Green Pill Radio: Vitalik Talks About Public Goods Financing and the Crypto Ecosystem

Source: Green Pill Podcast

Compiled by: Roy, Shawn, Long Jiao Jiao, The SeeDAO

"Key Points"

• Quadratic financing is a self-improving system that requires an open mindset to adjust mechanisms while maintaining simplicity;

• Improvements to the mechanism should be made through minimal tweaks to further optimize the matching algorithm; and cautiously explore the contentious issue of negative voting;

• The imbalance in public goods financing is a significant problem in the cryptocurrency space;

• The governance of DAOs and public goods financing will ultimately converge into the same issue;

• Layer 2 needs to continue becoming cheaper and more scalable;

• To achieve true sustainability technically, efforts must be made to enhance credible neutrality;

• Mechanism diversity and customer diversification are beneficial for risk prevention;

• NFT projects partnered with artists and charitable projects are a valuable exploration for promoting public goods financing;

• Replace unconditional token airdrops with Learn to Earn and tools to measure users' value contributions;

• Distinguishing community belonging among members is ultimately the evolutionary direction of quadratic financing;

• Public goods and private goods are not a binary relationship, but rather interdependent.

"Introduction"

Host for this episode: Kevin Hello everyone, welcome to Green Pill. I am Kevin Owocki, and this is a podcast about public goods and regenerative crypto economics. Today, we have invited Vitalik Buterin, the founder of Ethereum and a research scientist at the Ethereum Foundation. Vitalik's influence on the industry is clearly immense. He published the first version of the Ethereum white paper and is the visionary behind the Ethereum network.

In this episode, I want to delve into why Vitalik is so concerned about public goods. There are different voices suggesting that Vitalik is not as focused on public goods as he used to be; if that were true, I believe the Ethereum community would lose some of its vitality and its current community-centric attributes. Vitalik has always advocated for public goods, so such claims are unfounded. I am eager to understand how he views public goods, why they are beneficial, and which experiments in the community he believes hold the most promise for public goods financing, among other things.

In addition to being an advocate for the Ethereum ecosystem, Vitalik co-authored the "Quadratic Financing White Paper" with Glen Weyl. It is well-known as the cornerstone of Gitcoin. I believe there are many interesting overlaps between Gitcoin as the implementation of quadratic financing and the research that Vitalik and Glen have done on it. So, for me, this episode is very intriguing. I hope you enjoy this episode featuring Ethereum founder Vitalik Buterin. Stay tuned!

"Vitalik and Quadratic Financing"

Kevin: Welcome to the show. With me is Vitalik Buterin, the founder of Ethereum and a research scientist at the Ethereum Foundation. Welcome, Vitalik. Vitalik: Thank you, Kevin. I'm glad to be on the show.

Kevin: Thank you for joining us, Vitalik. Your background and how you founded Ethereum have been detailed in the book "The Infinite Machine" and elsewhere. So here, I want to talk about your advocacy for public goods and your speech on "Important Things Beyond DeFi" at EthCC this year. Naturally, we have to start with quadratic financing. Gitcoin Grants were built on the research paper you and Glen Weyl wrote about quadratic financing. How did you and Glen conceive of quadratic financing? How do you see its future development? Vitalik: I think Glen was the one who initially proposed the idea of quadratic voting. In fact, he was one of the people who came up with this concept. Later, it was discovered that there were a lot of papers throughout history pointing to very similar ideas. This is often the case for the best concepts. There was a paper from 1980 discussing why quadratic voting is theoretically the best voting rule. There are a few other papers that might have touched on this as well. Glen provided the best and most detailed exposition. I think that was a paper he published about five to ten years ago. Quadratic financing is the application of the idea behind quadratic voting to public goods. I think one of the huge differences between quadratic voting and quadratic financing is that in quadratic voting, the voting issues are still fixed; someone still needs to choose the issues. The fact is, the agenda setters actually have a lot of power.

Basically, if you belong to a majority group and your interest in something is less than that of some minority groups, and you want to defeat those minority groups, you can often exhaust their voting points by proposing the same issue in different forms repeatedly.

Quadratic financing is a bit different. It is a completely self-improving system. Even the issue selection does not need to be set in stone or have preconceived notions; you can call it whatever you want. According to the quadratic financing formula, based on the number of donors and the amount of matching funds a project receives, anyone can create a project and get it funded. So in this concept, even the decision of what issues (in this case, which public good to fund) is a powerful part of the mechanism.

