Evaluation: False (high confidence)

The public goods problem is fundamentally one of revenue raising, and Web3 cannot offer any mechanisms to raise revenue which can effectively overcome the free-rider problem at scale. Further, the desirability of the privatization and marketization implied by Web3 solutions is doubtful in the first place.

Web3 experiments may point to better ways of allocating funds which are voluntarily raised, but these do not rely on Web3 technology and are all but redundant when trying to allocate between equally vital public goods under conditions of resource scarcity.

Evidence of claim being made

Buterin, Vitalik. ‘Quadratic Payments: A Primer’, 7 December 2019. https://vitalik.ca/general/2019/12/07/quadratic.html :

Quadratic funding is starting to be explored as a mechanism for funding public goods already; Gitcoin grants for funding public goods in the Ethereum ecosystem is currently the biggest example, and the most recent round led to results that, in my own view, did a quite good job of making a fair allocation to support projects that the community deems valuable.

one can look at it [quadratic funding] through the "fixing market failure" lens, a surgical fix to the tragedy of the commons problem.

Commons Stack. ‘Commons Stack’. Accessed 20 September 2022. https://commonsstack.org:

We are building commons-based microeconomies to sustain public goods through incentive alignment, continuous funding and community governance... Token engineering has the potential to address many of the problems facing humanity by giving us the power to realign economic incentives.

KlimaDAO. ‘Manifesto’. Accessed 20 September 2022. https://docs.klimadao.finance/klima.fi-manifesto.

To deliver the change required, we need immediate and widespread mobilisation and coordination of those who can contribute, and those who want to participate. The change needs to be managed laterally and cooperatively, rather than top-down by unaccountable "leaders.” Web3 can enable this:

• DeFi delivers a step change in the way we collectively pool our capital to deliver impact. • Smart contracts disintermediate, facilitate and automate, and enable novel reward systems. • Web3 technologies enable coordination, collaboration and innovation, with transparency and accountability. • Open source software and composability enable rapid scaling of this vision.

Blockchain technology can and will open up new ways for managing our resources and collaborating across networks in the coming years. It will be the foundation for us to efficiently coordinate resources, outpace stale bureaucratic and political processes, and remove the need to jump through hoops to get exposure to the low carbon economy.

Owocki, Kevin. ‘Introducing GTC – Gitcoin’s Governance Token’. Accessed 14 October 2022. https://go.gitcoin.co/blog/introducing-gtc-gitcoins-governance-token.

why we built Gitcoin: A platform to fund builders looking for meaningful, open source work. We’ve pioneered Quadratic Funding, a novel, democratic way to fund public goods in our quarterly Gitcoin Grants rounds. Since its launch in November 2017, Gitcoin Grants has now provided nearly $16M of funding to public goods. This is in tandem with $3.54M in bounties which have been paid to open-source developers from all around the world.

Today, Gitcoin allocates millions of dollars of funding to thousands of public goods projects. Tomorrow, Gitcoin will allocate billions of dollars.

Wiblin, Robert, and Vitalik Buterin. ‘Vitalik Buterin on Better Ways to Fund Public Goods, the Blockchain’s Failures so Far, & How It Could yet Change the World’. Accessed 14 October 2022. https://80000hours.org/podcast/episodes/vitalik-buterin-new-ways-to-fund-public-goods/.

the big problem that quadratic funding is solving is this public goods problem

So quadratic funding is basically trying to make a sort of more market-like alternative that encourages the production of public goods that basically says like, we’re going to be neutral, we’re not going to have our own kind of specific opinion about what is a real public good and what isn’t. We’re just going to say, people can donate money and stuff. And if a lot of people are donating money to the same thing, then that’s clearly a project that benefits a lot of people. So that’s a public good. And so we’re going to detect that and we’re going to automatically subsidize it based on a formula.

Full analysis

Subclaims:

• P1: Traditional mechanisms for resolving the public goods problem are inadequate
• P2: Web3 can raise significant revenue for addressing public goods
• P3: Web3 can allocate this revenue more effectively
• P4: Web3 can do this for reasons that are innately tied to the technology itself

What is the public goods problem?

