Authors: Ori Shimony, Sofia Cossar & Alex Wesely
Reviewers: Jonas (Optimism), Cheeky Gorilla (Protocol Guild), James (Octant)
Smart contracts enable us to program commitment mechanisms that don't require force. This could fundamentally transform how societies fund and manage shared infrastructure. While states must use coercion to solve free-rider problems and communities struggle to enforce commitments through social norms, blockchain systems offer a third path: programmable mechanisms that align individual actions with collective needs.
This capability has sparked a wave of experimentation in public goods funding, with projects like Gitcoin directing over $60 million to open-source software and public health initiatives and Optimism allocating more than $100 million through its retroactive funding program.
To understand how these new mechanisms work, we need to break down the challenge they are solving. Public goods—like open-source software, scientific research, or clean air—are resources that anyone can use without reducing their availability to others. Their universal accessibility creates a "free-rider problem" where users can benefit from them without contributing to their creation or maintenance.
Any system that aims to solve this problem must perform three essential functions: gathering resources despite free-rider incentives, distributing those resources effectively, and capturing the impact of improvements in feedback loops that sustain the system. Each function presents distinct challenges.
Resource Pooling
How do you create strong enough incentives to overcome free-riding?
How do you ensure fair burden-sharing among beneficiaries?
How do you maintain funding through market cycles?
Resource Allocation
What mechanisms can aggregate collective knowledge about priorities?
How do you balance expert judgment with community input?
What safeguards prevent capture by special interests?
Impact Capture
How do you measure and verify improvements in public goods?
What feedback mechanisms connect outcomes to future funding?
How can success generate sustainable funding cycles?
Grasping these functions helps us evaluate both traditional and new approaches to provisioning public goods. In the following sections, we will first examine how nation-states handle these challenges, establishing a baseline for comparison with onchain solutions.
The modern nation-state represents humanity's most advanced system for funding shared infrastructure at scale. Its approach relies on one core feature: the monopoly on force. This power to coerce enables solutions to all three core functions:
Resource Pooling
States solve the funding challenge through mandatory mechanisms:
Taxation extracts wealth directly from citizens
Monetary policy creates indirect taxation through inflation
Sovereign debt enables borrowing against future tax revenue
Resource Allocation
Liberal constitutional democracies use a two-layer system for distribution:
Democratic processes set high-level priorities through elected representatives
Representatives vote on budgets that are administered through professional bureaucracies
Impact Capture
The state model creates several reinforcing feedback loops:
Better infrastructure increases productivity, leading to an expanded tax base from economic growth
Improved public services build citizen support, reinforcing the legitimacy of its coercive force (the so-called social contract)
Economic growth also strengthens the creditworthiness of the State, enabling it to bower at lower rates of interest
While effective at national scale, this model faces several critical limitations:
Scope Mismatch: State boundaries rarely align with infrastructure needs. They're too constrained for global challenges like climate change, yet too removed from local contexts to effectively incorporate community knowledge and participation.
Bias and Capture: Political cycles create short-term biases, while special interests capture both democratic and bureaucratic processes for their benefit.
Measurement Problems: Long delays between intervention and outcomes make impact hard to measure, while established bureaucracies resist potentially disruptive improvements.
Misaligned Incentives: The people who pay, benefit, and decide are often different groups, creating conflicts of interest and inefficient resource allocation.
Reactive Nature: Perhaps most critically, bureaucratic systems typically address problems only after they become crises, rather than proactively identifying and preventing emerging challenges.
Blockchains represent a new design space for addressing these limitations by enabling communities to deploy socially scalable commitment mechanisms.
By 2024, four approaches stand out:
Gitcoin Grants: Quadratic matching rounds
Optimism: Retrospective rewards
Protocol Guild: Vested payment streams to individuals
Octant: Community-based yield delegation
Unlike state systems that can rely on coercion, onchain approaches must solve the core challenge of voluntary participation.
Gitcoin Grants: Donations for Social Recognition
Gitcoin Grants combine social capital with matching incentives to drive funding. Their seasonal rounds create focused moments of community attention, where individual donors contribute to projects they value while large donors (often protocol foundations and DAOs) fund matching pools that amplify these contributions.