So Glen and I wrote the initial paper. I also proposed a modified version called "Bounded Pairwise Quadratic Financing," which is more robust against collusion and attacks from a small number of accounts. I think quadratic voting and financing started from there. "Evolution and Challenges"

Kevin: For me, Gitcoin's mission is the survival and development of open-source software. With that focus, we launched Gitcoin Grants based on quadratic financing. Hearing you recount how we got here is truly amazing. I want to know how you see the future development of quadratic financing? On Gitcoin, we use pairwise algorithms to prevent collusion in the mechanism. I know there are other projects doing well, like clr.Fund, which uses MACI in its mechanism. Are you envisioning future iterations of the mechanism, or are you just looking to address issues like resisting witch attacks or other problems associated with quadratic financing?

Vitalik: I see a need for both. But when it comes to what adjustments need to be made to the mechanism, I firmly believe we should maintain an open mindset. Other than possibly tweaking the pairwise coefficients a bit, I can't think of anything else we could do. One possible direction is to try to identify which projects are supported by the same group of people and which projects are genuinely receiving diversified support. We will make more efforts in this area; for example, the pairwise matching algorithm has already made some progress in this regard. But we will double down on this direction. Another direction is clearly to go back and explore the issue of negative voting to some extent. This is obviously very controversial, but I really believe that not doing so poses risks. Some things need to be responded to with negative feedback. Especially if a project like Bankless DAO or Gitcoin, or any project that starts well and enters the media spotlight, the media tends to lower the quality of public discourse. Just as our first attempt in the fifth round sparked a lot of controversy. So it's better to proceed cautiously with such things.

The mechanisms of positive and negative voting could be quite different. Any negative aspect might require more privacy. So to some extent, it might be one of those areas where experiments should be conducted carefully.

Aside from that, MACI clearly has privacy features to resist witch attacks. Otherwise, it would just be a series of tweaks. In fact, I believe the right approach is to keep the mechanism relatively simple and maintain minimal tweaks. It builds more confidence and sets a precedent that "this is how the mechanism works."

Kevin: Amazing. It's great to hear the perspective of one of the authors of the quadratic financing paper. There's something I want to discuss with you; in fact, there are some difficulties with the pairwise mechanism's adaptation on Gitcoin right now. Because each quarter we have 700,000 contribution points, and the pairwise algorithm means pairing every contributor with each other.

Vitalik: Wait, 700,000 contribution points. How many contributors are there? Kevin: I think it's around 30,000. I need to check again, but it does grow exponentially with the number of contributors. Vitalik: It should be quadratic.

Kevin: Yes. Vitalik: 30,000 times 30,000 equals 900 million. We might need to write it in C instead of Python. I'll keep that in mind. We're trying to think about whether we can do some algorithmic tuning.

Kevin: Exactly. I think replacing n^2 with log / log(n) would be great. But we will explore using C++, maybe moving to GPU memory or something similar for upgrades. Vitalik: I think another issue is that all these things on MACI will be SNARKed. So the efficiency will drop. So I do believe there is some room for algorithmic adjustments. But now that's a good insight. I'll think more about it. Kevin: Great. I just found the exact number: Round 12 Grants had 27,000 contribution points or contributors. Vitalik: Nice. So you get a 27,000 times 27,000 matrix, totaling 729 million entries, most of which are zeros. Kevin: Yes. The content of the show is aimed at the public, but for the Gitcoin engineering team trying to adapt to this data volume, we're being too brief.

"Green Pill Vitalik"

Kevin: Let's broaden our perspective and expand the topic from quadratic financing, which we have in common, to the entire field, discussing how cryptocurrencies and web3 can be effectively utilized for public goods. Since I started following you, Vitalik, you've been talking about cryptocurrencies. You've also talked a lot about public goods. I've been reading what you've written, and I want to know how you became a Green Pill person? What makes you care about public goods?

