Funding Public Goods in Web3 for the Uninitiated

Web3 is a new world of technical capabilities and social ways of organizing, based on blockchain and other decentralized protocols. Engagement is high, money is flowing, and lots of experiments are being conducted. I work with several nonprofits as well as self-organized community initiatives that don’t easily fit into traditional boxes. I wanted to understand the potential benefits for engaging in web3. I was motivated by the idea that we could use web3 in some or all of the following ways:

1. Plain old fundraising
2. Leveraging the culture of engagement to cultivate substantive participation and stakeholdership.
3. Building on experiments in governance and decision making to prototype new approaches to managing resources and coordination.

Each of these benefits can also be combined, and doing so has the potential to create positive feedback loops as well.

In addition to being a nonprofit, Open Lunar has also been developing a programmatic strategy focused on provision of public utilities for the operational lunar environment. So there is also overlap as a substantive area of inquiry; eg. what does it mean to produce public goods in areas outside traditional jurisdictions?

Other relevant touch points with web3 are DAOs and NFTs (the latter of which are not just for art, but more generally represent certificates of uniqueness, precedent, and authenticity etc.). Both DAOs and NFTs provide opportunities to explore governance and raise funds.

What is meant by “Public Goods” in Web3?

It can be hard to distinguish between hype, genuine public benefit, and what are simply experimental approaches that need time to mature. It’s also good to appreciate that in some cases, organizations are making money off of it, so for example platforms trying to attract public goods projects have an incentive to cast a wide net. Similarly, projects that position themselves as public goods gain access to funding mechanisms, as well as benefiting from a narrative of altruism and public benefit. There’s surely many good intentions, but in understanding this ecosystem I wanted to be aware of the ways in which my own interest in funding opportunities might lead me to be less critical of these new options. You might ask “why does it matter what we call it, as long as everyone is transparent about what the purpose of their projects are?” The short answer is that it matters for good incentive design and accountability (more on that in a future post).

Web3 public goods funding covers an almost unbounded range of projects and activities. They range from very traditional charitable activities like land stewardship and issues around homelessness, to projects that help specific ecosystems. A lot of the public goods funding is going towards “digital public goods” (ie software) with a big emphasis on open source and tooling for the Ethereum ecosystem. Well-known examples of web3 projects with an identity centered on funding public goods are Gitcoin, Metacartel and Moloch DAO. There are also initiatives focused more on traditional philanthropy and “meatspace” public goods, such as Giveth.io.

Not all projects being funded through those platforms are necessarily open source, nor even legal non-profits — many feel they have no need to formally incorporate in the “legacy” system at all, as they are operating entirely in the cryptosphere. For these projects (and many other non-web3 projects!) the distinction between nonprofit and for-profit can seem artificially restrictive.

None of these platform list a specific criteria for being a public good. Projects in this space are rallying around a public goods narrative and producing great marketing materials, including blog posts, public discussions, and webinars. This has a really positive benefit of developing hype around public benefits as a category, and making public goods sexy. Most of the materials being produced carry a very liberal definition of public goods — “know it when you see it.” This creates room for experimentation and through this experimentation we may well see an expansion of items or activities able to operate and be funded as public goods, and this is a huge opportunity. It also creates a gap in accountability that could obfuscate how best to draw on the long history of insights and scholarship about good governance of public goods, especially market failures, externalities, and privatization.

There are another category of public goods initiatives focused on “commoning,” including for example growing communities around “DeSci” (decentralized science) and “ReFi” (regenerative finance).

As long as one is confident about their own thesis of public benefit, none of this ambiguity is a reason to avoid engaging in web3 per se, but it’s relevant for understanding how to bring integrity to our projects and the incentives that might show up in our work.

Overall, commons and public goods focused initiatives seem to fall into a few different categories:

1. Fundraising platforms
2. Tooling/infrastructure for web3 ecosystem (from open source tools to token engineering, mechanism design, and new types of decision making)
3. Platforms that support non profits to receive and convert crypto into fiat.

