Exploring Cryptographic Positive-Sum Design: New Pathways to Achieve Positive-Sum Games

Written by: Shinya Mori

Compiled by: Luffy, Foresight News

In today's world, there is a phenomenon where an increasing number of issues, such as the environment, public health, and human rights, can only be resolved through global cooperation. Digital public goods also fall into this category. Since digital public goods are available for use by people all over the world, global participation and cooperation are required in their provision and management. The choices made must benefit not only specific individuals but also the people of the world as a whole. In fact, political economist Elinor Ostrom won the Nobel Prize for her research on the management of common goods, which demonstrated that resources can be governed autonomously by the communities of users (i.e., the commons) rather than by the government. While it is commonly believed that community management of resources leads to the tragedy of the commons, she clarified that it is possible to govern appropriately through specific principles without triggering the tragedy of the commons.

However, the commons studied by Ostrom are local communities, such as fishing villages. The digital public goods I mentioned are a global issue. Therefore, for a resilient or sustainable renewable world, it is necessary to coordinate with people on a global scale, but it cannot be extractive. In this case, humanity faces common problems, and the results of coordination should be based on cooperative positive-sum games rather than traditional competitive zero-sum games.

Positive-Sum Games and Positive Externalities

Positive-Sum Game vs. Zero-Sum Game

What exactly is a positive-sum game? To understand the concept of a positive-sum game, one must also be familiar with its counterpart, the zero-sum game. The terms zero-sum game and positive-sum game were originally used frequently in economics. A zero-sum game refers to a situation where one party's gain is exactly equal to another party's loss. In other words, it is a game where the total gains and losses among players add up to zero. An example of a zero-sum game is poker. In a poker game, the money won by one player is equal to the money lost by other players, so the overall profit does not increase or decrease, hence it is called a zero-sum game. A positive-sum game, on the other hand, refers to a game where all participants can increase the overall benefits through cooperation. In this game, the total benefit is greater than zero. An example of a positive-sum game is knowledge sharing. When one person shares knowledge or information, the recipient can use it to accomplish something. Since the original provider's knowledge is not diminished, both parties benefit. However, a well-known concept in general game theory is that even if cooperation between both parties can yield better results, by making choices that are optimal for each, both parties ultimately end up with unfavorable outcomes: the prisoner's dilemma. In other words, achieving a positive-sum game requires some form of coordination.

Positive Externalities Leading to Positive-Sum Games

One of the coordination mechanisms to achieve positive total benefits is "positive externalities." Positive externalities refer to benefits provided by certain economic activities to third parties who do not directly participate in that activity. Due to these positive externalities, benefits can extend beyond specific targets, thereby achieving a positive-sum game.

Public Positive Externalities: Public Goods

Public goods are known for creating positive externalities. Public goods are assets that are non-excludable and non-rivalrous, meaning anyone can use them for free. Examples of public goods include air and parks, which everyone can benefit from without charge. Therefore, public goods generate positive externalities. For instance, parks can serve as playgrounds for children and venues for community interaction, while also enhancing the cultural and environmental standards of nearby residents and acting as tourist attractions.

It seems that the more public goods there are, the more positive externalities are generated, leading to a positive-sum state. However, due to the free-rider problem, the supply of public goods is challenging and is often maintained through government taxation and subsidies.

Unwelcome Positive Externalities: Anti-Competitive Goods

Among what are commonly referred to as public goods, some assets are considered anti-competitive. Anti-competitive refers to a situation where the more a certain good is consumed, the greater the benefits it brings to third parties. Goods that are both anti-competitive and excludable are called network goods, while those that are anti-competitive and non-excludable are called symbolic goods; we collectively refer to them as anti-competitive goods. Anti-competitive goods are defined as "goods that become more valuable the more they are used or shared," examples of which include ideas and knowledge. When one person shares an idea or knowledge, many others can use that idea or knowledge to create new ideas, knowledge, products, or services. It can be said that the more ideas and knowledge are utilized, the more valuable they become. Another example is language; the more people who use a particular language, the more useful it becomes. Some believe that transactions involving goods with these attributes do not inherently lead to free-rider problems. Anti-competitive products may welcome free riders because the more they share with others, the more valuable they become. However, in a market economy, knowledge and ideas can be monetized and become excludable, creating asymmetries between supply and demand, thus establishing business models. Regardless, anti-competitive goods undoubtedly generate more positive externalities and achieve positive-sum games.