There are four broad types of economic good:

Public goods are non-rival and non-excludable (anyone can use this good and someone's use does not diminish someone else's use of the good). The trouble with funding public goods is that if anyone can use this good whether or not they have contributed to the funding or upkeep of the good, how do we motivate people to contribute to the good? This is known as the free-rider problem.¹ Public goods problems thus deal with the problem of how to get people to contribute to things that they have no self-interested incentive to contribute to if left to their own devices.

The classic solution has been compulsion by the state, typically via tax. The state can also leverage its monopoly on violence to make free riding impossible (or very costly). However, claims are being made that blockchain technology can provide solutions to the public goods problem that are not rooted in compulsion.

Claim steel-manned

P1: Traditional mechanisms for resolving the public goods problem are inadequate

Public goods provision falls pretty drastically short of where most of us would it like to be. This is true at the national/domestic level (how many of us have lamented potholes in our roads?) and is particularly damning at the international level e.g. around climate action (we can consider an unpolluted climate a global public good).²

P2: Web3 can raise enough revenue to meaningfully address the public goods problem

Web3 can address the revenue raising problem by creating voluntary incentive mechanisms for the funding of public goods rooted in the free market. Web3 can facilitate people contributing to public goods provision not because they’ve been forced to by the state, but because doing so is a good investment opportunity. Certain blockchain-based projects have managed to align public and private incentives, and have thus created an innovative solution to the public goods problem.

P3: Web3 can allocate this revenue more effectively

Blockchain-based innovation in governance has facilitated more effective methods of revenue allocation. Quadratic Funding in particular, a variant on Plural or Quadratic Voting³, has been shown to lead to near mathematically optimal allocation of resources across a public goods ecosystem⁴. Quadratic Funding works using the following mathematical formula: for any given project, take the square root of each contributor's contribution, add these values together, and take the square of the result. Individual, voluntary contributions are bolstered by funds from a central subsidy pool, to make up shortfalls between computed contributions and the money actually put up by individuals. This is the process by which GitCoin funds projects in the Web3 ecosystem⁵. This near optimal process revolutionizes public goods funding through enabling resource distributions which truly reflect community preferences.

P4: Web3 can do this for reasons that are innately tied to the technology itself

Blockchain is decentralized, is an immutable, public ledger, and creates the potential for tokenization. These contribute to blockchain based solutions in a number of ways. Firstly, blockchain can enable democratized investment which does not require one to trust an intermediary such as a broker. Anyone can buy a token in a public goods project, and be sure of its existence via reference to the chain. The removal of third parties can also remove prohibitive costs which might otherwise prevent retail investment⁶. These mechanisms can also facilitate better participatory decision-making; token holders can easily vote in how their resources are allocated, and be confident in the veracity of the outcomes because they are recorded immutably on the blockchain⁷. Finally, tokenization itself is a means of creating instruments which can better capture and financialise the full range of social value versus traditional money or other financial products⁸.

Evaluation: False (high confidence)

P1: Current mechanisms for resolving the public goods problem are inadequate (partly true)

Prima facie this claim is plausible. Public goods provision does fall short of where we would like it to be. This is certainly true at the global level, and at the national level in most societies. However, we must interrogate where his inadequacy comes from. For Web3 to be able to contribute to the solving of this problem effectively, the nature of the problem would have to be technical; Web3 would have to provide a more effective mechanism for aligning public and private incentives than the state.

An alternative story is that underprovision of public goods is not intrinsically a technical problem of incentive mechanism design. Instead, it’s a messy and deeply human problem of politics and culture, which goes to the heart of why we sacrifice for others (or not). Particularly for those of us who are more privileged in society, public goods provision must in no small part be about our willingness to contribute to a shared collective enterprise with people we feel in some way bonded to–through ideas of our moral circle–and that no amount of private incentive can completely compensate for that⁹. If this story is true, then we may be more pessimistic about Web3’s prospects. Through this lens it is not the inadequacy of solutions which is the problem, but a cultural unwillingness to implement them. The obvious solution to the underprovision of public goods is taxation and regulation to ensure their provision - implementing such policies is not technically but rather politically hard in societies with strong individualist sentiments and powerful private actors resistant to such changes.