Vitalik: I think if you observe the cryptocurrency space long enough, you'll find that there are basically two major problems. One is that many public goods are underfunded. You can see this severe imbalance: some projects spend hundreds of millions or even billions on securities, liquidity mining, or whatever, but can't scrape together a few million to pay for development. The second is that because suitable public goods are not funded, centralized alternatives emerge in the market. Essentially, you create an ecosystem, but the result is that its level of centralization becomes much greater than it should be. Open-source software is a great example of this situation. Open-source things are public goods, so it's harder to come up with incentives to encourage contributions to them. The situation often is that someone creates a half-baked software package, but because it's closed-source, it leads to a business model that allows developers to earn a continuous income.

Trying to come up with a better solution has undoubtedly been something I've been quite passionate about for a long time. I've always been very interested in the concept of DAOs. I think they used to be called DACs, and calling them DAOs is to make it more general—Decentralized Autonomous Organizations. Another perspective I have is figuring out how to truly achieve decentralized governance and what that decentralized governance mechanism would look like. Coincidentally, public goods financing is one of the most important issues, or at least one of the essential tasks that any rational governance mechanism will inevitably have to address. So in a way, they ultimately become the same issue. "The Endgame of Cryptocurrency"

Kevin: It's fantastic to hear you use open-source software as an example; that's why I find Gitcoin's goal is to ensure the survival and growth of open-source software. I believe that the underfunding of digital infrastructure leads to a systemic imbalance between value creation and value capture. What do you think the ultimate outcome of cryptocurrencies and public goods will be? For instance, do you think we can better fund those underfunded public goods within the Ethereum ecosystem? What conditions must be met to scale it to all digital public goods? Or perhaps all public goods in the world will eventually utilize mechanisms innovated in the cryptocurrency space? Vitalik: Good question. I do believe it's important to further expand into more digital public goods. I think you will face two main challenges. One is scalability. Actually, I forgot to mention, are the new D Grants deployed on the Polygon chain now? Kevin: Yes, I can deploy on any EVM-compatible network, but it is… Vitalik: Right, deploying to an EVM-compatible chain, although I think Layer 2 still needs to be cheaper and more scalable. Because the cryptocurrency space is made up of relatively wealthy people. The transaction fees are quite high by the standards of most ordinary people, but they can afford them more easily. Those outside the ecosystem cannot. I personally do believe that the approach of putting the encrypted record of votes directly on-chain, like MACI, is very valuable. It indeed enhances the security of the entire system. But if we want to make it technically sustainable, another issue might be… Let me see, one is that people outside the Ethereum ecosystem are not very familiar with quadratic financing. Another big problem is that there are these very large pools of funds on the blockchain seeking credible neutral deployment pathways. It's easy for a large project to come up with $500 million, but coming up with a mechanism to figure out how to use that money in a way that the community will truly accept is much harder. This is not a problem most people face, right? Most people can't even get $500 million.

I think governments have local taxes and such. You have to do better for people to be willing to experiment at that scale. I believe the Ethereum ecosystem itself is even willing to experiment. But maybe it can work; I mean, if it really becomes a thing, then great. There are some ecosystems that have neither cryptocurrency nor government support behind them. For example, non-cryptocurrency open-source software faces the problem of where the funding comes from. If the problem is significant, the only compromise is to find funding. Perhaps the most enthusiastic funders you find have strong opinions about which projects should be funded. So models like quadratic financing, which make decisions based on contributions from everyone, don't get a chance to shine.

Despite these anticipated concerns, I also genuinely believe there is great hope. So I strongly support any efforts for continuous expansion. The only way for this to ultimately succeed is to let the problems get solved over time. Some of these issues might technically take another year or two, but that's okay. Just like in the U.S., existing within a 225-year constitutional framework. So sometimes these things just take time. Right? "Diversity"

