Vitalik: The Ethereum Foundation’s Quadratic Fundraising Revolution

Original article: Dimension Tech

On October 20, 2020, at the "Fifth Annual Network Society Conference·Practical Wisdom Network" and "Tianwen: Dialogue on Worldview" events, Ethereum founder Vitalik Buterin delivered his latest speech on the theme of quadratic fundraising. In this speech, he introduced the Ethereum Foundation's one and a half year-long community experiment: how to use quadratic fundraising to reduce human rule and better provide financial services to the community.

What is quadratic fundraising? It is a new mechanism for raising funds for public goods. Through this mechanism, we can better allocate funds used to finance public goods to where they are needed in a fair, democratic and efficient manner.

1. Why do we need quadratic fundraising?

Suppose you have a fund pool (or a foundation), and now you want to use this money to support projects that benefit the public. However, spending money is not easy. There are many projects in front of you, and you are not sure which one is worth supporting. So, you want to get opinions from the public to help you make a judgment; but after getting public opinions, you still need to decide how to allocate funds.

Subsidizing donations based solely on the number of supporters, or simply matching donations based on the amount of support, cannot fairly reflect the real needs of the public. For example, there are 100 people in the community now, 99 of whom have 1 yuan, and another has 10,000 yuan. They use this money to set up a foundation. Now, 99 people want to donate 1 yuan to Project A because this project is in the interests of the general public, while the only rich man in the community wants to donate the money to Project B. You can't say that because this project has the support of 99% of the community members, 99% of the money should be allocated to Project A; at the same time, you can't say that because the rich man contributed 99% of the funds of the fund, 99% of the money should be allocated to Project B. The former ignores the contribution of capital, and the latter ignores the interests of the community.

To address this issue, quadratic fundraising can take into account both the number of people and the amount of money.

Basic properties

The distribution of quadratic funds is done through a special formula. A project usually receives several donations. Then, we can first take the square root of each donation amount, then add these square roots together, and finally square the result of the addition. The final result is the total donations received by the project.

It can be mathematically proven that when there are more than one participant, the square of the sum of the square roots is greater than the arithmetic sum of the donation amounts. Especially when there are many participants, the difference between the two will be huge. This will inevitably require a subsidy from one party, and our fund pool will take on this function.

Two major benefits

There are two very clear benefits to quadratic fundraising.

First, the more people participate in the donation, the better the matching effect. For example, if a project has n people and each person donates $1, then the amount received by the entire project is n squared. This makes up for the impact of the tragedy of the commons. Direct and simple donations do not work well because each participant can only get one-nth of the value of the public good.

Second, small donations are well matched. The formula dictates that every donation will be matched, but the ratios magnify smaller donations at a higher rate. This largely eliminates the phenomenon of the rich dominating everything, because someone who only donated $1 will get more matching than someone who is going to donate $10,000.

Therefore, quadratic fundraising can take into account both the number of people and the amount of money.

2. Why use quadratic fundraising in Ethereum?

The Ethereum community faces a lot of work: we have a lot of software to write, a lot of research to conduct, and a lot of documents to compile. In addition, we also need to provide public products in education, law, translation, and other areas.

Currently, the Ethereum Foundation is a centralized way of allocating funds to public goods. With an annual budget of $30 million, the Ethereum Foundation tries to be a fair fund allocation organization as much as possible, but the foundation is still controlled by a small group of people and is sometimes criticized for only supporting projects in a limited field.

Instead of hiring a few people to focus on allocating funds, it is better to delegate this power to the community. We now need a way to make fundraising and decision-making more diverse, more democratic, more open and inclusive, and quadratic fundraising is the perfect solution to this problem.

3. How does the Ethereum community improve quadratic fundraising?

We decided to reduce human rule, but this does not mean lazily leaving everything to programs and codes. Instead, it requires continuous experimentation, and improving, iterating, and perfecting new ideas in practice.

Gitcoin is a quadratic fundraising experiment conducted in the Ethereum community. Initially, quadratic fundraising on Gitcoin only provided rewards for people who wrote code for new projects, but now the scope of rewards has been integrated into many sub-sectors of the Ethereum ecosystem to support the operation of various public products. After a year and a half, Gitcoin's experiment has been carried out for 7 rounds. Since the third round of fundraising, the project has reached a high level of application.

Funding sources: Most of the subsidies come from the Ethereum Foundation, and some come from Consensys and individual donors. In the recent seventh round, some DeFi projects also donated. The largest donation came from BalanceLabs, followed by Synthetix Optimism, ChainLink, Learn and some other investment funds or individuals. This shows that the quadratic fundraising mechanism is becoming more and more important, because more and more projects are willing to participate in matching.

