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Starting from the open source community financing, explore the ethereum financing incentive model

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The financing incentive model for Ethereum developers is not yet complete, and most of it relies on developers' enthusiasm or self-interest to maintain community cohesion.

Original title: "Ethereum Financing Incentive Model Exploration"

Original author: Qian Baijun, HashQuark Community

Since the development of the Internet, centralized institutions have used patent barriers to monopolize code ownership. But with the rise of blockchain, open source has now become the core infrastructure of the Internet. From the free software movement led by Richard Stallman, to the Cathedral and Assemblies written by Eric Raymond, to Mozilla and Linux, as well as recent blockchain open source projects such as Eether Workshop, numerous open source code has brought huge output value to the project. However, for a long time, the developer incentive mechanism for various open source projects is still in its early stage of development. Developers cannot obtain continuous incentives in the open source ecosystem, and the free agent base of the open source community cannot be expanded. Although ethereum has a market value of tens of billions of dollars, the growth of core developers is relatively stagnant. How to motivate developers to contribute to the open source community in the long term will be the key to Ethereum iteration.

Open source financing

Open source software is a public good, which is a basic economic concept. Common public goods include defense, lighthouses, clean air and open source software. Public goods have two core characteristics. One is non-exclusivity: no one can be banned from using or consuming it, even if he has not paid for it (i.e., "hitchhiking"). The second is non-competitive: multiple people can use or consume it at the same time, and such use and consumption does not reduce its availability (both in quantity and quality). If public goods are financed through market mechanism, the problem of underinvestment will appear. For example, suppose an office worker raises money to build a new air system. If Zhang SAN knows that Li Si can enjoy the fresh air brought by the fresh air system even without paying for it, then Zhang SAN's enthusiasm to pay for it will decrease. If all the staff members have similar ideas and are reluctant to pay for fear that others will "hitchhike", they may not be able to raise enough money to build the new wind system. A similar logic applies to open source software: if everyone expects someone else to develop the software first, open source it, and use it for free, the software probably won't get developed. The issue facing open source software is important to the blockchain community. Here are four ways that traditional developers can participate in open source software: volunteer, donate, reward, and crowdfund.

volunteers

Volunteers are the most common participants in the open source community, actively contributing and maintaining software systems and participating in discussions without direct monetary compensation. Volunteers are often motivated by other factors, such as high ecological relevance, community reputation, ideology, or passion for the project.

The volunteer model has the following advantages: First, because the open source community does not provide developers with financial support, the developers who contribute in this situation are enthusiastic about the project and have a long-term strategic vision to improve the overall ecology, and are less likely to get bogged down by short-term interests. Second, developers are more likely to collaborate with other developers, and there are fewer barriers to starting projects. However, the volunteer model also has the following disadvantages: first, high mobility of developers and low barriers to exit. Without direct compensation, developers are often unable to keep up with the sustainable development of open source projects due to lack of time, power reduction and other reasons, resulting in poor ecological stability and difficult expansion. Second, most volunteer open source communities have no formal organizational structure or entity, no review of proposals, and no time constraints, resulting in inefficiency.

donation

Donations are a common form of funding for open source projects, with links to donations (such as Stripe and PayPal) on the project's website. Under this model, companies and individuals can contribute to the project, which then distributes the money to developers or pays them directly. These donors usually have no strings attached, but sometimes they may want to raise the priority of certain proposals. The donation model has two advantages. First, generally speaking, the interests of donors and developers are in line with the long-term health and sustainability of the project. If the future benefits of the donated project are visible and the return is higher than the donated money, the donor is incentivized to continue to fund the donated project. Second, the donation model is designed to be simple and easy to execute, and is often used for small project phases as additional revenue for developers rather than as a primary revenue stream. However, the donation model has several disadvantages. First, if the number of users of open source projects is small, the project will have the problem of centralization. When the development of an open source project depends on a small number of donors, the influence of those donors on the direction of the project becomes more and more significant, thus losing the significance of open source. Second, it is difficult for donations to become a major source of revenue for developers. Donors are scattered and unsustainable, and without dedicated fundraising channels, donations can only be used as additional revenue for developers. Third, it is difficult for developers to allocate funds, which may lead to the occurrence of different pay for the same work. Projects such as Linux that typically provide revenue to developers in the form of donations. Both Microsoft and Google are big sponsors of the Linux Foundation, a nonprofit organization that hires developers to work on Linux on a full-time basis.