Optimism: Protocol-Native Funding
Optimism takes a protocol-native approach, embedding funding directly into its economic system. By allocating 20% of the OP token supply, they have created a substantial pool of resources that grows with the ecosystem’s success. OP Chains that together form the Superchain ecosystem, such as Base, Zora, and Unichain, contribute a set amount of their revenue from sequencer fees back to the Optimism Collective. This shows how protocol-native funding can evolve beyond initial token allocations.
Protocol Guild: Dependency Funding
Protocol Guild appeals to enlightened self-interest of Ethereum ecosystem projects, encouraging them to support the infrastructure they depend on. In January 2024, Guild members released a pledge encouraging Ethereum-related projects to donate 1% of their native tokens. Currently they have raised over $50m of donations in ETH and ERC-20 tokens.
Octant: Yield Delegation
Octant uses staking yields to create sustainable funding streams. Starting with 100,000 ETH from the Golem Foundation's 2017 ICO, the system allocates 35% of staking returns to a matching pool and another 35% to GLM stakers, who can choose between keeping the yield or donating it to projects. While this creates predictable funding, the total amount is partially dependent on the proportion of the GLM stakers that choose to donate their yield, and to fluctuations in the ETH price and staking yield.
Each system takes a different approach to the core tension between broad participation and manipulation resistance.
Gitcoin Grants: Quadratic Donation Matching
Quadratic funding aggregates community preferences, weighting many small contributions over few large ones. Passport provides sybil resistance, while the Connection-Oriented Cluster Match mechanism reduces funding for suspiciously collusive donation patterns.
Optimism: Impact-Driven Allocation
The Optimism Foundation selects a group of badgeholders who make allocation decisions. Rather than voting directly on projects, badgeholders weigh different impact metrics, creating a more objective framework. Data about the project’s impact is collected from various reputable sources. As of Round 4, the system uses median calculations to filter out extreme opinions and implements both minimum thresholds and maximum caps to ensure balanced distribution. Long term, the vision is that new badgeholders will be automatically eligible based on predefined reputation criteria and that impact evaluations will be driven by onchain metrics as well as human expertise.
Protocol Guild: Membership Registry + Time-Weighted Distribution + Vesting
Protocol Guild consists of a membership registry of Ethereum’s core protocol contributors, which is self-curated by the members themselves according to an eligibility framework, and ratified onchain via a 1p1v Moloch DAO. Distribution follows a retroactive time-weighting formula; the longer you have contributed, the larger your share. A vesting module further ensures funding goes to contributors that stick around long-term, or those that show up in the future — not just those that are around today.
Octant: 1p1v + Quadratic Funding
Community members first vote on Snapshot to create a project shortlist, with each member being able to spread their vote across as many projects as they like. To prevent long-tail projects from diluting the funds allocated to the most strongly supported initiatives, Octact has limited the number of grantees selected in each round. Qualified projects then enter an allocation window where GLM stakers can direct their staking rewards, with a matching pool amplifying contributions using quadratic funding. Like Gitcoin Grants, Octant relies on the Passport system for Sybil resistance, though with a lower threshold of 15 score to be eligible for participation.
Each system attempts to create programmatic links between impact and future funding, moving beyond simple goodwill to self-reinforcing cycles.
Gitcoin Grants: Network Effects
Turns social capital into sustainable funding through network effects. Successful projects gain ecosystem visibility and legitimacy, attracting more supporters and often leading to partnership opportunities beyond direct funding.
Optimism: Market-Driven Validation
Links funding directly to ecosystem performance metrics: OP token market cap, TVL, transaction volume, and OP stack adoption. These metrics provide tangible validation of funded projects' benefits, while badgeholder engagement demonstrates community buy-in.
Protocol Guild: Infrastructure as Impact
Ethereum’s core protocol development is a foundational public good that impacts every project in the ecosystem. Growing metrics like network adoption and liveness support the Guild’s mission to fund this work, while time-weighting and vesting align long-term contributor incentives with network success.