Kevin: Yes, many experiments, iterations, and evolutions have gone through such time frames, spanning years. This actually leads perfectly into my next question: how do you view the Ethereum ecosystem? We've talked multiple times about client diversity, which is to ensure that once we transition to PoS (Proof of Stake), the base layer clients are willing to power the network. Implementing diversity can prevent any type of failure in the network when a particular client has a bug or security vulnerability. I want to know how you view the mechanisms and implementations of diversity in the public goods stack? Over the past year, you've been discussing traceable public goods financing with the Optimism team. I think it's a brilliant complementary mechanism for Gitcoin Grants' current operations. In the ecosystem of quadratic financing, we have Gitcoin, clr.Funds, from which we gain a diverse public goods fundraising stack. There are also inter-subjective consensus tools being established on DAOs, like Coordinate, which is used to create a mechanism to fund contributors to DAOs. I want to know how you view the mechanisms and implementations of public goods financing stacks in the Ethereum ecosystem? How does it relate to client diversity? To achieve diversity in ETH2 post-epoch, how do you view both? Vitalik: In fact, diversity is crucial for both types of situations. One is that overly powerful things can cause more problems when they go wrong. So a lack of diversity can make you vulnerable; overly powerful things can pose risks. Another situation that triggers risks is missing the opportunity to do things right. I think many public goods financing belong to the second type, especially in the software domain. It is much worse to waste ten million dollars on the wrong project than to miss funding a project that later proves to be quite important. This is also a strong argument for diversity. The second situation is precisely why I support the coexistence of multiple mechanisms. There are Gitcoin Grants and quadratic financing, there is Optimism's traceable financing. We can also have Uniswap DAO and various other DAOs. There should also be a few centralized organizations led by excellent people who work hard to execute their shared vision. As an ecosystem, it actually suffices to ensure that important matters do not go awry as long as one of them can get it right. This is one way, and it's one of the reasons I think diversity is important.

Another reason it is important is that creating greater diversity can prevent risks arising from a single client becoming too powerful. In the case of ETH2 clients, this is obviously very important. We have consensus layer clients and execution layer clients, right? It is important because if 2/3 of the network uses the Prysm client, once the Prysm client has issues, the network will immediately fail to produce blocks. That is not right. It would be very difficult for the ecosystem to recover.

Another example might be the balance of political power. Suppose there is a highly centralized political elite with significant power to decide how a protocol advances or has a large veto power; ultimately, it will really limit the development of things, restrict the evolution of protocols in different directions, or limit the possibility of getting back on track.

So keeping these two points in mind and promoting them is indeed crucial. I'm glad we have these two types of clients. There has been significant progress in acquiring users, but we not only need users; we also need applications, such as DApp nodes that many followers can rely on. I support all of this.

Clearly, more decentralized public goods financing inputs have already improved many aspects of the Ethereum space. You know, even Backless was a major recipient of early Gitcoin Grants funding. So we need both. We need a lot of this public diversity.

"Public Goods Mechanisms"

Kevin: Awesome. Earlier, we mentioned some mechanisms, and I want to recap for the audience: there is traceable public goods financing from clr.Fund and quadratic financing from Gitcoin Grants. Besides these, are there any other public goods financing methods that interest you and you think have yet to be fully explored? Vitalik: I've pushed for concepts of public goods financing that do not rely on centralized funding allocation in other contexts. Funding public goods with NFTs has been done quite well. So far, there are some very expensive NFTs on the market. They often support some interesting and fun projects. But if we can make these high-quality NFTs support not only fun projects but also meaningful ones, that would be even cooler. I think I've supported their models. Not long ago, when I wrote that article about legitimacy, I expressed the idea of NFTs where artists partner with charitable projects. Artists provide their artworks to charitable projects and lend some legitimacy, and the profits are shared by both parties.

NFTs have become a way to express both art and your concern for specific charitable projects. I know about OptiPunks, which is like an Optimism derivative of CryptoPunks. I see they put a portion of the sales from the punks into a traceable financing pool, something like that.

Kevin: Yes, they indeed donated. We are very grateful for that. We also experimented with a project called "Moonshot Bots" in Gitcoin DAO, where all proceeds from this NFT primary market sale go to public goods. Then we also released an NFT for public goods in collaboration with Nouns DAO. So Gitcoin has actually done some experimentation in this category of financing. It's interesting to hear you say that, especially with the explosive growth of NFTs in 2021. Vitalik: I'm glad to hear that.

Kevin: Great. Quadratic financing is indeed an elegantly brilliant mechanism, but it also comes with two types of risks. The need to address the inclusivity issue regarding witch attacks is complex, as well as the issue of continuous funding for the matching pool. To keep the quadratic financing engine running, these two interconnected problems need to be solved. You have always advocated "let's not spend too much money in each round" and "let's ensure the community is informed." Over time, quadratic financing has also been evolving. Therefore, people are starting to have expectations and adjust their actions to make an impact on public goods. Is my understanding of the two mechanisms correct? The two risks associated with quadratic financing are the innovative capacity of the matching pool funding method and the innovative capacity for fraud detection. Are there any other implementation issues related to quadratic financing that you would like to discuss? Vitalik: Those two are probably the main issues. The first type of issue is that we need to ensure the robustness of the mechanism, including responding to key attacks and witch attacks, cryptography, and so on. The other issue is to look for funding sources.