Money flows and the Mysterious Art of the DAO

How do these platforms actually work? Most of the donation platforms are associated with Decentralized Autonomous Organization (DAOs). Gitcoin and Giveth, which give out grants, both have DAO. These DAOs are funding public goods but also, importantly, they are experimenting with incentive mechanisms, token protocols, and decision making. It can be a bit confusing to unpack how these projects are supporting themselves, but it also provides helpful context for the understanding the mechanics of the ecosystem, and the mindsets in which funding proposals will be evaluated.

How do the DAOs themselves get funded or started? In some cases, a small group of people just pool money or tokens together to create a DAO that they control. This is perhaps similar to the way we might think of a private foundation — except it’s easier to do as a group. The DAO in this case greases the mechanics of pooling resources and decision making around what to fund.

Sometimes a project is seeded with fiat currency, and increasingly, large initiatives might seek VC money. I found this particularly interesting because it’s for-profit funds going into public goods funding. How do they get their return?

When funds are “put into the DAO” this means that they are put into the DAOs “treasury” (basically, a bank account somewhere), and used to generate (or “back”) project tokens. Projects can be initiated with any currency of course, and a lot are also seeded with ETH instead of fiat. Money in the treasury is managed with a “multi-sig” (ie, shared) wallet. It’s common for the treasury to be managed by a small set of trusted humans who enact decisions taken by the DAO. This two-step process is used for two reasons: because conducting transactions “on-chain” involves gas fees which can be quite expensive when used for each individual vote, and because not all decisions are easily captured by smart contracts (so the action to take still needs human evaluation). There are numerous tools such as Snapshot and Alchemy that support “off-chain” decision making (which we won’t go into here). Not all DAOs use this kind of delegation; sometimes smaller DAOs such as Moloch, Metacartel, Panvala, or other “Moloch framework” DAOs, manage the treasury directly by all members using non-transferable share-based voting.

Initial investment funds may not all be converted into project tokens. Although this was difficult to find information on, the impression I got is that they might also be used to pay for things such as people or spaces in fiat, outside the DAO. In some cases it seems that there are separate entities which govern different pots of money with governance over a specific subset of associated activities. Because this is a “wild west” it’s also worth noting that if for example you have a VC-backed project where founders’ income is not tied to the public good token, then incentives could (but of course not necessary would!) diverge.

Traditional non-profit funding platforms make their income through fees on donations, or a portion of initial investments/funds. In the web3 world, most public goods DAOs are being funded by some combination of grant proposals from other DAOs (eg. Giveth has received grants on Giveth and on Gitcoin); or through the value of its own token. The token-funding model is particularly interesting: when money is contributed to the DAO, that money goes into the treasury, and new project tokens are minted from it. Those project tokens have a market value (because they are fungible), and when the DAO wants money, it sells tokens in exchange for some more common currency, like Ethereum. In the case where the token market is healthy, the tokens are worth more when sold then when the initial funds were contributed, creating a positive feedback loop.

Of course the actual market for any of these tokens is subject to volatility and other market dynamics. There’s no guarantee that the project tokens will have any value, just like there’s no guarantee that USD or Euros will have value. The big difference between our more familiar money and these tokens is that most DAO-specific tokens are not backed by other assets or pegged to another stable currency, so they only have value because/when we believe in and use them. Some projects launch tokens and crash. Others take off. (And as we have seen just recently, even some stable coins are less stable than expected).

Token Design

How project tokens are generated is itself a huge design space, referred to as “token engineering”. This is the formal logic (implemented as a smart contract) that says how many tokens are created, for whom, and based on what inputs. It’s not always as simple as saying “$X fiat turns into Y project tokens.” A big topic that a lot of folks are excited about in the public goods funding space is called “augmented bonding curves” (ABCs). Bonding curves basically mean that the value of a project token increases as more tokens are minted. This means that early investors can sell their tokens for more than what they bought them for, as long as interest in the token keeps growing. For example, Giveth has stated their intention to implement ABCs for their $GIV token.