Finally, even if we are confident that at least some degree of technical optimisation can impact the public goods problem, we should ask why this must be based on Web3. Experiments modifying institutional arrangements via other means show promise¹⁰, further bringing into question whether off-chain solutions are really inadequate or just underexplored.

P2: Web3 can raise enough revenue to meaningfully address the public goods problem (false)

Public goods provision is made up of two things: revenue raising and revenue allocation. Both need to function effectively to get the outcomes we want. In this section we will focus on the revenue raising problem.

The mechanisms most lauded in Web3 for addressing the revenue raising problem focus on raising revenue via voluntary private contributions. Charities make up for shortfalls in public goods provision all the time, so what’s new here? The purported answer is that Web3 enables the use of market mechanisms to raise money. How do these market mechanisms work in practice? We’ve analyzed a couple of case studies.

KlimaDAO

KlimaDAO's goal is to become a Climate Carbon-Based Reserve Currency; effectively a semi-algorithmic central bank with DAO governance structures¹¹.

“The DAO serves the role of a "de-central" bank, governing the monetary policy of this new carbon-backed currency, just as a central bank governs the monetary policy of a fiat currency. Over time, we will build an economy around KLIMA by driving adoption and unlocking growth of the crypto-carbon economy.” - KlimaDAO¹²

The model is as follows:

Someone comes along with some currency, eg a dollar or a euro, and then converts that into USDC, the stablecoin equivalent of a US dollar. In exchange for depositing whatever amount of USDC, you get 1 divided by the price of Klima tokens from the Klima treasury.

Klima then takes the USDC that it has received, converts them back into dollars (or euros or pounds etc) and buys carbon offset certificates. Carbon offset certificates represent carbon sequestration (e.g. tree planting), methane capture, and renewable energy initiatives. The idea is then that certificates of carbon offsets come back into the treasury. Every Klima token that's issued is backed by at least one tonne of carbon offsets. So essentially what is being done is Klima are collecting money together and buying carbon offsets; basically the equivalent of a special purpose vehicle for buying carbon offsets.

You can also take those Klima tokens and sell them back to the Treasury or create derivative financial products on top of them, which can potentially give you more shares in the entity itself. This is called staking and bonding. This process doesn't change the macro structure of what KlimaDAO is trying to do end to end, it just adds another level for people who are already invested in it to get more invested. So what we have is a DeFi system which uses token staking and bonding to incentivize users to deposit or sell their collateral to the DAO treasury in return for discounted KLIMA tokens which trade on a secondary market and are used for governance in the DAO.

Evaluation of the KlimaDAO model

The KlimaDAO model basically boils down to the creation of a carbon-backed ETF¹³ on the blockchain. Its main innovation is opening up the trade in carbon-permits to retail investors. These permits are largely only available off-chain to institutional investors able to make very large purchases through brokers. The DAO acts as a central vehicle which buys offsets, and then allows people to buy into the vehicle itself at a far lower cost than buying the offsets directly. It should be noted that a major reason why this is possible appears to be the “regulatory arbitrage” possible by operating on the blockchain: it is far quicker and cheaper to set up a DAO to do this than a traditional ETF or equivalent vehicle, who’s creation is highly monitored and regulated.

We don’t want to spend too much time interrogating the model unto itself here. For a more detailed discussion on KlimaDAO you can watch or listen to our conversation with KlimaDAO. Instead, here we’re concerned with asking whether such a model can make a meaningful contribution to solving the public goods problem.

To answer this question, we should take a step back and examine voluntary carbon markets more broadly. The general idea is one of internalizing externalities; in other words, attaching monetary value to the environmental damage caused by carbon. This is an idea which has existed in economics for some time. If people have to buy permission to pollute, then the hope is that they will be disincentivized from doing so. By expanding the markets in carbon credits, KlimaDAO and other such efforts are banking on increased demand driving up prices, which in turn drives down pollution via the mechanism above.