"Resisting Witch Attacks"

Kevin: If there's nothing to add, I'm ready to talk about the issue of resisting witch attacks. I know you recently spent some time in Argentina with Santi. We discussed some of this on his show. I believe proof of humanity (PoH) is an impressive protocol in the Ethereum ecosystem for resisting witch attacks. Once witch attacks spread throughout the ecosystem, what new mechanisms might the ecosystem invent? You mentioned that one token one vote could lead to oligarchy. What kind of new mechanisms do you think transitioning from a one token one vote DAO to more one person one vote type systems will foster in the ecosystem? Vitalik: There are many governance aspects? Certainly. On the other hand, handling token issuance well is also important for major non-governance use cases in cryptocurrencies. Currently, there is obviously airdrops, but there are several reasons against airdrops. One reason is that airdrops cannot distinguish between those who truly care about the project and those who hardly care at all. Proof of personhood does not solve this problem; perhaps other solutions are needed to replace unconditional token distribution, and I am increasingly fond of Learn to Earn. The next issue is that airdrops will be harvested to death by venture capital. No matter what kind of airdrop mechanism someone comes up with, it can basically only be used safely once. That’s the problem. So I think using proof of personhood to set thresholds for airdrops can help improve the situation. You could even use a hybrid approach, for example, the number of tokens you receive is the square root of the dollars you contributed in liquidity.

More of such things, I think, could greatly benefit projects. Because I do believe there are people who genuinely wish to distribute more, but at the same time, there are also those who sincerely desire meaningful distribution rather than just throwing money around. Now there are more and more efficient tools that allow everyone to distribute all tokens with the push of a button. So I think proof of personhood can do a lot in this regard.

Kevin: Yes. Vitalik, what you imply is that an important mechanism should be able to distinguish who is creating value for the protocol. In a Learn to Earn type, tokens can be continuously distributed to those who add value to the ecosystem. Therefore, anything that can add value to a DAO or the Learn to Earn ecosystem can connect to that ecosystem's public goods financing mechanism. Is that accurate? Vitalik: Exactly. I think so. Kevin: Cool. So, perhaps a whole class of tools will be designed to identify value creators and measure them in different ways. I see a lot of innovation arising from this. Vitalik: I certainly hope so. "Community Value"

Kevin: Alright, we've been talking for half an hour. I'm ready to ask the last question. Regarding public goods and regenerative crypto economics, or the Ethereum ecosystem, is there any topic I haven't asked about that you would like to discuss? Vitalik: Look, we've talked about NFTs and personhood thresholds. I think another direction that quadratic financing might ultimately evolve into is that the current mechanisms cannot truly distinguish who is part of the community and who is not. You know Optimism. For example, to empower a real member of the Optimism community to have greater influence over the direction of the matching pool, distinguishing them from someone from the Arbitrum community. We are still powerless in this regard. There is a viewpoint that the problem lies in the flattening of the mechanism. Because as a contributor, it is through behaviors like "not wanting to throw money into the system" that one shows concern for Optimism. However, another viewpoint is that especially when there are limits per person in practice, some projects may ultimately be very easy to abandon. Especially if your funders place a high value on this, it becomes a problem. Because the original mechanism of quadratic financing is designed to be very neutral towards all funds and public goods. So from this point, you know it makes sense.

You want to maintain complete neutrality between everything. But when your funding sources want to be more specific, does trying to find a way to make the mechanism more specific make sense? In this fully automated world of Gitcoin Grants, if you know someone from Optimism is trying to get it done through signatures, what would happen? Someone from Optimism submits a project, applying for funds from the Arbitrum pool. And actually, this project transfers the money to do something for Optimism. This is transparent to everyone. Then they invite a bunch of people from Optimism, each contributing one dollar to get some funds matched to Arbitrum. How would you prevent such things? Would you use some method with participation thresholds? For example, if you are not a community member, would you either receive a lower matching rate or simply not be matched at all? Or are there other methods? Can the matching pool designate some participants with idle credit? I don't know.

