The Next Stage for Public Good Funding in Crypto

If you’ve spent any time in Web3, you’ve likely come across the term “public goods.” While its definition is often debated, the need to fund public goods is widely accepted by those who understand its importance. Key figures like Vitalik Buterin, the Ethereum Foundation, and organizations such as Protocol Guild, Octant, Optimism, and Gitcoin have made this a priority.

Traditionally, funding public goods has been seen as a charitable act. But what if there was another way — one that could drive innovation within the ecosystem while preserving the essence of public goods funding? What if we could transform some public goods into private greats?

To start, let’s define public goods in a way that will make sense for this article. Traditionally, public goods are commodities or services provided without profit to all members of society, typically by the government or private organizations. Common examples include clean air, roads, bridges, and libraries — essential resources that benefit everyone, regardless of individual contribution.

In Web3, however, the definition of public goods shifts slightly. As defined by a16z, “the classic challenge of decentralized networks is that they are public goods. Without a central entity to control decisions and capture profits, it is hard to incentivize their maintenance and development. Crypto helps solve this problem through decentralized coordination and economic incentives for development. Web3 will put the power in the hands of communities rather than corporations.” This version of public goods is built on decentralized systems that require a different model of sustainability.

While governments have historically managed public goods through centralized control and taxation, Web3 presents a unique challenge due to its decentralized structure, which lacks a similar enforcement mechanism.

If we consider the digital equivalents of roads, bridges, and tunnels in Web3, much of this infrastructure is open-source software — critical to running decentralized networks but equally in need of ongoing funding. Unlike traditional public goods, which governments can maintain through taxation, Web3 lacks a similar guarantee of revenue.

Without a central authority to mandate contributions or oversee funding, Web3 ecosystems must find alternative methods to sustain the infrastructure that supports their decentralized networks.

How do we fund these digital public goods when there’s no system in place to tax users or corporations to support their upkeep? There are already a few innovative models in place that aim to make public goods funding self-sustaining, but others are still needed.

One recent example has been the Protocol Guild Pledge, introduced by Tim Beiko, of the Ethereum Foundation, earlier this year. Their mission is to contribute to Ethereum L1 research and development through normalizing the idea of projects built on Ethereum to donate 1% of their native token to Protocol Guild.

Read more: Azeem Khan - It’s Time to Build a Sustainable Blockchain Ecosystem

There’s also Octant, which is aiming to create a self-sustaining model of public goods funding in a new version of crypto altruism. Supported with 100,000 staked ETH from the Golem Foundation’s treasury, a portion of those returns are used to give back to impactful projects using governance where the community can keep or donate staking rewards of $GLM. To date, over 1150 ETH has been distributed to over 40 projects in just a year.

Optimism’s Retroactive Public Goods Funding (RPGF) supports projects w based on their impact, orchestrated through community voting with grants rounds that take place twice a year. To date, it has distributed over 50 million $OP tokens across RPGF 1, RPGF 2, RPGF 3, and RPGF 4.

Organizations like Gitcoin, which began running grants rounds in 2019, have distributed over $60 million using a novel community-driven capital allocation method called quadratic funding. This system has enabled many projects to flourish, with several recipients of these grants going on to become some of the most successful companies in the Ethereum ecosystem.

Companies such as Uniswap, Optimism, Yearn, Gnosis, and 1Inch are examples of early Gitcoin grantees. The collective market caps of those that launched tokens, alongside the private valuations of others that raised capital without live tokens, far exceed the amount of funding initially provided. While many of these companies have given back to the ecosystem by donating to public goods, raising new funds for future rounds remains a challenge. This is especially true during bear markets, when capital is scarce, and venture funding is harder to secure.

A new model

Although not all public goods projects evolve into profitable ventures, whether through revenue generation or token issuance, it’s certainly within the realm of possibility. But what if there were a built-in model where companies benefiting from public goods funding returned a portion of their success to the community?

We need a system where a percentage of proceeds or profits were reinvested into public goods by those who benefited from them could ensure long-term sustainability. Unlike the Protocol Guild Pledge, where contributions specifically support Ethereum L1 R&D, this model would channel funds into a broader vehicle that reinvests directly into the overall ecosystem. While Protocol Guild focuses on Ethereum’s core development, this broader reinvestment model would support the diverse array of public goods necessary for a thriving Web3 ecosystem.

When considering vehicles to collect and distribute capital, a structured venture fund specifically designed to support public goods seems like the most effective option. This model would shift public goods funding from being a charitable act to becoming an integral part of business operations. These funds would be managed by experts in capital allocation, with the focus not on personal profit, but on strengthening and expanding the ecosystem. Typically, venture funds allocate 2% of total capital annually for operational expenses, including salaries and other costs. In a common model, 20% of the fund's profits, known as "carry," are allocated to the fund managers, while the remaining 80% goes back to the investors who contributed to the fund.

Using a model like this would allow companies that receive investment to return a portion of their success to the initial fund that helped them grow. The venture fund partners, experienced in investing, would still have financial incentives to generate returns through a portion of “carry,” in addition to their salaries. These salaries could be substantial, depending on the assets under management.

Read more: Azeem Khan - Crypto’s Venture Capital Gap

This alignment of incentives ensures that fund managers remain motivated to invest in successful projects, as their own financial success is tied to the ecosystem’s overall health and growth. As each success contributes back to the fund, its size would continue to grow. If aligning incentives leads to better outcomes, this approach to privatizing the investment of public goods could have a significant impact.

Receiving investment from this fund could signal to the ecosystem that a project is committed to giving back, distinguishing it from those that don’t. This positive reinforcement could enhance the fund’s reputation, attracting top deals and enabling it to continuously reinvest in the public goods ecosystem.

Public goods funding is a complex issue, and there may be no one-size-fits-all solution. . While charitable models have been the primary approach so far, the idea of privatizing public goods investment — allowing them to thrive without relying on charity — presents a compelling path forward. By aligning incentives and creating new funding vehicles, we can ensure that public goods become an integral, self-sustaining part of Web3’s long-term growth. Now is the time to rethink how we fund the infrastructure that powers decentralized networks.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.