After dissecting the intersection of blockchain technology and public goods, and analyzing the Retroactive Public Goods Funding (RetroPGF) mechanism, our exploration into frameworks for supporting public goods initiatives continues. We’re now curious to examine one of the most popular and impactful models, Quadratic Funding (QF).
One of the most viable ways to invite and unlock essential elements into a blockchain ecosystem is through supporting public goods. By incentivizing community impactful initiatives, a project can attract people to build tooling, infrastructure, liquidity, and so on. Yes, setting up a transparent, fair, and inclusive funding mechanism could be a challenge, and that is one of the reasons why the design space of Web3 capital allocation tools is so diverse. Let’s unpack how QF tackles this problem.
What is Quadratic Funding?
Quadratic Funding (QF) is a mechanism that amplifies available resources by matching them with crowdfunding and community donations. The main innovation that QF introduces is the fact that community contributions act as votes in favor of the applicants that deserve the most support. By placing a stronger emphasis on the number of contributors than on the amount collected, QF kills two birds with one stone: It expands the amount of available funding while also identifying the projects that have garnered the community’s praise. For those reasons, QF is arguably the most democratic, equitable, and inclusive mechanism for funding public goods.
How does Quadratic Funding Work?
The concept of Quadratic Funding manages to solve one major problem: How to select the funding applicants in order to achieve the most considerable social impact possible. QF achieves that by allocating funds proportional to individual contributions, and thus funding what matters to as broad a slot of the community as possible. Here’s an example of QF in action:
- A company or foundation sets aside a dedicated public goods fund.
- Projects applying for funding invite the community to support by providing a donation.
- Each community contribution is then matched by the total amount generated in proportion to the total number of unique contributors and the total amount of community contributions.
- As a consequence, contributions from more individuals are matched more generously than those from fewer individuals.
One of QF’s most advantages features lies in the fact that it completely excludes human subjectivity from the process of fund distribution. It uses a mathematical formula where the matching funds increase quadratically with the number of unique contributors, thus fostering fairness and inclusivity.
That means that if two projects compete for funding, and Project A collects $100 by 100 contributors, while Project B attracts $101 by 1 contributor, Project A will get 99% of the matching prize pool, even though it received a smaller total amount of dollars.
By this methodology, QF manages to reach several important milestones:
- Distribute funding in a much more transparent and efficient way;
- Encourage community contributions, no matter how modest they are, by assigning the same voting weight to each individual donation;
- Increase fairness and inclusivity by leveling the playing field and placing lesser emphasis on large donors;
- Increase diversity by motivating donors to participate, regardless of their financial means;
- Support smaller initiatives that may have struggled to attract the attention of investors, but are still important to the community.
Why is QF so powerful? Because even contributing a single dollar can lead to thousands of dollars of matched funding, depending on how big the matching pool is and how many other contributors there are.
Is Quadratic Funding better than other funding models?
Taking into consideration that QF and RetroPGF are the two most widely used mechanisms at the moment, it makes sense to compare them:
- Retroactive vs. Proactive: While RetroPGF targets initiatives that have already been proven valuable, QF extends support to future endeavors.
- Technocratic vs. Democratic: Both funding mechanisms rely on the community to select the project that deserves support, but the community subset that actually has the right to vote is quite different. While in RetroPGF only a selected group of well-regarded and respected community members can vote, in QF, typically everyone has the opportunity to vote. Accordingly, QF is viewed as the more democratic capital allocation method, since it invites people from the outer edges of the community to fund what matters to them. On the other hand, it can be argued that protocols currently performing RetroPGF programs, like Optimism, are progressively decentralizing the voting process.
The QF framework does have a notable design flaw that should be taken into consideration. Since it’s the number of contributors that tips the scales, grant applicants are incentivized to fabricate identities and use those identities to contribute to the voting – essentially sybiling the process. One of QF’s biggest advantages, i.e., allowing every community member to cast a vote, has turned into its most worrisome vulnerability.
To overcome this issue, Gitcoin, one of the biggest QF proponents and infrastructure providers, has introduced Gitcoin Passport. With it, the company aims to help contributors verify their identity while increasing attackers’ cost of forgery. However, that solution also has issues since it increases the cost for real users to verify, too.
How did Quadratic Funding come about, and who is using it?
The Quadratic Funding model was invented by Microsoft’s E. Glen Weyl, Ethereum’s Vitalik Buterin, and Harvard University’s Zoe Hitzig. In their 2020 paper “A flexible design for funding public goods”, the authors outline a mechanism for citizens to contribute to public goods projects that they find valuable. According to their model, the total funding a project receives is proportional to the square of the sum of the square roots of all contributions.
Later on, Gitcoin embraced QF as part of its arsenal and it became its flagship product. Up until the time of writing, Gitcoin has performed more than 245 funding rounds and has invested over $60M in public goods. It was initially only focused on the Ethereum community, but is now active in many other ecosystems.
Earlier in 2024, Gitcoin presented its 2.0. white paper, which envisions it becoming a capital allocation powerhouse, allowing communities to deploy tokenized treasuries and allocate them to what matters to them. Apart from QF, Gitcoin now offers direct grants, RetroPGF, and other innovative funding solutions. Various crypto behemoths have used Gitcoin’s infrastructure to fund public goods, including Coinbase, Optimism, Protocol Labs, Uniswap, and Polygon.
Of course, Gitcoin is not the only protocol performing QF rounds. Others include Giveth, Endaoment, and clr.fund. In the Cosmos ecosystem, Dora Factory was granted $1M to perform 10 QF rounds over the next two years, currently carrying out Round 4 of ATOM Economic Zone (AEZ) Grant Quadratic Funding.
Quadratic funding is an innovative approach to capital allocation, guaranteeing equitable and transparent distribution of funds, and inclusive community participation. It’s a step toward a fairer future, though it comes with its set of challenges. While neither QF nor RetroPGF are panacea for the challenges of funding public goods, they are valuable tools that complement one another.
It’s a mission for DCF to support innovative solutions empowering decentralized cooperation and public goods development. We’re eager to learn and spread the word about disruptors, encouraging a systemic change. If you’re working on something similar, reach out to us.
Want to learn more about QF? Watch this TEDx talk from Gitcoin to dive deeper into how Quadratic Funding is shaping the future of Web3.
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