterized by measurable financial return as the sole factor in investment decisions. Again, the idea that projects are only chosen based on the value they can extract rather than the value they can add is not in the best interest of our community. The RPGG model seeks to address this misalignment by incorporating incentive into the funding of projects that create value, thereby creating a sustainable avenue for community members to invest in public goods well into the future.

Another way to assess the sustainability of RPGG is by looking at time spent. Funding public grants can sometimes be a resource-intensive process – grant writing, application fees, reviews, legal matters, etc. While these are necessary gatekeeping steps in prospective grant funding, they undoubtedly require time. So instead, rather than selecting from a group of worthy applicants before the creation of a public good, retroactive funds are distributed only after the value of said good has been demonstrated, thereby reducing the possibility of time and resources being allocated inefficiently.

Each aspect of retroactive funding in turn encourages further project development

The ultimate cornerstone of sustainability is the motive and desire to contribute. Community involvement creates accountability, which encourages quality work. Once this quality work demonstrates value, it is then rewarded. This new focus on value contributed then motivates additional community members to build on existing projects. Building on existing projects then promotes further project development, and the cycle remains continuous and sustainable.

The Retroactive Public Goods Grants Model

If a RPGG body deems a completed project or product useful, then funding is dispersed to reward the team that’s responsible. Seems simple enough, right?

No…but seriously, that’s pretty much the idea.

Acquiring seed funding to successfully get a project off the ground is very competitive, and only those with the clearest roadmap to profitability make the cut. Public goods, by definition, are unable to demonstrate future profitability and it’s this lack of an exit that makes allocating capital a lot harder to justify. Many open-source software projects end up failing before they even have the chance to produce any real good for the community. The value proposition of a retroactive grant funding model is therefore one that provides a supplemental funding source for public goods without prohibiting developers from seeking additional funding.

The sheer existence of useful tools that failed to receive an initial investment is proof that funding models like RPGG have a place in DeFi and the cryptocurrency community at large. A famous example of a project with tremendous community value that did not receive adequate initial funding was Ethereum’s EIP-1559, which was first proposed in November of 2018. This proposal included key upgrades to the Ethereum protocol which would affect the total supply of ETH over time, but 1559 didn’t go live on Ethereum Mainnet until this past August…nearly three years after it was proposed. This project sat idle for a long time, until a large portion of the community recognized its value in late 2020 and diverted a substantial portion of the Gitcoin Grants matching pool towards 1559 development.

Upon completion of the project, an NFT auction was arranged to distribute proceeds to contributors based on an allocation table. These funding mechanisms eventually helped fund the development of 1559 and reward its contributors, but they lack the critical structure necessary to make them effective in incentivizing public good development.

While the progress and funding cycle of EIP-1559 provides an excellent case study, the question remains — how can this model be effectively applied to public goods in DeFi?

In the Summer of 2020, DeFi really took off. With hundreds of projects making their crypto debut, doing the necessary due diligence on each individual project was grueling. The developers of Defi Llama identified this problem and quickly got to work on a solution. Centralizing and displaying real-time data in an easy-to-consume form is not a new idea, but doing so without following the well-defined path to profitability is what set DeFi Llama apart. The value their product provided to the community is an excellent example of a project worthy of recognition in this discussion.

So How Exactly Does this Form of Funding Work?

• WHO decides how the funding is distributed?

Good question. We want to invite the community to help identify projects that are worthy of this type of grant, but the ultimate funding decisions will be at the discretion of the grantsDAO. However, there is also the possibility for the community to be involved in the decision-making process via quadratic funding. Gitcoin Grants offers this new form of funding, which uses quadratic voting in order to efficiently determine the value of a public good, and then guide the disbursement of public funds accordingly. This allows users to both create and contribute to projects they are interested in supporting.

• WHAT projects will get funded?

Projects that benefit the public good, of course! But more specifically, those that contribute to the betterment of the community and provide value to the ecosystem.

• WHERE does the funding come from?

For now, funding will come from the Synthetix grantsDAO.

• WHEN do projects get funded?

As we are starting out, projects will just be funded retroactively — so, after the fact. However, as this effort grows, we hope a prediction market mechanism will add a prospective element. Soonthetix 😉

• HOW do we distribute funding to these public goods projects?

Currently, there are several options on the table. The first two are the most self-explanatory: 1) distribute funds to the individual or organization responsible for the project, or 2) create a smart contract with a fixed allocation table to split the funds between multiple individuals or organizations who contributed to the project. Pretty standard stuff, right? The third option is a bit more radical: to create a project token that is distributed to the development team, but that can also be traded. In doing so, a prediction market would be created, allowing community members to take part in the seed funding of public goods by trading the project tokens ahead of funding decisions.

What Does this Have to Do with Synthetix…?

As we all know, the Synthetix grantsDAO was one of the first in the DeFi ecosystem. Initially created to fund public goods and tools within Synthetix, the grantsDAO’s role was redefined, allowing them to take on a more proactive role within the community.

Up until now, the grantsDAO has focused on funding public goods that very closely and directly support the Synthetix ecosystem. This has included many useful projects like Discord bots, staking management tools, and frontends for ecosystem partners like the ambassadorDAO.

There are many other public goods, however, that have been built without funding that still benefit the Synthetix ecosystem. Given that the grantsDAO mandate is to support all initiatives like these, it is both logical and beneficial to continue expanding our funding efforts to now include retroactive grants for public goods that were built without funding. With RPGG, we are excited to begin rewarding developers for creating projects and services that have both directly and indirectly benefited the Synthetix protocol and DeFi community at large.

The burden to fund universally useful DeFi public goods shouldn’t necessarily rest solely on the Synthetix ecosystem, however. Since Synthetix has always been a pioneer in decentralized governance frameworks in DeFi, we would like to actively encourage other DeFi funding bodies to join us in dedicating a share of their funding budget to retroactive public goods grants.

I’m Hooked! What’s Next?

Well, we already have a buy-in from the Synthetix Treasury Council. 🎉 So they’ll be sponsoring our upcoming RPGG project, which will launch during the next Gitcoin Funding round starting December 1st, 2021. In the meantime, the grantsDAO will be submitting a curated list of projects that we would like to support, so keep an eye on our social media and Discord for more information to follow.

What can you do? Help us find crypto public goods projects that you think we should reward! And let us know on Twitter @snxgrants or in the #grants-dao channel of the Synthetix Discord.

We want your participation in our upcoming RPGG projects! Be on the look-out for more information from us soon, and be sure to share this post and tell everyone what’s happening. We’re in this together, let’s do it!