The bounty

The donation model described above belongs to the fundraising model of the overall open source community, while rewards belong to the small, piecemeal task model. The bounty model can be understood as an organization's voluntary outsourcing of tasks previously performed by employees to a non-specific mass network. Tasks don't have to be specific; they might be finding code flaws or providing directions for the open source community. Rewards are based on the level and duration of demand of the task publishing entity, similar to a "Crowdsourcing" business model. The bounty model has two advantages: first, developers are paid according to their contributions, which is fairer than donations, and it can motivate capable developers to join the community, which helps open source project expansion. Secondly, the bounty model is particularly suitable for solving security-related problems of the project. Libra has used its Vulnerability Bounty program to train volunteers in the open source community to experiment with security using outside developers and researchers. The transparency of bug bounty programs can bring public trust and industry recognition to a project. But the bounty model has three drawbacks: First, it may create a negative incentive for the project. Difficult, multi-tasking tasks tend to be unpopular, while simple, repetitive tasks are more popular with developers, which is detrimental to the long-term development of the project. Second, many open source projects cannot be quantified, resulting in disagreement between the project and the developer over whether the work has been done or not, and potentially leading to poor quality project results or a situation in which the developer is squeezed by the project. Third, the release of bounty tasks is usually low and unsustainable, and developers are paid passively for accepting work tasks, without motivating developers to contribute actively.

The raise

Crowdfunding is an investment activity of "pre-consumption". Open source projects use project ideas and future goals to raise funds from within and outside the open source community. Both one-time crowdfunding and sustainable crowdfunding have the following characteristics: First, sufficient marketing activities are required to promote crowdfunding activities. Second, the project usually must have a clear plan and the results that the plan will achieve, which will also cause development and production pressures. Third, crowdfunding often fails to generate sustained pledges of donations. Compared with venture capital, the capital chain is not complete. Fourthly, crowdfunding belongs to a holistic donation mode, and the criteria of internal allocation among developers are relatively vague.

However, traditional crowdfunding is not fully applicable to blockchain open source projects. First, developing a project usually takes several years, and the plan and roadmap are often adjusted to the needs of the community, with no certainty as to what will be achieved in the future. Second, developers need sustainable contributions to contribute to open source projects over the long term. This means continuous PR marketing campaigns that compress developers' time and effort. Finally, the open source project of blockchain attaches great importance to values, and the open source community is resistant to the capital that violates the values. Crowdfunding is currently the most common financing mode of blockchain, and various projects try to be applicable to the innovation of blockchain. Gitcoin Grants, for example, is a crowdfunding platform that periodically funds Open source ethereum projects and aims to provide funding assistance for open source software that is capital constrained. Gitcoin Grants USES secondary financing to maximize the fairness of developers' allocation of funds, makes use of subsidies and donations to enable more projects to receive financing, and solves the problem of fund allocation.

Ethereum financing Mechanism and direction

In the Ethereum ecosystem, money for developer incentives is largely managed by two institutions: The Incubator Of Ethereum, Known as Talsys, and the nonprofit Ethereum Foundation, known as The Ethereum Foundation. There are two problems with ethereum's money management: the first is the allocation of funds. Ethereum does not have a good governance mechanism to determine the use of funds, leading to a perception in the community that Ethereum is not transparent enough. The second problem is the source of funds. Once the Ethereum foundation runs out of money, it will face problems in developing and upgrading the underlying agreements. Ethereum's financing incentive model needs to address the source and allocation of funds to stop the loss of core ethereum developers and further improve ethereum's sustainability. Currently, only miners have been included in ethereum's incentive scheme, and both core developers and application-level DApp need reasonable incentive funding. The financing incentive model for Ethereum developers is not yet complete, and most of it relies on developers' enthusiasm or self-interest to maintain community cohesion. Here are three financing incentives ethereum could consider in the future.

Inflation financing

Inflation financing is a mechanism used to finance the development of the blockchain open source community and other public goods, similar to the function of state taxation. The state collects funds by taxing individuals to invest in the common infrastructure of the society, which cannot be completed independently by individuals in the society. The only difference is that the state is a centralized authority, and the government is empowered to levy taxes by the people. If Ethereum were to finance inflation, it would have to do so either by making rules up the chain or by voting in a community down the chain. Unlike existing fund management models, inflation financing has a continuous source of funding, is more decentralized and flexible, and the potential rewards available are large.

