Thoughts on Public Goods Problems with special reference to Web3 and Regenerative Finance

#type/essay #status/10percent

The main issue in public goods provision (aka commons management etc) is how to raise funds (or, more generally, coordinate contribution). A secondary issue is how to manage and spend the funds raised. These two aspects do have a connection because the nature of the management can influence the willingness to contribute e.g. people are more willing to pay taxes for public goods in a democracy compared to a dictatorship because they have a say in how the money is spent ("no taxation without representation" etc). That said, too much attention is often placed on the second issue – or it is even assumed that addressing the second issue, i.e. having good allocation mechanisms, will automatically solve the first issue i.e. how to ensure contribution.[^1] This is plainly not the case: ensuring adequate funding however good the allocation mechanism is.

This focus on the second issue is even more misplaced in the common practical case where one can already take for granted that the allocation mechanism is fairly democratic or representative e.g. shareholders in most modern public corporations, citizens in democratic states (and even in many more authoritarian ones where substantial indirect mechanisms exist). In these cases, one is already starting from an already decent level. Thus, any improvements in allocation mechanisms will have only a very marginal impact on incentives for contribution.

This is especially important to emphasize in relation to web3 and ReFi for several reasons. First, there is a huge amount of interest and discussion around mechanism design and public goods funding. Second, there is generally agreement on a participatory model with the debate focused on exact details of voting and governance mechanisms for allocating funds e.g. quadratic voting, continuous voting etc. Third, the ellision highlighted above is common and leads to neglect of the first issue relative to the second – there even often is an implicit assumption that addressing the second issue will address the first.

This essay is about clarifying that the hard and important part of public goods is the coordination of contribution. And, hence, that innovations in allocation or voting are of little relevance – especially in web3 and ReFi.

The Public Goods Problem

Fundamentally, the heart of the public goods problem is a free-rider problem. It is about how to deal with ensuring adequate contribution of those who stand to benefit – and, in particular, avoiding "death spirals" where concern about others contributions (or simply rational self-interest) drive down contributions to the point of breakdown in provision of the public good.

For sake of this exposition it is worth having a concrete "toy" example in mind. In our case let's think of a public swimming pool in a community.

This small toy example can stand for a variety of larger real-world cases such as:

• Resourcing creation of open-source software or protocols
• Removing plastic from the world's oceans
• Resourcing research in general
• …

It also applies to cases of prevention e.g. collective action to reduce carbon emissions to prevent climate change.

Basic story goes like this …

• Creating a public swimming pool in a village
• …
• Swimming pool does not get sufficiently funded

Solutions

• Restricting access to the swimming pool