Negative contribution: The projects funded by the experiment are mainly divided into two categories, one is technology projects and the other is media projects. Technology projects include Uniswap, Saliber, Dappnode, etc. Media projects include the Week In Ethereum News, a media that collects news related to Ethereum, and the Twitter account @antiprosynth. Technology projects are generally not controversial, but media projects are different. Some people think that media projects have little value and may even have negative effects. So we thought of modifying the formula to allow people to express such views - they think a certain project has negative value.

So in the fifth round of fundraising, we experimented with negative contributions. We experimented with a mechanism where people could not only donate money, but also take money away from the project and then reallocate it to other projects. In fact, this experimental mechanism did not work very well, and few people actually made "negative contributions" in the end. People were frustrated about the consequences of this mechanism. They didn't like to see people using this mechanism to hurt each other. In the sixth round of fundraising, we terminated the "negative contribution" setting. In fact, if we can achieve good enough anonymity in the future, we can try negative donations again.

However, in the subsequent experiments, the community's controversy over media projects seemed to disappear. Among the top 10 projects with the most fundraising in the seventh round, media projects are all quite good. There are Bankless, Week in Ethereum News, and some decentralized finance tutorial projects, such as Ethereum Magicians, Zero Knowledge Podcast, etc. This is a very valuable podcast for Ethereum, which will explain zero-knowledge proof and zkSNARKs technology in depth. In addition, there are RadicalxChange Foundation, ETH Memes, @antiprosynth, etc.

Income stability: We want people to be able to not only get a little extra money on top of what they already earn through quadratic fundraising, but also be able to live entirely on quadratic fundraising and become quadratic freelancers. The problem is that the amount of money people get from round to round is very unstable. So in round 6, we experimented with automatically transferring donations from the previous round to the next, but in the end it didn't actually have much of an impact. But we're continuing to monitor this issue.

Collusion and fake accounts: In round 5, we found collusion and fake accounts. Collusion and fake accounts are a thorny problem based on how quadratic fundraising works. For example, a user who distributes donations between 50 accounts will get a much larger match than an honest user. So in round 6, mobile phone verification was added to the identity verification process, which made it more difficult to create a large number of fake accounts. In round 7, we added decentralized identity verification. BrightID is a decentralized identity platform that creates decentralized, social network-based mechanisms to prove that certain accounts correspond to a single individual. In addition, we modified the formula, which is called "bounded quadratic fundraising". To minimize the risk of cheating, the matching amounts are divided by a number (at least ten). Overall, this mechanism works well.

User experience: Finally, we have improved the user interface and simplified the process for the community to contribute to the project. We have also added a second-layer protocol payment, and users can use zk rollup to reduce transaction fees.

in conclusion

First, the quadratic fundraising mechanism is useful. It better allocates funds used to finance public goods to where they are needed in a fair, democratic and efficient manner. Current practice has proved that it will bring some good results.

Secondly, quadratic fundraising is not only efficient in allocating funds (so that the Ethereum Foundation doesn't have to allocate funds itself), but it is creating a culture of civilized and open community participation, and many people have found a way to express their opinions and talk about things they think are valuable in the Ethereum ecosystem. I think this is absolutely helpful in creating a very wonderful and cooperative ecosystem. Many people are very actively participating in donation activities.

Overall, the effect is quite good.

Challenges & Opportunities

Quadratic fundraising still needs improvement in some areas. We may want more ways to make it easier for people to determine which projects are worth contributing to and which are not, and allow more proxy authorization. We also want to continue to improve security and make fundraising results more inclusive and more distributed, such as expanding communities and projects outside of Europe and the United States, such as Asia and Africa.

Another important thing is that for any new community, quadratic fundraising is a new thing, and it takes several rounds of work to make it work better. In the Ethereum community, we conducted at least four or five rounds of experiments before people really understood how quadratic fundraising works. So, although the first one or two experiments are not very effective, we should still persist. If it is done every three months and very reliably for two or three years, the effect will be better.

The Gitcoin Grants team is trying to apply quadratic fundraising to other scenarios. They did an experiment called "urban stimulus" to apply quadratic fundraising to businesses, such as some local businesses in Denver and Colorado, and the results looked promising.

We learn more and more with each round of fundraising. For example, we are becoming more and more clear about what projects should receive donations and what standards should be followed for community participation in projects. In general, quadratic fundraising is still evolving and improving.

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