Funding public goods like open-source software, scientific research, and public spaces is crucial for technological advancement and societal growth. However, competitive capital markets often underfund these goods since the benefits are shared. Traditional funding sources like charities also have limitations.
Quadratic funding has emerged as an innovative matching model that helps optimize the sponsorship of public goods. By leveraging matching pools, quadratic funding aims to democratize and decentralize support for projects with wide public benefit.
How Does Quadratic Funding Work?
Quadratic funding was first proposed by E. Glen Weyl in 2014. In 2018, Weyl alongside Ethereum’s founder Vitalik Buterin and Zoë Hitzig released a paper called “A Flexible Design for Funding Public Goods.” The core idea is that rather than funding coming from a few large donors, many small contributions are matched to provide projects with quadratic returns.
Here is how quadratic funding works in practice:
1. A public funding round is announced for any project to apply for matching funds.
2. Individuals donate to the projects of their choice by sending contributions tagged for each project.
3. The total amount donated to each project is squared and then matched from a pool.
4. Projects therefore get quadratically more funds as more people donate.
- Let’s say there are three projects participating in a quadratic funding round: A, B, and C.
- Project A receives $1,000 in total from 2 contributors ($500 each).
- Project B receives $1,000 in total from 5 contributors ($200 each).
- Project C receives $1,000 in total from 20 contributors ($50 each).
To calculate the quadratic funding distribution, we use the following formula:
Matching contribution to project i = (Total contributions to project i)² / Total contributions to all projects
Using this formula, we get the following results:
- Project A: $740.74
- Project B: $1851.85
- Project C: $7407.41
As you can see, Project C receives the most matching funding, even though it received the same total amount of contributions as Project A. This is because Project C has more supporters, which is a sign that it is a more popular and well-supported project.
This simple and elegant matching structure provides more funding for projects with widespread grassroots support and prevents centralized gatekeepers.
How Quadratic Funding Democratizes Public Goods Funding
Quadratic funding brings several key advantages that enhance access and participation compared to traditional funding models. For instance, a large number of tiny donations can unlock substantial matched funding, empowering more stakeholders. It also helps to prevent whale dominance, which is quite prevalent in crypto and DAO circles. In particular, larger donors don’t gain disproportionate influence over what gets sponsored. Their contributions face diminishing marginal returns.
This model of funding democratizes public goods funding in other ways, such as:
Minimizes gatekeepers: Fund distribution is not controlled by a small group of funders or experts. The crowd’s wisdom decides allocations.
Reduces plutocratic bias: Wealthy interests can’t easily capture funding outcomes for their niche causes. Broad public backing is incentivized.
Promotes underfunded ideas: Projects focused on less wealthy communities still get support if their cause resonates widely. Niche but important work can get sponsored.
Together these effects result in a more participatory, equitable, and transparent distribution of public goods funding. The model puts sponsorship power in the hands of the many rather than the few.
Advantages of Quadratic Funding
Beyond enhancing funding diversity and access, quadratic funding brings other benefits:
Efficiency: The matching structure directs sponsorships toward projects with the highest total welfare improvement for all stakeholders.
Sybil resistance: Fraudulent contributions gain little since funds are squared before matching. There is reduced incentive for fake accounts or identities.
Simplicity: The mechanism is straightforward. Sponsorship requires just a public address and tagged contribution.
Adaptability: Quadratic funding can work at any scale, from local community projects to global public software development.
Blockchain native: Cryptocurrency transactions and smart contracts make implementing quadratic funding seamless.
Limitations and Considerations of Quadratic Funding
While promising, adopting quadratic funding has some limitations to consider:
Initial funding source: A substantial matching pool must be provided by founders, benefactors, taxes, or other means. This mechanism does not generate new funds itself.
May fund unvetted work: There is less oversight on project quality compared to expert-evaluated grants.
Favors universal causes: Causes that resonate across demographics get more support than narrow issues.
Difficulty setting rules: Governance must determine appropriate project categories, geographic scope, and other program guidelines.
Administrative overhead: Running rounds requires evaluating applications, interfacing with projects, monitoring spending, preventing collusion, and other duties.
Legal compliance: Tax laws and money transmission regulations must be navigated for implementation.
Cryptocurrency volatility: Crypto asset fluctuations create uncertainty in matching pools and recipient funding amounts.
Thoughtful program design, community agreed policies, strong legal review, and the use of stablecoin funds can help overcome these limitations.
Implementing Quadratic Funding in DAOs
DAOs are a natural environment to implement quadratic funding, as their decentralized structure mirrors the distributed ethos. Configuring quadratic financing can unleash new community funding opportunities.
Here are some ways DAOs could adopt quadratic funding models:
Protocol development: Let the community democratically fund shared infrastructure improvements.
Ecosystem grants: Provide public goods like documentation, developer tooling, and educational content.
Focused initiatives: Build specific products like wallets, analytics, and marketing materials identified as needs.
Community campaigns: Support causes that members care about, like climate change or diversity.
Rewarding contributions: Incentivize participation with quadratic rewards for value-add behaviors.
Conferences and events: Sponsor in-person coordination and relationship building.
To implement quadratic funding, DAOs should allocate a treasury pool for matching, allow anyone to apply for funding, and leverage smart contract-based voting and fund distribution. Parameters can evolve through governance.
Quadratic funding facilitates broader, more equitable support of public goods compared to centralized or elite models of sponsorship. Its elegant matching design brings efficiency, Sybil resistance, and accessibility.
Originating in the digital commons movement, quadratic funding is now gaining traction as a primitive for decentralized collaboration. DAOs are an ideal environment to experiment with quadratic mechanisms to fund shared resources.
Future adoption by governments and philanthropies could also harness quadratic funding for large-scale public good sponsorship. Like any new model, details must be refined through practice – but the underlying concept shows immense promise to democratize funding where it matters most.