Across human history, coordinating stakeholders to fund public goods has involved complex governance processes with moral hazards and inefficiencies. Policymakers today rely on taxation, philanthropy, and incumbent institutions focused on rigid mandates rather than flexible community needs.
However, emerging decentralized autonomous organizations (DAOs) offer a radical new paradigm for stewarding capital towards public goods. By bridging gaps in governance coordination, DAOs like Gitcoin enable permissionless participation in funding decisions. This reveals organic demand signals for goods benefiting digital/local communities. In this article, I explore the use of DAOs as a tool for funding public goods.
What are public goods?
Before exploring DAO-powered funding models, it helps to formally define what public goods are. In economics, goods are classified as either private goods, common goods, club goods, or public goods based on their exclusivity and rivalrousness attributes.
- Private goods like cars and ice cream have strong excludability (ability to exclude non-payers) and are rival (one person’s consumption diminishes availability to others).
- Common goods like forests and lakes are non-excludable but rival in consumption based on depletion.
- Club goods offer some excludability based on membership access but otherwise are shared non-rival resources like parks or satellite TV.
- Public goods are strictly non-rivalrous and non-excludable making their incentives tricky. Classic examples are streetlights, sanitation systems, research, and national defense. These goods suffer from market failure and underfunding since it is impossible to prevent those not paying from benefitting as well.
History of Public Goods Funding
The concepts underpinning decentralized funding for public goods have their roots in economic theory and cryptography. While the actual term DAO was coined in 2016, relevant frameworks evolved gradually over decades.
In the 1960s, economists highlighted “free rider” challenges associated with public goods lacking excludability and rivalrous consumption. This market failure meant public goods depended on external budget-setting processes beyond organic price signals.
In the 1990s, cryptography breakthroughs like digital signatures and commitment schemes allowed self-enforcing agreements and transparency in peer-to-peer networks. This laid the groundwork for tamper-proof coordination between participants without central intermediaries.
Over the 2000s, Bitcoin introduced the ability for global value transfer and programmable incentives enforced by its blockchain-based decentralized network architecture. Experimentations with blockchain-based funding for open-source software and digital infrastructure followed.
In 2016, Ethereum expanded its scope with a generalized programmable distributed computing platform enabling autonomous smart contract execution. This allowed the birthing of lasting token-based organizational structures we now call DAOs. Early examples like the Ethereum Foundation and Moloch DAO pioneered on-chain voting and funding.
Generally speaking, the intellectual basis for community-coordinated funding of public goods existed for decades across economics, cryptography, and computer science literature. However, translating theory into actual permissionless participation architectures only became viable in the last few years through blockchain platforms and tooling standardizations.
Public goods suffer from market failure
As already mentioned, public goods are defined in economics as non-rivalrous and non-excludable. A classic example is a lighthouse guiding ships at sea. The ‘non-rival’ aspect means one ship benefitting from the lighthouse does not diminish others benefiting. And ‘non-excludable’ means ships cannot be prevented access even if not paying for lighthouse maintenance.
These attributes cause a market failure where no ship captain has an incentive to fund the lighthouse alone knowing others get it for free. Without external coordination, the public good is underfunded failing to meet demand. Even with coercive tax policy, determining optimal funding levels for public goods is an intractable governance challenge.
Traditional funding approaches
In modern nation states, funding for public goods relies on philanthropy, government spending, or community fundraising. Philanthropic grants are allocated by wealthy benefactors based on individual whims rather than holistic needs. Bureaucrat-determined government budgets for infrastructure, arts, sciences, and others tend towards inefficient spending and misallocation. Grassroot non-profit drives mobilize money but rely on gatekeepers and lack continuity incentives.
Across all these patronage models, capital flows remain restricted by reliance on cabals and middlemen. Market demand signals get obscured by information asymmetry and turf wars. The capacity to meet collective needs depends on appeasing special interests rather than optimizing for community welfare. Without credible neutrality, even decisions made in good faith risk entrenched biases.