Octant: Network Adoption and Market Performance
Relies on the success of Ethereum's staking ecosystem and the GLM token economy. By tying funding to staking yields, they create direct alignment between ecosystem growth and funding capacity. Octant v2 will also incentivize other actors with large treasuries to contribute staking yields.
Resource Pooling | Resource Allocation | Impact Capture | |
|---|---|---|---|
Nation-State | Taxation, seigniorage, debt issuance | Representative elections, budget voting | GDP growth, sovereign credit ratings, currency strength, citizen well-being, environmental health |
Gitcoin Grants | Donations | Gitcoin Passport, COCM, Quadratic Funding | Social recognition |
Optimism | Token issuance, transaction fees | Badge Holders, Weighted Voting on Impact Metrics | OP market cap, total value locked, transaction volume, OP stack adoption, community buy-in |
Protocol Guild | Donations | Self-Curated List, Retroactive Time-Waiting, Vesting Module | Network adoption, liveness, credible neutrality |
Octant | Yield delegation | Gitcoin Passport, Weighted Voting Qualification Round, Quadratic Funding | ETH market cap, network adoption |
Drawing insights from both state systems and early protocol experiments, we can envision how onchain mechanisms might enable communities to sustainably provision their shared infrastructure. These mechanisms could serve municipalities, regional alliances, diaspora communities, professional associations, religious groups, decentralized protocols, and more. This section explores this design space, combining traditional financial instruments with new commitment mechanisms made possible by smart contracts.
(1) Elastic Token Supply
Tokens are programmatically minted in proportion to measurable, verifiable impact, creating an elastic money supply tied to the productivity or value of shared infrastructure. This contrasts with static token allocations by aligning token issuance with the system’s real growth. This mechanism mirrors how sovereign debt historically grew with national productive capacity, ensuring resources are allocated dynamically as the system scales.
(2) Bond Offerings
Projects issue bonds backed by anticipated future revenues, enabling them to raise capital upfront while committing to structured repayments. These instruments are particularly suited to large-scale infrastructure projects where immediate funding needs exceed current revenues. For instance, a local community might issue 3-year bonds to fund a local mesh network, repaying bondholders with fees from membership dues.
(3) Lottery
State-run lotteries have long funded public goods by combining entertainment value with social benefit. These systems typically direct 20-30% of ticket sales to public projects while maintaining prize pools that incentivize participation. Smart contracts enable programmable versions of this mechanism with deterministic prize distribution and transparent operation, as demonstrated by PoolTogether's no-loss lottery design. One example of this is LottoPGF.
(4) Conditional Funding Markets
Prediction markets are used to determine whether a project should receive funding, tying resource allocation to community confidence in its success. Participants bet on the likelihood of predefined success metrics, and funds are only unlocked if the market’s consensus exceeds a set threshold. For instance, a decentralized transportation initiative might set up a market predicting whether it will achieve a targeted ridership within two years. If the market reaches a threshold of confidence, funds are released; otherwise, contributions are returned, ensuring only high-confidence projects receive resources.
(5) Membership Dues
Religious institutions and membership organizations have long used regular dues or tithes to fund shared resources. These systems work by creating social commitments to contribute a fixed amount or percentage of income at regular intervals. Smart contracts enable programmable versions of these arrangements and transparent tracking of collective contribution goals; from subscription payments to real-time streaming.
(6) Harberger Tax
The Harberger tax model enables continuous resource pooling by requiring owners of assets to self-assess their value, pay a tax proportional to that assessment, and keep the assets available for purchase at their declared price. This ensures that a system's scarce resources are always productively used while pooling funds for shared infrastructure. For example, a decentralized domain naming system could adopt Harberger taxes for domain ownership. Owners would self-assess the value of their domain names, paying an annual fee based on that valuation. If someone values the domain more, they can purchase it at the declared price, ensuring domains remain efficiently allocated. The taxes collected could then be allocated to infrastructure provisioning.
Current allocation methods face multiple challenges: bias, cognitive overload, complex applications, popularity contests, and liquidity gaps. Several mechanisms show promise in addressing these issues.