Putting aside accusations of greenwashing and mismanagement of offset projects¹⁴ there are a few reasons to be skeptical that solutions such as this can do much to solve the public goods problem when it comes to climate change:

• The size of the voluntary carbon market¹⁵ is paltry compared to the investment required to reach net-zero by 2050¹⁶, even when accounting for projected growth.

• The core of the mechanism is that one can potentially profit from carbon as an investment. This means selling it on to someone willing to pay a higher price than you. Most often, these will be firms that will use the credits to continue to pollute, rather than take them out of circulation to serve decarbonization. Thus, my profit as an investor is tied to a continuation of pollution, which is the key thing these mechanisms seek to reduce¹⁷. Now this is a simplification; proponents will argue that eventually prices will reach a level that disincentive effects kick in, and that initial investments help this point be reached sooner. However…

• Prices are still far far lower than appear to be required to actually disincentivize pollution, particularly by the large firms who are the biggest offenders. It doesn’t appear likely that even with a spike in demand prices will reach a point where they can make a dent in the profits to be made from polluting industries, and thus their disincentive effects will be minimal¹⁸. Where carbon markets do have a place, they appear to require international regulation to artificially set the price of carbon far higher than it is now. This then essentially takes us back to state coercion, which was the very thing these mechanisms were meant to bypass.

In short, these mechanisms, which try to marketise public goods provision, are nothing new. There is a reason why they have not made much of a dent in the underprovision of such goods. The very nature of public goods, particularly their nonexcludability, means it is very hard to turn a profit providing them at anything close to the scale which would be required to adequately address their underprovision. The history of capitalism began with nothing but the free-market deciding allocation decisions; it was because this did so badly in providing these goods that state intervention arose in the first place. Whatever one thinks of carbon markets and their role in fighting the climate crisis, it appears a stretch to think that they can do much to solve the public goods problem, even if they’re on the blockchain.

Regenerative finance

The regenerative finance (ReFi) movement is seeking to solve the public goods problem via a similar mechanism. One can create a DAO, gather investment in exchange for tokens, and use that investment to provide public goods. People buy-in because they expect their tokens to appreciate in value.

You can learn more about ReFi in our discussion with Jeff Emmett. Jeff is the creator of the CommonsStack, which is explicitly intended as a means of funding public goods provision.

"At the common stack we're aiming to build tools that improve a community's ability to raise funds, coordinate on the use of those funds, and make decisions together on how to allocate their collective resources." - Jeff Emmett

Evaluation of the ReFi movement

People make investments because they think they can make money out of the investment; they anticipate a return. How does that work here? Take Jeff Emmett’s TrashHero, how do we fund beach clean up as well as getting our money back? How does that add up?

Jeff’s response was that it isn’t in fact possible for everyone to enter this community and exit with more money than they started. However, with revenue coming in from elsewhere, e.g. the Thai Government, investors can get a return on their money and beaches can get cleaned. The incentive for the Thai Government is that the beach cleaning effort would save them $1million worth of aquatic damage, so by funding this initiative with, say, $500,000, they are still saving $500,000.

At that point, however, the mechanism for funding public goods has moved from using a DAO, to some other entity funding public goods - in this case, we’re back to the state providing the funding. TrashHero is not solving the public goods problem any more, the Thai Government is.

Jeff responded: “The new part is not the outcome of the government giving money, the new part is what incentivised the government to give the money. We're not saying this is an entirely new thing, what we're doing is using interesting incentive mechanisms to crowdfund money and give local, democratic, participatory budgeting of those funds.”

So again, we’re left with a situation where essentially a private firm is established to provide a public good. For all the reasons outlined above it’s very hard to make profit as such a firm, and so the recourse is often to government contracts paid using money from taxation. In terms of revenue raising, this again seems to be nothing new.

One notable thing about Jeff’s example is the reference to “democratic, participatory budgeting”. But this speaks to the allocation of funds problem, not the revenue raising problem.