Participation is the missing link
The common bottleneck across existing systems is the lack of credible participation in coordinating stakeholders in the decision process. Individuals lack the agency to signal value for themselves. Governance becomes a black box vulnerable to internal interests rather than direct community needs.
But emerging digital institutions allow new radical approaches to public goods funding. Crypto networks, through incentive design and information propagation, can unlock participation and institute credible neutrality at scale. Elected officials as sole custodians get replaced by verifiable communal coordination logic.
DAOs bridge preference gaps
Decentralized Autonomous Organizations (DAOs) enable codifying participatory governance and publishing funding allocation decisions on tamper-proof ledgers. In an idealistic environment, rule sets get defined upfront through open-source software circumventing plutocratic influence or political gridlocks. Automated contracts autonomously execute funding once proposals achieve on-chain approval milestones.
Importantly, DAOs allow transparent and pseudonymous participation giving individuals direct signaling power over budgets. Backroom deals get replaced by community discourse and feedback loops on public channels. Fund allocation responds dynamically to grassroot sentiment rather than fixed mandate budgets or individual patron whims. In short, DAOs institute participatory policymaking.
The Gitcoin Example
A pioneering DAO leveraging quadratic funding and community curation for orienting capital flows towards digital public goods is Gitcoin. Through credibly neutral dynamics, Gitcoin Grants elicits latent demand revealing the sheer breadth of infrastructure projects communities wish to exist at scale.
Over $56 million has already been matched on grants benefiting domains like wallets, identity protocols, bridges, programming languages, testing tools, etc. Support flows organically to technically strong teams building towards community-defined metrics of success.
Rather than paternalistic aid or gatekept financing subject to turf wars, Gitcoin Grants coordinates stakeholders as active co-builders of digital infrastructure. Perfect price discovery is infeasible but quantizing demand into dynamic community budgets is progress on that eternal economic challenge.
Since inception, over 3,700 public goods projects have received funding through Gitcoin Grants thanks to in-built credible neutrality and incentive mechanisms promoting trust-minimized coordination. DAO underpinnings like on-chain transparency, Ethereum security, and Chainlink automation replace fallible human custodians.
This permissionless paradigm makes public goods funding accessible to any team ready to take responsibility for stewarding capital toward community needs. Novel projects often lack access to traditional incubators or patrons. By revealing latent demand, Gitcoin Grants provides runways for new public goods to prove viability beyond grants.
However, DAO-led funding of public goods does come with some inherent challenges. Dependence on crypto assets brings market volatility risk requiring carefully designed continuity instruments. The lack of formal identities risks proposal evaluations becoming echo chambers. And there is always potential for bribery/collusion if sufficient sybil resistance is lacking.
There are also thorny questions around who constitutes a ‘community’ for something aspiring to be a global public good. Gitcoin Grants has taken steps towards progressive decentralization with community moderators, multilingual resources, localized partnerships, etc. But fully decentralized governance is still an aspirational ideal rather than an implemented reality.
Still, DAOs demonstrate better scalability, cost efficiency, and credible neutrality than existing funding models. And they unlock latent demand through permissionless participation. Leveraging these strengths while acknowledging weaknesses is wise.
The future is participatory
DAOs like Gitcoin Grants pioneer participatory policymaking using economic signaling to dynamically budget for digital public goods. By eliciting latent demand from community coordination rather than central planning or gatekept patronage, they quantify value channels for fluid capital allocation.
Gitcoin Grants and its sibling initiatives provide an existence proof for technology-enabled participatory governance of public goods. As internet native digital natives enter policymaking ranks, we can expect more real-world capital flows adopting what works from tools like quadratic funding and community curation.
Radical solutions emerge in times of great need. Better governance through community coordination comes just in time as existing institutions falter in funding collective needs across healthcare, education, infrastructure, sciences, and the environment. The future will see governments embracing participatory funding models as rising DAO-native generations manifest their preferences through code and community.