On the other hand, Moloch DAO uses a much simpler model of simply pooling funds and allocating them together through decisions taken by the DAO. Unlike Giveth or Gitcoin, where the DAO creates a platform for 3rd parties to make funding decisions, in Moloch DAO, funders and DAO members are one and the same. Funders are manually approved by existing DAO members. So it’s more like a cooperative charity.

Token Engineering Commons and Commons Stack are both working to develop new approaches to token design that align public goods funding and public benefit.

Funding vs Participation

What does funding the platform have to do with receiving grants ON the platform? The different organizational models described above — from small groups pooling existing tokens to DAOs creating new tokens and ecosystems around those tokens — affect what might be involved in seeking funding from those organizations and what you might get.

In the “ecosystem DAOs” such as Giveth and Gitcoin, community participation is highly valued. Receiving a grant doesn’t mean the recipient has to get involved in the DAO — you might simply use it as a pass through to receive a grant and that’s all — but some projects give DAO governance tokens to grant recipients. This gives people a vested interest in being public advocating for the project. You could see why some people dismiss this as a pyramid scheme, and also why there’s so many hybe “vibes” around DAOs.

Another consequence is that you also have an avenue to get involved in the DAO itself. Active involvement in a DAO is targeted at those who want to support, invest in, and help the funding platform develop. It’s similar in many ways to getting involved in a company with shares (here called “tokens”). Project tokens are fungible, and you can sell them on the open market. There are tons of variation in this pattern (the extreme case being where governance tokens are not fungible at all — ie, you can only use them to govern but can’t speculate on them or transfer them to others) but the project-token model does seem to be the general Way of Things.

Like a company or coop, there are other ways to earn project tokens, like being an early and/or valued ongoing contributor, or investing capital, and (often but not always) those tokens can be bought and sold on exchanges. In the public goods world, donors often also earn project tokens along with their donations, which is meant as an incentive for supporters to want the platform to thrive.

Though not structurally required in any way, most DAOs invite open participation. Joining looks like signing up for the Discord server (group chat) and getting involved in the discussions and projects of the DAO. Many people participate casually in these DAOs and don’t have any tokens. But giving tokens is a way to reward ongoing engagement, creating an incentive to grow the value of the project — then the value of the tokens will also grow, and those tokens can be sold.

In some cases grant-making decisions are made by members of the DAO itself (either the initial small “club” members, or DAO token holders); in others, the DAO is just the platform and funders (who are not in general token holders) directly allocate to the projects they want to fund.

It is common for project tokens to be described as having no monetary value. “They are just a governance token.” I assume this is to get around US SEC regulations. But (IMO) this is a bit misleading, because shares in a traditional company are also indirectly rather than intrinsically valuable, and both are being speculated upon. The big difference is that formal shares tend to come with a claim on financial rights (such as dividends). The positive feedback loop for project tokens comes from giving out tokens to those who have participated in the ecosystem of the project, the network effects of scale (a large instead of small number of ‘shareholders,’ each of which becomes a potential ambassador and marketing agent), and an ethos of “access” (a very wide funnel for those who want to get involved). It has elements of a worker + consumer coop (though typically not 1 person 1 vote), or an ESOP (but not limited to employees). The underlying drive is to reward contributions and expertise in a way that is missing in a lot of multi-stakeholder governance. It is one strategy for rebalancing away from economic incumbency.

Project Funding

The actual allocation of funds for public goods is being done in a few different ways. In addition to platforms like Gitcoin and Giveth, which support 3rd parties to browse projects on the platform and fund them directly, there are also operational web3 platforms that are giving out grants to support broad enrichment and development of their ecosystems. These don’t even always require building something with their toolsets. Near and Harmony are examples of projects giving out grants even for events and community organizing. If I understand correctly, these foundations are funded by token endowments of various kinds. Then there are also more traditional foundations associated with web3-centric projects like Protocol Labs/Filecoin Foundation.

