Carl Cervone, a member of the crypto community, put forward his own views on the fund allocation mechanism for public infrastructure. He believes that to solve the free-rider problem, it is not necessarily to constantly encourage everyone to pay attention to big issues, but to ask everyone to focus more on the things they care about. , market efficiency can be maximized. And cite Optimism cases as evidence.

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There are different levels of life circle

In fact, everyone has different levels of attention, and they usually start from the people and things closest to them. The same goes for financing markets. Every funding ecosystem has core areas and important but secondary areas.

attention circle

Generally speaking, people often worry about things that are less likely to be lack of funds, because they may directly affect themselves.

Most people are incapable of thinking about things outside their immediate surroundings

Most people can usually reasonably evaluate the things they come into contact with on a daily basis, which may include things faced by family and friends, projects at work, frequently used tools, etc.

Of course, you can also evaluate some (but maybe not all) of the upstream or downstream aspects of your daily life circle. For example, the upstream of the software may be code and development tools, and the downstream may be valuable courses or promotional resources.

But when a person wants to pay attention to more than one category, his concentration will become divergent. Therefore, in most cases, people can only pay attention to things within the scope of life's field of vision.

So funding is the same thing, it's hard to motivate stakeholders to care about things outside their own immediate circle. Everyone would rather fund someone they know than an organization or team they don’t know. Therefore, it becomes a classic free-rider problem.

The risk is that people use distance as an excuse not to fund these public goods and perpetuate the free-rider problem.

Apart from governments that have the ability to print money, tax and issue bonds to pay for long-term public finances, most societies do not have good mechanisms for people to provide funding outside the circle of concern. Capital flows towards short-term returns and more relevant to themselves. Things that have a direct impact.

Cervone believes that the most effective way to solve the problem of free riding on public funds is not to force people to focus on matters outside their core life circle, but to allow people to focus more on the things they care about and provide funding. Let the funded projects continue to push part of the funds out of the circle of concern. In fact, this is to imitate the flow of private financial mechanisms.

How private property works

The venture capital model has been around for many years and is proven to provide returns of over 5 to 10 years for a specific technology. This model works in large part because the capital is composable and divisible.

Composability means that in addition to venture capital, entrepreneurs can also conduct IPOs, bank loans, issue bonds, and raise funds through more unique mechanisms. All these funding mechanisms are interoperable.

Because there are clear commitments about what to own and how to allocate cash under different circumstances, these mechanisms work well together and most companies will use a range of financing instruments over their life cycle.

Investment capital can also be split easily. For example, if many people invest in the same fund, the liquidity in these funds will be invested in a diversified investment portfolio instead of a company, making it easier to reach upstream and downstream outside the life circle.

How do you fund something that has no short- to medium-term returns? It can imitate the long-established model of venture capital, allowing resources to be freely combined and disassembled, and flow to the most efficient place.

Although this prioritizes self-interest, it can improve the efficiency of market operations. The way capital flows in public goods could perhaps follow suit.

Optimism Experiment Case

In its launch of the Retroactive Public Goods Funding (RetroPGF) and subsequent discussions, Optimism may have seen a possible future allocation model of public funds.

(Abuse of public funds? Think about Web3 from the Optimism Funding Project. How can public funds be managed sustainably?)

Optimism allows more public funds to flow outside the circle

The community believes that the future funding scope of Optimism RetroPGF should be closer to the upstream and downstream, such as OP Stack research or ecological project funding, etc., rather than staying within the core functions of Optimism.

Optimism differentiates the distance between different project attributes and the core functional circle (data source)

Optimism further focuses on the scope of funding. Each round of RetroPGF will focus on specific areas, making the rewards of funding more concentrated. For example, the next fourth round of funding plan will focus on downstream on-chain developers to fund teams that promote important projects on the chain. The fifth round is the development of the upstream OP Stack, the sixth round is the upstream governance ecosystem, and the seventh round is the downstream developer tools.

Optimism RetroPGF allows resources to flow to important areas outside the core functional circle through conscious segmentation and focus.

The community has polarized opinions on this. Opponents believe that many important projects fall outside these categories, and that too much focus and division will cause these projects to miss opportunities.

Projects that receive funding proactively disseminate funds to the outside world

Specifically, if Optimism uses more funds to fund DeFi applications on its own network, then these DeFi applications can then fund front-end, portfolio tracker products, etc. within its core circle, or even launch its own external funding plans. Ultimately, the scope of funding should be as wide as possible.

This has happened in various forms. For example, EAS recently launched its first scholarship program; POKT Network and Kiwi News have also begun launching their own retrospective assessment public fund raising programs. Degen Chain even requires its community members to donate token allocations to other communities in the form of tips.

Funds obtained from funders can be split into other projects according to their own needs, or combined with other funds. Applying private financial mechanisms to the allocation of public funds can improve market efficiency.

All of these experiments succeeded in moving public finances away from central pools (such as the Optimism coffers) and outside the inner circle, indeed expanding the circle of influence of funding.

How to verify funding effectiveness

The next step is to start making these commitments clear and verifiable.

One of the potentially feasible methods is for the project to publicly determine a floor value and distribution percentage. The floor value refers to the threshold for the project to distribute tokens. If it does not exceed the threshold, it will not distribute the tokens. The distribution percentage refers to how much tokens should be distributed. Token.

For example, if the minimum value set for a project is 500,000 OP tokens, the distribution percentage is 80%. If the project finally receives 1 million OP tokens, it will be distributed outwards (100-50) * 80% = 400,000 tokens given to other projects.

The public commitment and the fact that token circulation is transparent on the blockchain will give Optimism a more complete reference when redistributing funding tokens.

Projects that continue to receive lower-than-expected receipts will begin to wonder whether their projects have been mispriced, or whether the ecosystem has underestimated their value; projects with surpluses will not only consider their own impact, but also how they can generate wider external impact. Impact.

It’s time to build an effective system for allocating public funds

It is not enough to fund things outside the circle of concern only when a project reaches a certain scale and success, nor should we expect less successful projects and whales to fund all public goods.

A better way is to make a clear commitment to provide funds for public finances when the project is not yet growing, and to establish an effective and proactive operating mechanism, so that public resources can be effectively developed.

This article How to improve the efficiency of public financial development? Is there a solution to the free-rider problem? First appeared in Chain News ABMedia.