Quadratic Funding — the funding model of tomorrow
Quadratic Funding is a relatively new concept that has just recently started getting wind into its sails — and with good reason. The concept was proposed in an economics paper written by Vitalik Buterin, Zoe Hitzig and E. Glen Weyl and published in the year 2018.
The consequences of a large-scale adoption of this new funding concept could have far reaching implications for the human society, and how it functions.
Before considering the effects, utilizations and far reaching implications of the Quadratic Funding concept, let us first observe what exactly is Quadratic Funding.
What is Quadratic Funding?
As stated previously, Quadratic Funding is a new funding concept that is based on matching contributions from individuals or organizations — according to a specific formula proposed in the previously mentioned paper.
The formula is:
This formula is intended to provide a significant enlargement of smaller contributions by matching them with funds from a ‘philanthropist’ pool of funds.
This means that contributing even a small amount — will be highly incentivized, which is the key behind funding public goods. For those less acquainted — public goods are non-rivalrous goods & non-excludable goods such as clean air, infrastructure, privacy and — open source.
Therefore Quadratic Funding is a more democratic form of matching funding for public goods than other funding models, as it optimizes matching funds from the aforementioned ‘philanthropist’ pool of funds. The optimization is performed by prioritizing projects based on the number of people who contributed.
This way, funds intended to benefit the public are directed towards projects that truly benefit a broad public, instead of things that only have a few wealthy backers.
As the world progresses into the digital era, open source technology is slowly but surely becoming the foundation of prosperity and advancement. This is why it is extremely important to innovate in the field of economics whereby new concepts of funding, such as quadratic funding — will supercharge the open source revolution.
The key that will unlock the human potential
Open source has become prevalent in the blockchain industry because it is the only efficient method for rapid innovation. Any other chosen path elicits obstacles that greatly hinder technological advancement.
However, Venture Capitalists shy away from open source projects as they do not offer a so-called ‘exit’ which is essentially the sale of the company or project — and its associated intellectual property. ‘Exits’ offer very large and immediate returns for investors, which is exactly why an investor will always consider investing in startups and companies with a possibility of executing an ‘exit’.
Even though Venture Capitalists are the ones stirring innovation with their funding — in the end they are also the ones suppressing it with their ‘for profit’ mindset.
The best example of stifled innovation due to Venture Capitalists’ ‘for profit’ mindset combined with a lack of vision — is the fact that the Cisco team that built the first commercial internet router, which is the basis of the modern internet router — got refused by over a hundred VCs before they finally acquired funding. Had they not been as passionate as they were — today we would be living in a very different world, a world that most likely would not have the blockchain technology, Quadratic funding and many other amazing innovations that are lifting humanity up.
Quadratic funding will unlock the human potential by taking the funding reins away from wealthy individuals — and giving them to us all.
Further sophistication of the Quadratic Funding model
The potential of Quadratic funding can be exponentially increased by combining it with the so-called Retrospective funding. Retrospective funding is an older concept commonly used in insurance — where the insurance premium is adjustable after the claims to reflect the cost of loss. However, Vitalik Buterin has recognized that this concept could significantly benefit the open source movement & the field of public goods by utilizing a public-goods-oriented version of the exact same mechanism.
In Vitalik’s own words: “it’s easier to agree on what was useful than what will be useful”. The application of this quote is simple, some time after an individual or an organization has created or advanced the benefits of a public good — a set of voters can vote on how much funding the individual or an organization has ‘earned’.
This set of voters can of course be replaced by a DAO, moreover — to simplify the process, the DAO through which such decisions are made, could be a launchpad’s DAO through which a project was launched.
Hence, the launchpad’s DAO can fund projects retroactively, rewarding projects that it recognizes as having already provided value.
The most promising concept is however — the fusion of both the Quadratic Funding model — through which the initial funding is acquired, and the Retrospective Funding — which is used to divest the funding to participants that generated the most significant benefit for an ecosystem or project.
These futuristic concepts and ideas have given birth to a new concept — the Public Benefit Corporation(PBC). In short, PBCs are for-profit corporations that function with the intention to produce a public benefit and operate responsibly and sustainably.
Utilizing the DAO, Quadratic funding & Retrospective funding — for a better future
The concept and utilization of the DAO, which is rapidly evolving in the last few years, is the next step in the evolution of our global society. It is however extremely important that the ideas on which the DAO is based on — are well thought out and tested. Both Quadratic Funding and Retrospective funding have proven to be extremely powerful funding mechanisms which bolster innovation, fairness and sustainability — whereby this is also the DAO’s purpose as well — among others.
This is why L2PAD’s DAO and DAOs of the future will utilize both of these funding concepts.