(1) Pairwise voting
Rather than overwhelming voters with endless project lists, pairwise voting presents just two options at a time. This simple change transforms the cognitive load from paralysis to focused comparison. Pairwise produces more thoughtful, quality decisions by preventing decision fatigue. Opens source tools for pairwise voting include PairDrops by dOrg and Pairwise by General Magic.
(2) Random sampling (Sortition)
Random selection of evaluators for each project disrupts traditional popularity contests. When projects can’t target their outreach to specific voter blocks, the focus naturally shifts from marketing to substance. This mechanism specifically counters the tendency for well-networked projects to dominate funding rounds regardless of merit.
(3) Delegated domain allocation
Following Compound’s Grants Program 2.0 model, this approach puts allocation power in the hands of domain experts. These specialists bring deep understanding to their areas, whether it’s protocol security, user interface design, or community building. The result is a more nuanced evaluation and more efficient resource distribution.
(4) Continuous funding stream
Traditional grant rounds create feast-or-famine cycles that can cripple project development. Continuous funding protocols like Drips Network offer a solution: steady, predictable resource flows that match the actual rhythm of project development.
Conviction voting introduces time as a key factor in allocation decisions. Rather than using one-time votes, participants continuously signal their support for proposals, with their influence growing stronger the longer they maintain their position. This mechanism naturally favors consistent, long-term contributors while protecting against short-term manipulation. If supporters change their minds or withdraw support, their conviction decreases gradually, creating a more stable and considered allocation process. The time-weighted nature of conviction voting helps communities distinguish between fleeting enthusiasm and genuine, sustained support for initiatives.
(6) Time-bound funding competition
Platforms like Jokerace and Prop House implement time-limited contests where participants compete for a predetermined prize pool. Unlike open-ended funding rounds, these competitions create focused periods of engagement with clear stakes. The fixed prize and timeline encourages participants to submit their strongest proposals upfront, while voters can compare all options simultaneously. This format is particularly effective for specific initiatives or themed challenges, as it creates momentum and attention around a particular funding goal.
Impact capture is perhaps the most challenging question of all. The aim is to create an effective link that ties successful resource allocation efforts into strengthening the system’s ability to fund itself.
(1) Hypercerts
Hypercerts are fractionalized, semi-fungible tokens that represent claims on the impact of specific work. They serve as a standardized method to capture and represent the positive outcomes of projects. By transparently documenting the impact of public goods projects, hypercerts enable retrospective funding, where funders reward projects based on observed outcomes. This approach incentivizes creators to undertake high-risk, high-reward initiatives, knowing they can receive compensation proportional to their impact.
(2) KPI tokens
Projects like Outcome proposed these tokens as a way to bridge the gap between pooled resources and impact capture by directly tying funding contributions to measurable outcomes. Issued either by the supported project or an onchain funding platform on its behalf, these tokens are distributed to contributors, community members, or stakeholders as a reflection of their support. Their value is tied to the achievement of predefined goals, ensuring that resources are only rewarded when impact is verifiably delivered. This creates a feedback loop where pooled resources drive progress toward specific targets, and token value mirrors the success of those efforts, aligning incentives between supporters and project teams.
(3) Token Burns
Token burning mechanisms create direct feedback loops between protocol usage and token value. When protocols burn tokens based on activity or impact metrics, they create a self-reinforcing cycle where successful public goods increase the value of remaining tokens. Burn mechanisms allow an ecosystem to capture impact without requiring explicit measurement or evaluation. Instead, they create automatic feedback loops where usage of public infrastructure translates directly into increased value for token holders.
(4) Impact Measurement
Transparent and standardized measurement tools can amplify the ability of a system to capture impact by making impact legible to the system’s participants and mechanisms. Some notable tools for this include Open Source Observer, Karma Gap, and Metrics Garden.
While these mechanisms offer novel ways to pool and allocate resources, the fundamental key to sustainable public goods funding is that the system itself generates real value for its participants. Only when a network, protocol, or community creates tangible benefits can it effectively capture and reinvest value through taxes, fees, or other mechanisms. The tools explored here simply make this reinvestment more efficient and aligned with collective needs, suggesting a future where any value-generating system can programmatically sustain its shared infrastructure.
