In his best selling book Sapiens: A Brief History of Humankind, Yuval Noah Harari argues that the unique human ability to transmit information about things that don’t really exist is what separates us from our closest primate ancestors. Large numbers of strangers are able to effectively cooperate by conjuring up and communicating shared abstract ideas such as religions, nations, political parties, corporations, money, and human rights. These things do not exist independently and only emerge from the complex interactions between individuals and collectives. Most are systems that cannot be touched, seen, pointed to, or otherwise directly observed. Yet by collectively acting as if they exist, acknowledging them, and participating in them, massive amounts of coordination and progress can be achieved. The interactions and relationships between these different ideas form the basis of our cultures and socio-economic systems.

For most of history ideas were constrained by the shackles of physical reality. They first proliferated by word of mouth and then through writing; both subject to the laws of physics. The advent of modern information technologies such as the internet released ideas from these shackles into the digital realm. Here, ideas and information are transmitted instantaneously on a global scale. This allowed for the abstract ideas that coordinate cooperation amongst us humans to be shared rapidly with high fidelity. For the first time, cultures were not constrained geographically. People across the world with similar interests and affinities for particular ideas self-organized into niche internet subcultures. The internet alone, however, lacks a viable way for these groups of people bound by shared sets of ideas to organize into full socio-economic collectives. The reasons for this are many but, in short, it is mainly because the internet alone lacks economic incentives. It is unable to independently induce scarcity, verify value, and keep track of ownership.

Ethereum is a globally shared substrate for coordination that solves this problem and gives groups of people on the internet the ability to organize into full socio-economic collectives. This opens up the design space for entirely new kinds of markets, economic systems, business models, organizational structures and relationships between entities on the internet. We are only just beginning to see and understand the implications of this. The Optimism Collective governance experiment from Optimism is one of the latest and most exciting examples of this. Let’s see how it works.

Optimism is an optimistic rollup built on top of Ethereum. At a high level, optimistic rollups increase the transaction throughput of Ethereum by executing transactions on their own chain and submitting the data to Ethereum in batches. In this way, the fixed cost of executing a transaction on Ethereum is spread across many rollup transactions resulting in significantly lower transaction costs for users.

https://ethereum.org/en/developers/docs/scaling/optimistic-rollups/

The natural next question is how do you know that the transactions executed on the rollup are following the rules of the Ethereum blockchain? In short, the entity that is responsible for submitting transactions to Ethereum, known as the sequencer, is required to stake collateral that can be taken if they act maliciously. Since all data is public, just one other entity needs to be watching the sequencer to make sure that they are following the rules. This is incentivized by entitling the watching entity to some of the sequencer’s staked funds if they correctly identify fraudulent activity. Notice, transactions submitted by the sequencer are assumed to be valid unless challenged by a watching entity. Hence, the ‘optimistic’ in optimistic rollup. For a less incomplete description of optimistic rollups see here.

Optimism’s vision of a digital socio-economic collective is, well, optimistic. They imagine a decentralized ecosystem of protocols, applications, communities, companies, and citizens united by the principle that “positive impact to the collective should be rewarded with profit to the individual”. In the real world, this is often not the case. There are many goods and services that provide positive impacts to a collective but have concentrated costs to the entity that provides them and lack a viable monetization model. These are called public goods and examples include clean air, public parks, and open-source software. Since they cannot be directly monetized, public goods are most often provided by the government which is an inefficient solution and still leads to these important resources being underfunded.

https://www.optimism.io/vision

Optimism is using the power of Ethereum to create a new socio-economic system that solves this problem in cyberspace for a decentralized collective. The Optimism Collective will use retroactive public goods funding to harness the power of the profit-motive for funding public goods in the Optimism ecosystem. The expectation is that this will catalyze the growth of the ecosystem’s economy and produce a virtuous cycle that drives the growth of a more rich, pluralistic digital collective. It may not be immediately obvious how an optimistic rollup such as Optimism enables the formation of such a system. Don’t worry, it will make more sense as we dig into the details of the Optimism Collective.

As defined by Optimism, the Optimism Collective is “a new model of digital democratic governance optimized to drive rapid and sustained growth of a decentralized ecosystem”. Okay great, but how does it actually work? What do they mean by digital democratic governance and where does retroactive public goods funding come into play? What do they even mean by retroactive public goods funding?

It all starts with the sequencer. The entity responsible for submitting the optimistic rollup transactions to Ethereum. The sequencer generates sustainable revenues from this service. Instead of the sequencer retaining all of this revenue as profit, some is distributed back to the Optimism Collective. The collective then uses retroactive public goods funding to reward entities and projects in the ecosystem who have already provided a public good. This creates a financial incentive to build public goods that benefit the ecosystem as a whole even if there is no monetization model. This opens up the design space for viable business models on the Optimism chain and leads to a more diverse ecosystem of goods and services. The end result is a virtuous cycle: a better ecosystem → more demand for Optimism blockspace (i.e. more revenue for the sequencer) → more retroactive public goods funding → a better ecosystem. See the diagram provided by Optimism below:

https://community.optimism.io/docs/governance/economics/#

This virtuous cycle sounds great but it immediately requires some clarification. First, how exactly does retroactive goods funding work and why is it used? Second, what is the governance structure of the Optimism Collective (i.e. how does it collectively decide what should receive funding in a digital, decentralized way)?