The different approaches to funding break down into a few different categories (and like everything, I am sure there are more and that this is an incomplete list — additional welcome!):

• Funding “clubs”: pool funds and give out grants based on a particular theory of change.
• Platform grants: projects post grant proposals on an open platform (Gitcoin, Giveth) that allows 3rd party donors to browse and choose individual projects to fund.
• Ecosystem grants: projects submit an application that goes to a foundation team for evaluation and selection (MolochDAO, Near, Harmony, Filecoin Foundation, Protocol Labs, etc.).
• Bounties: funders put up a ticket with a description of the work they want done, and a way for people to claim it by showing they did the work (Gitcoin among others).
• Retroactive Public Goods funding: a DAO that exists to retroactively recognize and fund public benefits already created. This is being discussed a lot but perhaps only tried in a couple of projects so far, including Optimism PBC and the Ethereum Improvement Protocol. I am not sure if any “platforms” are supporting retroactive funding yet.

It’s worth pointing out that there are a number of approaches being taken, and experiments being done, around the actual decision making logics as well. This is a really exciting area.

• Direct funding: individual donors directly fund proposals on a platform. No donor coordination or group decision making is involved.
• Majoritarian decisions by foundation or DAO: the organization votes as a whole, through its internal decision making procedures, whether or not to fund a project (Moloch DAO, Near, Harmony, Filecoin Foundation, Protocol Labs).
• Quadratic funding: matches funds from donors with funds from the treasury following a quadratic funding model that weights the matching funds as a function of how many supporters it had, as well as the total amount it received (Gitcoin is the most well known example of this. Giveth has announced its intention to implement QF but I’m unclear if it’s been implemented yet).
• Conviction voting: a voting model where voting takes place over some period of time, during which your vote can change. But the longer your funds remain committed to a given project, the more heavily your funds are weighted in the vote. (Giveth) (I personally am not sure conviction is what I would want to optimize for — I think I’d prefer to reward people for updating their opinions based on new information, but that’s another conversation…)
• Curation markets: a way of rewarding community members who provide good quality information in support of effective decision making, by staking project tokens on their contributions.

As mentioned above there’s a massive community and industry emerging around this kind of governance and token design process (TEC, Block Science, etc.). Here I am mentioning examples that I have noticed to be at the forefront of the conversation at the moment.

Involvement

In thinking about non profit and public benefit activities in web3, a few distinct ways of engaging seem worth highlighting:

• Web3 as a simple mechanism for raising funds. But this is not just a 1–1 mapping of the strategies used in the traditional fundraising world: we need to think about cultural alignment, rather than transposing proposals from legacy domains. It means learning to communicate using the aesthetics and culture of web3. There’s also a differently level of fluidity in web3. This is true inside and outside the public benefit space but still worth noting: the volume of funds available is incredibly different. Not only is there more available, but those funds have greater fluidity and greater volatility. This in turn changes the logics of decision making. There is more emphasis on experimentation. more emphasis on open source and open access. And more emphasis on community engagement.
• In the legacy world, the policy and governance aspects of public funding incentives and tradeoffs would be something left to “policy makers.” But in web3 we are all policy makers. There’s an opportunity to think about genuinely new mechanics and incentive design through engaging in experimentation at the level of decision making and funding mechanics, not just grant applications. This includes both how to incentivize participation in governance, as well as financial contributions to your project, and rewarding engagement. When everything is backed by fungible tokens, substantive and monetary contributions begin to blur in interesting (and unpredictable) ways — for better and worse.
• We can engage at the level of market shaping through raising new funds, offering bounties, and other redistributive mechanisms that imbue a certain set of priorities and values.
• Instrumenting ourselves to receive donations in crypto, and keeping and managing crypto assets as an endowment in the web3 space (diversification).
• I had hoped that the web3 communities already investing in public goods would be interested in working together on more foundational research or awareness raising around the nature of public good provision outside of national jurisdictional frameworks, or to look into questions about representation and accountability, but I haven’t experienced much pick up there so far.