The Relationship Between Positive Externalities and Scale

It is believed that the impact of positive externalities varies with the scale of the goods themselves. Here, "scale" refers to goods that are used or consumed by more people. Referring to the previous example, for public goods like parks, if only one or two people are using it, it is comfortable; even if a third person uses the park, it remains comfortable. However, if hundreds or thousands of people use the park simultaneously, it may no longer be comfortable and may instead have negative effects. On the other hand, for anti-competitive goods like knowledge and ideas, as the scale increases, externalities come into play, thereby increasing the value of knowledge or ideas. Thus, there is a close relationship between positive externalities and the scale of goods. Furthermore, it is commonly believed that the provision of these goods leads to free-rider problems, resulting in insufficient supply of the goods. Therefore, it is thought that the expansion of positive externality effects will eventually cease.

So, what is the relationship between positive externalities and scaling in the digital world? It is considered to be divided into three main types.

The Relationship Between Positive Externalities and Scale

(i) As scale increases, positive externalities monotonically increase, but after reaching a certain scale, the effect of positive externalities begins to diminish.

Web 2.0 services are of this type. Web 2.0 services provide benefits to more people through network externalities, but many of these services operate according to market principles, which are based on competition, always resulting in winners and losers. Their goal is to win the market competition based on market principles, generating more revenue and returns, while positive externalities are secondary. Meta (formerly Facebook) is an easy example to understand. Meta demonstrates value through social networks like Facebook and Instagram, which are used by many users, but on the other hand, it establishes a dominant position in the social networking industry by acquiring competitive projects or developing similar services. Here, while they operate under the influence of network externalities, their fundamental game is a zero-sum game in the market. Therefore, it can be said that coordination between other services is difficult. Additionally, Web 2.0 is characterized by centralized storage of user data, which often raises issues of user privacy protection. In the case of Web 2.0 services, expansion increases the number of users, thereby exposing privacy protection issues arising from holding data about these users. Although some Web 2.0 services are free and can be considered public goods, Web 2.0 is often centralized, potentially including the possibility of excludability, thus it is not a true public good. In fact, there was a controversial case where X (formerly Twitter) suspended former President Trump's account, indicating that Web 2.0 platforms potentially contain excludability. There is no credible neutrality.

The Relationship Between Positive Externalities and Scale in Centralized Systems

(ii) As scale increases, positive externalities monotonically increase, but the effects of positive externalities converge to a constant value as scale increases.

Open Source Software (OSS) is a typical representative of this situation. OSS is software with publicly available source code that allows anyone to use, modify, and distribute it, and its value increases as more people use it. Therefore, OSS may initially be viewed as a public good due to its non-competitive and non-excludable nature, but it is more appropriate to consider it as an anti-competitive item. Taking the open-source operating system Linux as an example, we can see that Linux is applied in various services due to its open-source nature. In fact, cloud services such as AWS, Google Cloud, and Microsoft Azure all use Linux, expanding its use as mainstream cloud infrastructure. Additionally, standardization efforts like the Linux Standard Base (LSB) enhance compatibility among different Linux distributions. Thus, the value of Linux itself increases as its usage becomes more widespread and many complementary features are developed. However, it is generally believed that the supply of OSS faces free-rider problems, leading to insufficient supply and difficulty in sustaining supply. This seems to contradict the assumed anti-competitive characteristics of OSS here, but as a general rule, we acknowledge the existence of free-rider problems. Thus, as the scale continues to expand, positive externalities will ultimately converge to a certain level.