The inflation Financing implementation process is divided into three steps: first, anyone in the Ethereum community can submit EIP(Ethereum Improvement Proposals) and submit them to the community for discussion. Second, the ETH owner or the community participants in the chain vote, according to the results of the vote to approve the proposal and valid or rejected. Third, the community decided how much money would be given based on the value the proposal would bring to Ethereum, and added new ETH to the proposal developers. For example, if ethereum 2.0 is successful, the community estimates that it will add 20% to the ethereum ecosystem, and according to the concept of inflation financing, Ethereum will issue 20% of the ETH and distribute it to developers participating in the upgrade. Tezos is using inflation financing to incentivize developers. Tezos writes bonuses into protocol code in the form of rules that encourage developers to innovate, and each proposal can be individually validated and automatically rewarded for passing the test. But there are some problems with inflation financing that remain to be discussed: first, how incentives are allocated and ETH's additional issuance criteria are set. If it were set by foundations, there would be oligarchic suspicion. Second, the value of a proposal is sometimes hard to measure, and it is not easy to persuade an entire community to pay for it. Third, the rising ETH supply will affect the ETH price performance in the secondary market, leading to the decline in the ecological value of ethereum as a whole.

The second financing

As mentioned above, secondary financing is the crowdfunding allocation of projects by Gitcoin Grants on Ethereum, trying to solve the inefficient financing of public products in ethereum ecology. The principle behind the secondary financing is to better allocate the funds raised through crowdfunding, and the final funding is the "square root of the sum" of the funds donated by community members, with the ethereum Foundation making up the difference. For example, consider two financing scenarios. One is to raise $1000 from one person, and the project will receive $1000 in total financing. The second is to raise a total of $1,000 from 10 people, each investing $100, and the project will receive a total of $10,000 in financing. Therefore, it can be seen from the above examples that secondary financing will subsidize a large number of small investments more than a small number of large investments.

Although secondary financing can maximize the subsidy of open source projects, it has the following disadvantages: first, multiple identity attacks, in which an entity controls multiple addresses and distributes funds to these addresses to invest projects, can maximize its own benefits in the secondary financing. Second, a conspiracy attack, in which a group of people collude to launch a project and invest a small amount of money to defraud the foundation of subsidies. Assuming that they disbanded the project after receiving the subsidy and profited from it, this constituted a conspiracy attack. Third, the boundary issue of project subsidy. There is no limit to the number of Grants that can be applied for on Ethereum. In the early stages of the fourth Gitcoin Grants phase, a project that had the Twitter account as its main body applied for Grants in the hope that the community would fund its Twitter tweeting activities was then expected to receive a $20,000 Ethereum Foundation grant. This phenomenon has also led the Ethereum community to question the boundaries of crowdfunding for public goods. Fourth, the secondary financing essentially relies on the ethereum Foundation's subsidy, which solves the problem of the allocation of funds, but does not solve the problem of the source of funds.

Transaction fee mechanism

Transaction fee mechanism is a scheme proposed by Vitalik Buterin to encourage developers to participate. When a developer creates a new smart contract, or comes up with a new EIP, any community participant using the contract will allocate a portion of the transaction fee to the developer as a reward. And the way the reward is distributed is either a one-time distribution or a linear distribution. This mechanism is currently conceived to be implemented on ethereum 2.0. Phase 0 does not support transfer transactions, and Phase 2 is not expected to enable transfer transactions and execute smart contracts. Assume that Phase 2 implements the transaction fee mechanism and a portion of the verifier's revenue is allocated to the developer, allowing the developer to officially enter the Ethereum incentive mechanism. Ethereum currently generates around $50,000- $100,000 per day ($18 - $35 million per year) in transaction costs, equivalent to the entire ethereum Foundation budget, so the scheme is sustainable. The details of this scheme are still to be discussed, but the key to implementation lies in the allocation of benefits between developers and verifiers and the formulation of incentive standards.

summary

Open source software is a non-exclusive public good that has problems with free-riding and the tragedy of the Commons. The usual solutions of traditional economics, such as turning public lands into private or regulated goods, do not apply to open source projects. Blockchain projects, whether standardised or privatised, will undermine the decentralisation advantage of blockchain. As the largest blockchain open source community, how to motivate developers to continue to contribute is a key factor determining the ecological sustainability. As mentioned above, traditional incentives for developers, including rewards, donations or crowdfunding, cannot be the main financing incentive model for Ethereum. In the innovative financing incentive model, the transaction fee distribution mechanism can solve the problem of capital distribution and capital source simultaneously. The secondary financing and inflation financing can solve the problem of capital allocation and capital source respectively. The integration of multiple financing modes with consideration of capital allocation and sources will be the future development direction of Ethereum.

In addition, the financing incentive model for ethereum's future development will be closely related to its governance mechanism. Currently, Ethereum adopts the chain governance approach to make decisions on various proposals and USES the chain community vote to discuss the development direction. If developers' incentives are included in the discussion of proposals under the chain, both stakeholder differences and participants' perception of the proposal will result in inefficient or deadlocked discussions under the chain. Therefore, the combination of governance mechanism and financing incentive mode will become the key to the sustainable development of Ethereum community.