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Author: minerva-wow

_posts/2023-01-20-QF.md

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+---
+title: Quadratic Funding - Balancing Individual Utility and Wealth Impact
+date: 2023-01-20 02:03:01 +0800
+categories: [Blockchain,Economics]
+tags: [economics, blockchain, ethereum, public-goods, funding]    # TAG names should always be lowercase
+---
+A deep dive into the Liberal Radical Mechanism proposed by Ethereum's co-founder, a Harvard economist, and Microsoft's principal researcher
+
+Translated and adapted from Chen YanLong's original article.
+<https://medium.com/swf-lab/quadratic-funding-465b5da3b3c9>
+
+**Important Reference:** [Quadratic Payments: A Primer](https://vitalik.ca/general/2019/12/07/quadratic.html) by Vitalik Buterin
+
+This article caters to two distinct audiences: those with an economics background and those without. For readers versed in economics, particularly those who've taken microeconomics, the content should be readily accessible. For others, I recommend skipping the sections marked with asterisks (*) which contain mathematical derivations requiring microeconomics fundamentals. I'll strive to keep the explanations as intuitive as possible.
+
+# Origins and Context
+Quadratic funding emerged from a paper titled "Liberal Radicalism: A Flexible Design for Philanthropic Matching Funds," co-authored by Vitalik Buterin (Ethereum co-founder) and two economists. The concept draws inspiration from "quadratic voting," an idea presented in Glen Weyl's book "Radical Markets."
+
+Quadratic voting challenges the conventional "one person, one vote" (1p1v) principle where each vote carries equal weight. While this might sound controversial at first, consider this scenario:
+
+Imagine an election where:
+- Alice would gain $20 if candidate X wins
+- Bob would gain $10
+- Charlie would lose $50
+
+Under the traditional one-person-one-vote system, Charlie has no recourse to express the magnitude of their potential loss. The system doesn't allow individuals to weight their votes according to how much they stand to gain or lose – even if they're willing to pay more for greater influence.
+
+This raises a fundamental question: Should individuals have the option to pay more for greater voting power? While this notion might seem radical, it addresses a real limitation in current democratic systems.
+
+# The Evolution to Quadratic Funding
+The initial concept was "quadratic vote buying," where voters could purchase additional votes at a quadratic cost. For example:
+
+- 2 votes would cost 4 units
+- 3 votes would cost 9 units
+- 4 votes would cost 16 units
+
+More precisely, each nth vote costs n units, making the total cost for m votes equal to m²/2 units.
+
+Quadratic funding shares some objectives with quadratic voting, particularly in addressing preference intensity, but it tackles an additional crucial challenge: the free-rider problem in public goods funding.
+
+# The Public Goods Problem
+## Understanding Public Goods
+Public goods possess two key characteristics:
+
+- Non-excludable: You can't prevent others from using them
+- Non-rivalrous: One person's use doesn't diminish others' ability to use it
+
+Examples include public parks, clean air, and open-source software. Unlike private goods (like pencils or personal property), public goods' benefits are shared collectively, making their value calculation more complex.
+
+Consider a public park:
+
+- If it provides utility of 5 to you
+- And utility of 10 to your neighbor
+- The total social utility is 15
+
+As the number of beneficiaries grows, calculating total utility becomes increasingly challenging.
+
+## The Free-Rider Problem
+Let's extend our park example:
+
+- Cost to build: $8
+- Your utility: $5
+- Neighbor's utility: $10
+
+Would you build it? No – the cost exceeds your personal benefit.<br>
+Would your neighbor build it? Yes – their benefit exceeds the cost.<br>
+Can you use it if your neighbor builds it? Yes – it's a public good.
+
+This illustrates the free-rider problem: those who benefit without contributing. More formally, mathematical proofs demonstrate that individually-provided public goods will not maximize social benefit. People act in self-interest, optimizing for personal rather than collective utility.
+
+This article itself exemplifies a public good - freely accessible knowledge that required significant time investment to create, yet readers benefit without direct compensation to the author.
+
+# Challenges in Current Funding Models
+## The 1P1V vs 1D1V Dilemma
+When allocating resources for public goods, we face a fundamental trade-off between two approaches:
+
+One-Person-One-Vote (1p1v):
+
+
+- Ensures democratic equality
+- Everyone has equal say regardless of stake
+- May not reflect intensity of preferences
+- Can't account for varying impact on different stakeholders
+
+
+One-Dollar-One-Vote (1d1v):
+
+
+- Allows expression of preference intensity
+- Reflects stakeholder investment
+- Concentrates power with wealthy individuals
+- May lead to plutocratic outcomes
+
+Both approaches have significant drawbacks. One-person-one-vote can't capture how much people care about outcomes, while one-dollar-one-vote gives disproportionate power to the wealthy.
+
+## Visual Comparison
+When we look at how voting power (influence) increases with contribution amount, different systems show distinct patterns:
+
+![alt text](/_posts/20230120/comparison.webp){: width="900" height="300" }
+_https://vitalik.ca/general/2019/12/07/quadratic.html_
+
+## Current Solutions and Their Limitations
+Existing approaches to funding public goods include:
+
+1. Taxation
+
+- Government collects taxes to fund public goods
+- Centralized decision-making
+- May not reflect local preferences
+- Administrative overhead
+
+
+2. Privatization
+
+
+- Converting public goods to private ones
+- Excludes some beneficiaries
+- May reduce social benefit
+
+
+3. Charitable Fundraising
+
+
+- Relies on voluntary contributions
+- Subject to free-rider problems
+- May not achieve optimal funding levels
+
+Each of these solutions has mathematical provable inefficiencies. This is where the Liberal Radical Mechanism comes in as an innovative alternative.