Retroactive Public Goods Funding is the concept of… retroactively funding public goods. Funding is given to projects, companies, communities, or other entities that have already provided value to the Optimism ecosystem. This is done in part because, in the words of Vitalik, “it’s easier to agree on what was useful than what will be useful”. Projects that have proved to be actually useful to the ecosystem can be more easily identified resulting in better capital allocation.

Furthermore, providing rewards retroactively gives projects building public goods the ability to raise capital and bootstrap from speculators or early investors in search of financial upside. This effectively inserts the profit-motive into the development of public goods on Optimism which ultimately leads to increased innovation and funding. As David Hoffman puts it, “[Retroactive Public Goods Funding] injects Silicon Valley-type financial incentives into projects building public goods”.

Retroactive Public Goods Funding only works if the entities in the Optimism ecosystem believe that they will be retroactively rewarded for producing and supporting public goods. Thus, it is very important that the Optimism Collective distributes sequencer revenues to public goods in a fair and transparent way in alignment with the community as a whole. This is a difficult problem. Deciding how to govern shared resources in the best interest of a collective is the crux of political philosophy. Luckily, in the digital realm, unlike in the real world, design philosophies are not a matter of life and death, can be iterated on in a matter of months or weeks instead of years or decades, and are not bound by physical constraints.

Recognizing the difficulty of the governance problem, Optimism has established a working constitution for the Optimism Collective that commits to governance experimentation as a core principle. The initial governance design is a two-house system stewarded by a legal organization called the Optimism Foundation.

The two-house system consists of $OP token holders and OP citizens; the Token House and the Citizens’ House. This design was chosen in order to strike a balance between short-term incentives and long-term vision for the collective. The Token House makes explicit the plutocratic governance model seen in many DAOs today. Token-based governance structures can be effective at driving growth but are susceptible to power consolidation since tokens accrue monetary value and can be freely exchanged. This also makes it difficult to ensure that token holders are truly aligned with the best interests of the project over long periods of time.

The existence of the Citizens’ House is meant to counteract these shortcomings. The Citizens’ House consists of entities that are granted non-transferable citizenship in the Optimism Collective. These entities (ideally) will have proven to be aligned with the long-term interests of the Optimism ecosystem and can provide checks and balances on the Token House. The exact responsibilities of and relationship between the two houses will evolve over time. A condensed overview of the governance structure is outlined below:

https://community.optimism.io/docs/governance/

Token House

• $OP Tokens are “airdropped” to entities that are likely to be aligned with the Optimism ecosystem

• Responsible for submitting, deliberating, and voting on governance proposals

• Governance proposal types include: Optimism Protocol Upgrades, $OP inflation rate adjustments, $OP incentive distributions, Optimism Foundation $OP expenditures, and $OP holder rights protections

• $OP holders may participate in governance themselves or delegate their rights to an eligible third party

Citizens’ House

• Non-transferable citizenship NFTs will be awarded to entities who are known to be aligned with the Optimism ecosystem

• Primarily responsible for allocating sequencer revenues using Retroactive Public Goods Funding

• Mechanisms and systems for establishing persistent identities and relationships on blockchain networks are an active area of research that will continue to inform the citizenship process

Optimism Foundation

• Legal organization based in the Cayman Islands acting through its board of directors

• Will guide the growth and development of the Optimism Collective

• Responsibilities include facilitating the administration of governance, allocating treasury $OP, amending the working constitution and enacting on-chain transactions as directed by the Optimism Collective

• Designed to gradually decentralize out of existence over time (see Maker Foundation for precedent)

It takes some time to even grasp the concept of a digital socio-economic collective, let alone the details of how one would operate. The Optimism Collective is one of the first experiments on this strange frontier of socio-economic organization in the digital realm. It is very likely that many of these experiments fail. This might leave you questioning why they’re even worth our time and resources. Why should we care about groups of people from across the world trying to create weird socio-economic systems on the internet using Ethereum? The answer requires some foresight and optimism.

Ethereum is a sandbox for applied socio-economics. Experiments implementing new socio-economic systems can be tested and iterated on more quickly than is possible in the physical world and without many of the corresponding negative externalities such as violence. Furthermore, it unlocks a design space that is not even available in the physical world. Novel economic incentive structures that lead to more fair, efficient, inclusive, and transparent socio-economic systems are possible. It can even be conceived that we may one day extend these decentralized digital systems into the physical world for the benefit of all humans. As Optimism puts it, “The idea that a decentralized ecosystem could reliably provide for basic human needs at scale may seem idealistic today, but it will seem commonplace tomorrow. We start small out of a sense of pragmatism, but we aim big out of an overwhelming sense of Optimism”. Stay Optimistic :)

Thanks to everyone for reading! I greatly appreciate any and all feedback.

I would like to thank the Optimism PBC, Vitalik Buterin, David Hoffman, and Camila Russo for the inspiration and phenomenal resources. Please see their profiles (linked) for more great content involving Ethereum/Crypto.