The Relationship Between Positive Externalities and Scale in OSS

(iii) As scale increases, positive externalities continue to monotonically increase.

This situation is the theme of this article, and we refer to this design as positive-sum design. It is believed that positive-sum design can be achieved through cryptographic protocols. Let us consider why cryptocurrencies can achieve positive-sum design.

The Relationship Between Positive Externalities and Scale in Positive-Sum Design

Positive-Sum Design

The argument of this article is that "to sustain a positive-sum game, a design that continuously generates positive externalities as scale increases is needed." In fact, some advocate for the importance of positive-sum states. It discusses how this positive-sum design can be achieved through cryptocurrencies.

Summary of the Relationship Between Positive Externalities and Scale

Reducing Negative Effects

When the scale of Web 2.0 services expands, privacy protection issues often arise, and the European GDPR can be seen as one of the movements to address privacy protection issues. However, the emergence of blockchain technology has significantly changed this situation. Blockchain allows data to be stored and managed across multiple nodes rather than a single central server, enhancing data transparency, security, and fault tolerance. Having private keys enables users to have complete control over their data, assets, and identities, thus achieving self-management. This can be seen as a complement to the negative effects brought about by the expansion of Web 2.0 services due to blockchain technology. It provides a solution at the architectural level, rather than relying heavily on legal regulations like the GDPR, which depends significantly on the design of the protocol itself.

In the case of open-source software, supply shortages may occur due to free-rider problems, making sustainable supply generally difficult. Typically, governments intervene through taxation and subsidies to address free-rider problems, but cryptographic protocols can maintain their own treasury through protocol revenue or the issuance of native tokens. As will be mentioned later, funding OSS through protocol revenue has the potential to resolve free-rider problems.

Some Examples of Positive-Sum Design

As mentioned in the previous section, blockchain and smart contracts can solve traditional coordination problems, with a significant feature being the ability to create programmable designs and adjust incentives. In particular, the ability to create one's own economic system through programmable design can continuously generate positive externalities. Blockchain-based protocols often possess these attributes. Here, we will list designs that continuously generate positive externalities to sustain positive-sum games.

Interaction with Other Projects: Tasks and Competitions

This type is more of a tool that continuously generates positive externalities. By directly interacting with other protocols, it can create positive externalities directly. These services do not terminate at the protocol itself but guide users to access other services. For example, in the task protocol RabbitHole, various tasks are released for different protocols, and by completing these tasks, users can earn rewards. This mechanism allows users to participate in other protocols in a game-like manner driven by economic incentives and gamification elements through RabbitHole. This mechanism promotes beneficial actions for other protocols, thereby generating positive externalities. Code4rena, also known as AuditDAO, is a protocol that allows the community to audit the code of protocols. When using Code4rena, users audit the code of other protocols, encouraging beneficial actions for those protocols. Participating in hackathons and competitions can also guide users to develop products using a certain protocol or find solutions to problems within the protocol, creating valuable actions for various protocols. Specific projects include RabbitHole, Layer 3, buidlbox, Code4rena, Jokerace, Phi, etc.

Ease of Forking: SDK

This is one of the most notable features of OSS. In OSS, the source code is open, and anyone can download, customize, and use it according to their preferences. This is the advantage of OSS; in fact, various new protocols have been created by forking code. For example, there is a protocol called Moloch DAO, which is a DAO that funds Ethereum infrastructure as an important digital public good and is managed by stakeholders. Forking the Moloch code has led to the creation of protocols based on Moloch, such as MetaCartel. Forking in OSS essentially involves forking code repositories, but the creation of development kits and no-code tools is aimed at making forking easier. DAOhaus is a tool used to fork Moloch. Using DAOhaus, we can easily build a protocol with functionalities similar to Moloch. Other examples include Cosmos SDK, which allows the creation of Layer 1 blockchains with Tendermint consensus, and OP Stack, which allows the creation of Optimistic Rollups (the same type as Optimism). These development kits make it easier to leverage the advantages of OSS and promote the creation of positive externalities. Specific projects include DAOhaus, Nouns Builder, Cosmos SDK, OP Stack, Conduit, Gitcoin Grants Stack, Zora, etc.