But ultimately, this is just one of those interesting things, right? I want to talk about broader content. We frame this issue as if there is a binary relationship between private and public goods. But in fact, nothing is entirely private or entirely public. There are some medium-sized public goods that benefit some people but cannot benefit others. Some people and funding sources only care about a specific ecosystem and not others. How do we establish mechanisms that address all these issues? This would be an interesting challenge. But I think it is also a very important challenge. Kevin: Yes, I also think it is indeed important. As Gitcoin Grants, we have been continuously expanding vertically, which means a larger matching pool. But now, in what I call "horizontally," we are also starting to expand into other ecosystems, like Uniswap, and then Polygon. We have also been doing public rounds for climate change, human longevity, and news interviews. I truly believe we need to be able to discern whose voices matter in the public goods of various ecosystems. "Public Goods Vs. Private Goods"

Kevin: The issue you raised is that we now do not just have public goods in the usual sense. This is an interesting problem yet to be solved. I want to talk about the binary relationship between public goods and private goods. From a governance perspective, I have always been troubled by the fact that many projects on Gitcoin are, from one perspective, public goods, and from another perspective, private goods. I see these as dual, perhaps triple-sided markets, where one side is public goods, and the other side is private goods, which you have to pay for. I want to use ENS as an example. The ability to find anyone based on a memorable name, figuring out their Ethereum address, like mine is owocki.eth, allows you to find me. This ability to find anyone belongs to public goods. However, writing content into the ENS system requires spending ETH. So at the market level, it requires a certain amount of money as a threshold. It has exclusivity and competitiveness. Therefore, I want to know how you view the categories of purely public goods and private goods? Is there subtle room for adjustment in how to finance these public goods? For you, is it a binary relationship or a spectrum distribution? Vitalik: From my perspective, it is definitely a spectrum. I think it hasn't manifested as a spectrum yet. The reason for this is that the amount of funding for public goods is still far from what it should be. So when funding is scarce, it can only be allocated to the items that need funding the most, which are those that are very pure and extremely underfunded, with no opportunity to establish a business model other than relying on donations. But as funding increases and the ecosystem saturates somewhat, I believe public goods financing mechanisms will also intervene in the mixed public-private area. That makes complete sense. If the entire government eventually starts operating on quadratic financing, then those companies that work harder to ensure their products are environmentally friendly and health insurance companies that strive to provide fully inclusive products for everyone might deserve government subsidies. Similarly, in the real world, there are many items that mix private and public attributes. I think this is definitely part of the complexity for the world we are trying to build. There is absolutely no problem with that.

Kevin: To me, for things that businesses may have already externalized, such as environmental impacts or healthcare issues for impoverished groups, the crypto economy might provide incentives. Using incentives from the crypto economy to curb externalization and bear its costs. Creating such incentives through quadratic financing. I’m not mistaken, right? Vitalik: That's right. "Net Positive Impact"

Kevin: One of the things we always talk about in the field of regenerative crypto economics is defining impact. Anything that brings a net positive impact to the world, whether in finance, social issues, or other areas of impact on the world. I want to know what you think about this definition? I am looking for atomic components in the field of regenerative crypto economics. The best definition I can come up with is: creating a net positive impact on the world, bringing benefits to the world. What do you think of this definition? Can we build composable components for more regenerative systems? If not, how would you define it? Vitalik: Can we build a component from our regenerative systems? I think there are many components available for more regenerative systems. It is difficult to reduce a component because of public goods financing, different types of public goods financing, and even the dependencies of these financings are different. For example, we talked about identity verification, some cryptographic perspectives, decentralized governance, and certain arbitration. All these systems are interdependent in complex ways. I think there might be at least half a dozen components, if not more. If we try to diagram all of them, we would see them. Kevin: Right. I am looking for the lowest common denominator. For example, with ERC20, you have a token that is both a governance token and a utility token, or a security. ERC20 is that lowest common denominator. My attempt at the lowest common denominator is something with positive externalities. And that can achieve… Vitalik: Yeah, I think that might be the closest thing you can get. Kevin: Cool. Vitalik, thank you very much for participating in the regenerative crypto economics show. I look forward to seeing you again in East Denver in 2022. Thank you very much, Vitalik. Vitalik: Thank you too.