Our evaluation is that Web3 does not appear to offer any legitimate innovation around raising funds for public goods provision. The projects making these claims rely on people investing their money in projects to provide public goods in the hope of turning a profit. This is just a form of privatization, and has existed for some time. Not only does there seem to be little evidence that significant sums of money can even be raised in this way, there is a further, deeper reason for caution.

Privatization of public service provision of all kinds requires the new, privatized entities to be an attractive investment proposition in the wider market. We live in an era where investment yields of 10% or more have become the norm, and even many “ethical” investors would rather not settle for much less than this in exchange for more socially minded investment¹⁹. So, for these mechanisms to work effectively, they need to create investments which can compete at close to an equal footing with more traditionally capitalist firms and funds. In the case of public goods provision it is hard to see a plausible mechanism for this, save a select few cases of securing monopolistic government contracts for provision at extortionate rates (e.g. the government pays my firm large amounts to install and run all the nation’s street lamps) which would need to be both so inefficient as to be unjustifiable outside of ideological zealotry but also again rely at their source on government funding gathered through the exact same mechanism (tax) that these solutions claim to bypass.

Aside from this, we should consider the broader ramifications of bringing the incentive of private profit into the provision of the core underpinnings of our lives. There is ample evidence that these incentives and the need to compete in the wider market have led to privatized public services being gutted, overleveraged and delivered at (and often below) the bare minimum level of quality we would ever expect²⁰. There is no reason to believe that provision of public goods would be any different. Thus, even if it was plausible to raise significant sums in this way, we should pause to ask whether it would actually be desirable.

P3: Web3 can allocate this revenue more effectively (possibly true)

Web3 may not be able to raise revenue for public goods provision more effectively, but perhaps it can provide innovation in revenue allocation. This is the promise of projects such as GitCoin, with their use of quadratic funding. We’ll focus on quadratic funding here as it is the most popular and lauded allocation mechanism in the Web3 sphere.

As referenced above, there has at least been a theoretical case made that quadratic funding can lead to better allocations of resources for public goods provision. However further evidence of this being borne out in reality is required to confirm this potential value. At best, then, we can tentatively accept that the mechanisms used by certain Web3 projects may support better revenue allocation.

However, it should be stressed that in the context of public goods provision the issue has never been one of effective allocation. Resource use might be able to be optimized, but the real bottleneck is that there are simply not enough resources in the first place. The question of how to optimally allocate resources between safe and crime free living environments, well maintained basic infrastructure such as roads and a flourishing and non-toxic natural environment seems to be missing the point somewhat. Of course if we have to prioritize then ensuring prioritization decisions adequately reflect population preferences is valuable. However, most of us would likely agree that we’d rather live in societies where we don’t have to prioritize much, or in fact at all, between these things in the first place.

This is where the actual functioning of these mechanisms diverges from the grand claims made about them. Currently these mechanisms have largely been used to develop Web3 projects and infrastructure²¹, which may be useful but are in fact not vital to basic standards of living. Choosing between an array of options takes on a different significance in this context than in more traditional public goods problem areas, where the goods in question are all to a greater or lesser extent vital. Any purported solution to the public goods problem as a whole which keeps us stuck in conditions of scarcity and retains the necessity of such prioritization doesn’t appear to be much of a solution at all.

P4: Web3 can do this for reasons that are innately tied to the technology itself (false)

Finally, it’s worth turning our attention to the value add of Web3 itself. Even if P2 and P3 were to hold, for the overall claim that Web3 can help solve the public goods problem to be true, this would need to be because of some feature(s) of Web3 technology itself. In other words, it’s insufficient for contributions to the public goods problem simply to be coming out of the Web3 sphere, they need to rest on features of Web3 which make them impossible to replicate elsewhere. This means turning our attention to the blockchain technology underpinning it.

On examination, the capacities of blockchain technology outlined in the steel man section do not seem particularly unique to blockchain technology, and where they are, they don’t seem to make much additional contribution to the public goods problem.

