Quadratic Funding in a Nutshell
During Gitcoin Grants CLR matching rounds, you’ve probably seen mentions of small contributions getting matched by almost unbelievable amounts. You might be wondering: how is it possible that small donations can be matched by so much? So how does it all work?
The answer to your question is quadratic funding. Written by Vitalik Buterin, Zoë Hitzig, and E. Glen Weyl, Liberal Radicalism proposes a design which applies concepts inspired by quadratic voting to funding public goods. In fact, Liberal Radicalism is the ‘LR’ in Gitcoin’s CLR, but more on that later. Due to their relationship, let’s briefly cover the basics of quadratic voting in order to understand quadratic funding.
Quadratic voting
Quadratic voting is a method of collective decision-making system where instead of each person getting one vote individuals have a budget and can “pay” for addition votes. However, the cost of additional votes increases as more votes are cast [i.e. cost to the voter = (number of votes)2].
Since each voter has a limited budget, the exponentially increasing cost per vote makes it less effective to focus on one issue. Rather, it encourages voters to spread their votes across several issues instead of using up their budget on one issue.
Quadratic funding
Imagine a philanthropist wants to donate a large sum or a government needs to decide on its budget. Everyone can agree that funding public goods is a positive thing for everyone. However, how do we determine what projects should be funded to benefit the most people? This is the exact goal of quadratic funding mechanisms like Liberal Radicalism.
Like quadratic voting, quadratic funding let’s individuals “buy for their vote” for what projects deserve to be funded by donating. Donations are then matched by a pool of money dedicated to fund public goods. And just like buying votes, there are diminishing returns to individual’s potential for donation matching. Additionally, the number of contributors matters more than the total contributions. For example, a project that receives 1000 donations of $1 will receive more matching than 1 donation of $1000.
To boil it down, more contributors = more matching. As more people contribute to a project, the impact of each previous donation increases. By valuing contributors over amount contributed, quadratic funding tries to amplify the values signalled by the community and optimize the distribution of public goods to benefit the most people.
Gitcoin Grants CLR Matching
Gitcoin has crowdfund matching rounds which utilizes a mechanism called Capital-constrained Liberal Radicalism (CLR). This process was created to help fund grants supporting Ethereum research, infrastructure, and resources in general as a public good.
“Individuals make public goods contributions to projects of value to them. The amount received by the project is (proportional to) the square of the sum of the square roots of contributions received.” source
Community members can create Gitcoin grants for public goods which are then eligible to receive CLR matching during each round. Organizations like the Ethereum Foundation (EF) and ConsenSys sponsor each round, providing the funds which are used to match donations.
This initiative is an experiment to test quadratic funding and so each round iterates on the last. So far, there have been 4 CLR matching rounds with Round 5 currently happening. Round 4 almost doubled the numbers of the previous round. Summary of Gitcoin Grants Round 4 (full read):
- $143,642 in funds were committed by the Ethereum Community. This, plus the $200,000 in matching funds results in $343,642 to Ethereum projects for this CLR round.
- 5,936 contributions were made to 230 open source Ethereum projects
- 1,115 unique Ethereum community members participated in the funding round
As of writing this, there’s only a few days left to participate in Gitcoin Grants Round 5 ending April 7th, 2020. $250K have been dedicated to matching this round: $100k to support COVID-19 research, response, and recovery projects, $100k to Ethereum Tech and infrastructure projects, and $50k Ethereum community projects. Don’t miss this chance to signal what you value to the community while contributing to vital infrastructure. This round of matching ends in on April 7th, 2020!
Keep DeFi Safe! The DeFi Pulse Registry
We’d like to take a moment to mention our team’s Gitcoin Grant for DeFi Pulse, a part of the Concourse Open Community, to fund the DeFi Pulse Registry, a new directory of DeFi projects committed to transparency about user risk.
This directory will make it easier for DeFi users to find reliable information about the risks they may face while using DeFi. We can build stronger relationships with users by trusting them with complete, current info about the risks they face. And hopefully, informed users can minimize risks and avoid losses, strengthening DeFi.
DeFi has grown at an astounding pace. But, the truth is this pace can only be maintained by keeping DeFi safe.
Informed DeFi users are less likely to get burned and abandon DeFi. DeFi Pulse Registry will form standards to improve user risk transparency. https://t.co/jjF78V3CjO pic.twitter.com/M7xl34kg69
— DeFi Pulse 🍇 (@defipulse) April 2, 2020
Learn more about the DeFi Pulse Registry. Please share and donate to our grant for a safer, more transparent future for DeFi users. As you know from reading, even donating 1 DAI goes a long when matched. But, more contributors equals more matching so please help us spread the word and keep DeFi safe!
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