Optimism and Buterin Tap Profit-Motive to Accelerate Public Goods for DeFi, Sparking Debate

Gitcoin rustles up millions of dollars in funding to support Ethereum developers. Lighthouse gives away Ethereum 2.0 software. And EthHub provides educational services on the Ethereum ecosystem gratis.

These endeavors are known as public goods, and no surprise, Defiers love them, and want more of them.

But influential voices in DeFi, including Ethereum co-founder Vitalik Buterin, are concerned about how to encourage more development of public goods. So taking a page from the venture capital playbook, they’ve come up with a new way to incentivize people to create them. And the move has sparked debate in the DeFi community.

The Key: Exits

Enter Optimism, the Layer 2 solution on Ethereum. It aims to use a profit-motive to accelerate the buildout of more projects to deepen the DeFi ecosystem. On July 20, the Optimism team announced it will commit all the earnings generated by sequencing, or processing transactions, to fund public goods.

The key to the plan are exits. In the TradFi startup space, investors back ventures with an eye toward eventually cashing in via an initial public offering or acquisition. Public goods don’t have that element, so Optimism is setting up something called “retroactive public goods funding.” The idea is that Web 3.0 entrepreneurs will be motivated to produce public goods because even though there won’t be a deal or IPO there will be rewards along the way.

How? By using a DAO, of course.

Buterin’s Take

Buterin made a guest appearance in Optimism’s post and sketched out how a public goods DAO could create the equivalent of an “exit” incentive for creators. The Ethereum co-founder outlined a simple way of compensating a project’s creators after the DAO deems it worthy of rewards.

Buterin also explained how to set up a system to continually reward developers of public goods. By having the DAO establish a floor price for a project’s tokens, this would establish “an open order to buy up the entire supply of tokens” and allow the payout of repeated rewards through subsequent raises of the floor. In other words, the better a public good performs, the more valuable its tokens, with the floor price rising to set ever higher valuations. Nifty, huh?

But There’s Skepticism

Still, not everyone is ready to pronounce victory. Hasu, a researcher at crypto investment firm Paradigm, expressed skepticism about the concept on Twitter, commenting that a Layer 2 with a sequencer that passed profits back to users could outcompete one that donated proceeds to public goods.

“So you donate all revenue from running the sequencer to public goods?” Hasu tweeted. “That’s a heartwarming story, but as a user, I will always stick with rollups that kick the MEV back to me.”

Kain Warwick, the founder of derivatives protocol Synthetix, countered that the new incentive structure will foster improvements in public goods. “The counterintuitive aspect [in my opinion] is that public goods help an ecosystem to outcompete a similar ecosystem without this incentive structure,” he tweeted. “This mechanism realigns the incentives such that you will have an objectively better experience within that ecosystem due to this funding.”

This is the crux of the issue: Which projects will the DAO reward? If the DAO funds public goods that increase the value of the ecosystem, and that in turn funds the DAO, the mechanism could become a virtuous circle.

Even so, Rari Capital developer and Optimism Discord moderator who goes by “t11s” in the Layer 2 project’s server, pushed back on the whole discussion. “None of these projects have very concrete plans yet,” he told The Defiant. As a result, it’s hard to see what the tradeoffs are going to be.

Still, Optimism’s push shows just how vital public goods are to the evolution of DeFi as a whole. The values of open source and fair access are an integral part of Layer 2, as stated on its website. While crypto continues to be seen by many as a money making-machine, it’s community-driven projects that have largely built DeFi into the force that it is today. Designing a DAO to keep this side of the ecosystem humming seems a worthy public good in its own right.