Composability

Composability may be a familiar term in the crypto space, especially in the DeFi sector, where it has become commonplace, leading to the term "money Legos." Many protocols are composed of existing smart contracts, which is particularly evident in DeFi. A similar trend is observed in governance; for example, one of the on-chain governance contracts launched by Compound, Governor Alpha & Bravo, is even used outside of DeFi, utilizing Compound's governance contracts. Furthermore, the drawback of the Governor Alpha and Governor Bravo contracts is that projects with different needs must fork the code to customize it according to their requirements, which may introduce high risks of security issues. Therefore, OpenZeppelin has built the "Governor" contract as part of a modular OpenZeppelin contract system. Modular governance tools like Zodiac can also be seen as an extension of this idea.

This is possible because the focus is on creating relatively small modular components. If these components are open-source and lightweight, it becomes easier for other protocols to adopt them, just as bricks are more versatile than the grand castles built from them. In fact, on Ethereum, the ERC20 token standard is more accessible than the Ethereum Virtual Machine (EVM). By building protocols within modular components, they become more composable, making them more friendly to other protocols and fostering a positive-sum environment.

By the way, Ethereum Improvement Proposals (EIPs) on the Ethereum platform adopt the CC0 (Creative Commons Zero) license. CC0 is a Creative Commons license that waives all rights to a work, allowing third parties to remix and build upon the work for free without permission, including for commercial purposes. Proposers on Ethereum completely relinquish their copyright, enabling others to propose the same ideas on different blockchains or propose new proposals based on them without needing permission. The adoption of CC0 promotes more seamless collaboration, making it easier to generate network externalities and contribute to positive-sum games.

Funding Public Goods

This may be the most unique aspect of cryptocurrencies. While traditional OSS projects find it challenging to create their own economic ecosystems, cryptocurrencies can achieve programmable designs in economics and establish their own treasury.

Since its early days, Ethereum has been considering the issue of funding public goods and has conducted various experiments over time. The Ethereum Foundation and Gitcoin have funding programs, and Gitcoin is running quadratic funding provided by Glen Weyl, Vitalik Buterin, and Zoe Hitzig, while DAOs like Moloch DAO contribute to the Ethereum ecosystem, along with various funding DAOs based on the Moloch protocol—providing grant programs and retroactive funding for public goods, mainly conducted and experimented by Optimism as part of its third round. These initiatives involve not only allocating funds to their own protocols but also investing in peripheral tools that support their protocols. This practice is an attempt to address the supply shortage of public goods caused by free-rider problems. However, some seem more inclined to expand their own products rather than fund public goods. In fact, even funding aimed at expanding product ecosystems can continue to generate positive externalities, but to create more positive externalities, a method beyond the ecosystem may be needed.

Conclusion

It is well known that public goods and anti-competitive items generate positive externalities. Through scaling, continuously creating positive externalities is necessary for nurturing a positive-sum state, and this article summarizes approaches to approaching a positive-sum state. While cryptocurrencies can address traditional coordination problems, the focus should not be on reducing negative effects but rather on seeking greater positive impacts. For us, it is crucial to design protocols that can continuously generate positive externalities to sustain positive-sum games, and cryptocurrencies can achieve this. Furthermore, I believe that positive-sum design may lead to regenerative economies, anti-fragile protocols, and resilient societies.

Special thanks to Scott Moore, Toby Shorin, and Naoki Akazawa for their feedback, review, and inspiration.