The common element in all these examples is thinking about engagement and participation in different ways. The web3 ecosystem rewards working out loud and community engagement, which for many initiatives will require developing capacities around transparency, community building, and online decision making.

Concluding Thought

I asked someone “how do we know if private speculation on public goods is a good thing?” Speculation on the underlying tokens could introduce perverse incentives to the underlying market, which could have flow down effects on the projects that get supported. Their answer was “But if we don’t allow speculation, then how can we trust them to have the best interest of those public goods in mind?” This blew my mind. It shows how deeply internalized a wholly different logic is in an extremely short period of time. Traditional (“legacy”) logic would have that we should trust people supporting public goods because they don’t get any personal benefit from it, and that altruism is a trustworthy motivation in and of itself.

This difference is at the heart of web3. If I am honest, it’s a conversation I am worried we’re not having. This doesn’t mean good isn’t coming from these funding initiatives, but that I am not sure the incentives are there yet to look very deeply at these questions. This means that for those working on public benefit, we need to be discerning, and differentiate between public goods narratives and actual public benefit. Most of the “public goods” described above are not Public Goods in a formal economics sense—that is, non-subtractable and non-excludable—but actually Club Goods, which are non-subtractable but are excludable. There is nothing wrong with this per se, but it’s useful to make the distinction because conflating the two can unintentionally erase the ways in which market failures, exclusion, or rent seeking can happen around these resources. Effective public services and utilities also tend to have accountability mechanisms through feedback loops from their beneficiary populations, and mechanisms for investing in long term infrastructure. If we simply hand wave and narrate open source as an intrinsic public good, we miss an opportunity to explore the design space around accountability and effectiveness.

On the other hand, there is clearly a massive new landscape for non profits and public benefit creation in front of us, and access to potentially unprecedented amounts of capital operating under entirely new and different logics. We desperately need this as a society. These funds are less conservative, less focused on metrics and specific outcomes, and the resources are just more fluid. We might see some mistakes and some bad decisions, but it will also allow new approaches and new concepts to get funded and new experiments to be run.

Non profits and public benefit projects will need to do their own work to ensure accountability to their mission and their stakeholders — the ecosystem has not matured enough yet to do this for us. Some, of course, consider it a benefit not to have gatekeepers around the notion of public benefit, and there are undoubtedly improvements to be made in how we fund public goods today. So none of this is a reason to avoid the ecosystem altogether, but rather to approach it as an opportunity to contribute to its maturation and legitimacy.

Postscript: Additional References and Links

• A Prehistory of DAOs — gnosis guild 🪐
• Reality Intrudes on a Utopian Crypto Vision — The New York Times (March 8, 2022)
• Impact Certificates
• Funding The Commons (event hosted by Protocol Labs, 2021 and 2022, recorded talks available)
• Retroactive Public Goods Funding
• 1HiveOrg — Funding is done by making conviction voting proposals. Proposals can be voted by $hny holders and disputed by subjective oracle celeste if they infringe the covenant. More at wiki.1hive.org.
• ArtizenFund.eth — community fund for art, science and public goods.
• Public Land Protocol DAO
• DreamDAO — train + fund proven Gen Z civic leaders around the world to explore web3 + leverage its power to build a #solarpunk future.

Meta-projects (that make it easier to run philanthropic projects)

• JuicΞbox Protocol — A programmable treasury for community-owned Ethereum projects.
• Aragon 🦅 — govern better, together.
• DAOHaus — a no code platform for Moloch DAOs.
• Tweet thread of web3 regen projects