While the removal of third parties might reduce investment costs, we should examine how much of the cost reduction in blockchain projects is due to regulatory arbitrage rather than this simplification. Often most of the speed, ease and price advantages of raising investment via Web3 is a result of the fact that there are few legal safeguards in the sphere yet, rather than because of the removal of third parties. Similarly, while the requirement of one type of trust is reduced, the aforementioned lack of regulation means that one still has to trust that the blockchain project one is investing in will do what it says, and not just take the money and run. The prevalence of “rug pulls” shows that this trust can often be misplaced²².

Additionally, in the case of participatory decision-making, blockchain adds little that other digital voting technologies do not already provide. It is true that the outcomes of votes can be publicly confirmed, but again we must ask whether the hindrance to more participatory forms of budgeting around public goods is really that people lack trust in the outcomes of their votes. More plausible are mechanisms such as time and attention costs. The excitement surrounding blockchain-based innovation relating to governance is often centered around experiments with novel voting mechanisms such as quadratic voting, not the technology itself. Such experiments may legitimately add value which is not present in current off-chain approaches but they are by no means tied to blockchain technology. In fact experiments are already underway to leverage them in off-chain contexts²³.

Finally, while tokenization does allow anyone to create new instruments for investment, the major difference between these and traditional financial derivatives is again simply a lack of regulation. These tokens must eventually be tied back to some form of activity or commodity in the off-chain economy, be these off-chain carbon credits or beach cleanup efforts (it should be noted that this connection is absent in many Web3 projects²⁴, hence the speculative bubble dynamics which plague the sector). In this picture tokens simply do what all other forms of securities do - provide the ability to raise capital and perhaps allocate voting rights. The only difference is that the legal requirements for their creation are far less stringent.

So, even if there were plausible mechanisms by which Web3 was meaningfully contributing to the public goods problem through revenue raising and/or allocation, it is hard to see how these contributions could reasonably be attributed to the technology itself. In most cases the major advantage offered by Web3 projects is the capacity for regulatory arbitrage, and this is not something that is a unique feature of the technology itself nor something that is particularly desirable itself in the long run.

Conclusion

While it may be the case that traditional mechanisms for resolving the public goods problem are inadequate, we find that Web3 has so far not provided a more effective mechanism for raising significant revenue for funding public goods. In addition, excitement currently surrounding experiments in governance within the Web3 space actually has little to do with the underlying technology, seeing as innovative approaches such as quadratic voting are not reliant on blockchain technology.

Related content

Deep dives and notes

• Deep Dive: Collective Action Problems & Climate Change
• Richard D. Bartlett, Stephen Reid & Rufus Pollock on Critical Exploration of Web3
• On the Potential of DAOs & Web3 with Jordan Hall & Rufus Pollock
• Stephen Reid & Rufus Pollock on Worker Cooperatives and DAOs
• Open Collective, Steward Ownership & Exit to Community with Pia Mancini
• Regenerative Finance and Web3 for Public Goods
• Samer Hassan on Decentralization, Platform Monopolies and Web3
• Deep Dive: Web3 and Post-State Technocracy
• Notes on Jeff Emmett's 'Rewriting the Story of Human Collaboration'
• KlimaDAO & Life Itself in Conversation
• Making Sense of KlimaDao

Concepts

• Distributed Autonomous Organization
• Technosolutionism
• Techno Collectivism
• Hyperfinancialization
• Decentralization
• Externalities
• Free Rider Problem
• Public Goods Problem
• Governance tokens
• Smart Contracts
• Post-state Technocracy
• Consensus algorithm
• Initial Coin Offerings (ICO)
• Regulatory Arbitrage
• Crowdfunding

FAQs

• Is the underlying technology of “blockchain” useful for non-monetary purposes?
• Is Web3 decentralized?
• Is Web3 a well-defined term?
• Is Bitcoin a currency?
• Can I raise money for my non-profit using crypto tokens?
• Can I do a crowdfunded equity raise for my company?
• Is bitcoin mining harmful to the environment?
• Is crypto bringing about the "financialization of everything"?
• What's the opportunity cost of crypto?

References