What are Public Goods

Forward the Original Title ‘何为public goods：GCC《Web3公共物品生态研究报告》总结’

Summary:·In traditional Western economic theory, public goods must be non-excludable and non-rivalrous. Non-excludability means that the item cannot be restricted from use by multiple individuals simultaneously, while non-rivalry implies that consumption by one person does not diminish the quantity or quality available to others.

·In addition to being non-excludable and non-rivalrous, public goods should also exhibit externalities. Positive externalities refer to the benefits an item provides to the public without corresponding charges.

·Regarding the theory of public goods determination, Vitalik proposed the “Income-Evil Curve” to measure how much harm commercialization/monetization of a public good would bring to its positive externalities. According to this theory, the public goods most in need of donations are free open-source software, while ordinary commodity sellers are the least in need of donations.

·The primary aim of donating to public goods is to achieve “Pareto Efficiency” to the greatest extent possible. This state maximizes the interests of society or the industry as a whole. To promote this state, moderate donations to public goods suppliers or controlled monetization can create a mutually beneficial situation for both suppliers and consumers.

·In Web2, product development necessitates the creation of barriers using products, data, technology, etc., to achieve high exclusivity and competitiveness. Conversely, Web3 product logic emphasizes strong user connections to enhance product advantages, requiring sufficient non-exclusivity and non-competitiveness. Open-source public goods in Web3 pave the way for new business models, emphasizing openness over closure.

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Public goods are a fundamental concept in Western economics concerning the overall welfare of society and the market. Blockchain technology has introduced new production relations at a macro level, redefining the meaning of “public goods” beyond traditional economic perspectives. In the micro context of Web3, essential infrastructures like public chains and smart contracts inherently possess the key characteristics of public goods due to their decentralized nature.

Given the above points, it is essential to redefine the concept of public goods within the framework of Web3. While there is a growing body of research on Web3 public goods, two primary issues must be addressed first:

Firstly, with the rapid advancement of productivity, the global economic system has undergone significant changes since the establishment of the Western economic system. Therefore, the traditional definition of public goods may no longer be entirely relevant today and requires updating and iteration.

Secondly, Web3 has revolutionized decentralization and trustlessness within the traditional economic system, leading to the emergence of numerous new economic entities and behaviors. In this context, the evaluation method for public goods becomes a significant topic for discussion.

In this article, following a comprehensive review, the author, an expert in economics, introduces the collaborative effort of Ray and Tiao from LXDAO, Twone from Uncommons, and Hazel and Yuxin from GCC in preparing the 76-page “Web3 Public Goods Ecosystem Research Report.” The report delves into the core content and theoretical framework, shedding light on the definition of public goods, the identification of Web3 public goods, an analysis of the current Web3 public goods ecosystem, and insights into future development and challenges.

The GCC research report serves as a valuable resource, offering crucial insights into Web3 public goods and stands out as a significant reference material in the realm of public goods research in the Chinese ecosystem, where the public goods ecology is relatively underdeveloped.

(The research report reportedly encapsulates the research experiences of GCC and LXDAO members on public goods, playing a crucial guiding role in the donation or incubation activities of GCC and LXDAO.)

Introduction to the basic concepts of public goods

1. Traditional economic definition of public goods

As noted at the outset of this article, in tandem with advancements in productivity and production relations, the definition of public goods must evolve with the changing times. To delve into the Web3 public goods ecosystem, it is imperative to first grasp the complete definition of public goods.

Mankiw’s “Principles of Economics (Micro Part)” serves as a representation of traditional Western economics. Within the book, goods are categorized into four groups: private goods, club resources, public goods, and common resources based on their excludability and rivalry. Hence, it is essential to begin by elucidating the concepts of exclusivity and rivalry.

Exclusivity: This property pertains to an item’s ability to prevent other entities from utilizing it once in use (akin to locks in operating systems and databases).

Rivalry: Upon consumption by one entity, the quantity and quality of the item available to others diminishes (it is consumed).

For instance, upon purchasing a product at a mall, you have the exclusive right to use it and prevent others from using the same product. This exemplifies exclusivity. Similarly, in a fruit-picking garden, the total quantity of fruit is finite. As you pick fruits, the available quantity decreases. While others can still pick the remaining fruits, the overall amount diminishes. If you pick more, others will have access to fewer fruits, establishing a competitive relationship among pickers. This illustrates rivalry.

In traditional economics, goods are categorized into four groups based on the presence of these two properties:

It is evident that in traditional Western economics, public goods are defined as goods that are non-excludable and non-rivalrous. However, with the evolution of productivity and the progress of globalization, two issues arise with this definition:

Firstly, changes in reference standards can result in a shift between contradictory opposites. For instance, a country’s national defense may be non-exclusive within that country but exclusive to other nations.

Secondly, the excludability and rivalry of goods do not simply fall into a binary classification but rather form a two-dimensional “broad spectrum” between private goods and public goods (as depicted in Figure 1).

In the illustration provided, Alice has 1,000 ETH for sale, Bob operates an airline selling tickets, Charlie constructs bridges and charges tolls, David produces a podcast, Eve releases a song, and Fred invents an improved cryptography algorithm.

These six examples cannot be neatly categorized based on the simplistic dualism of exclusivity and rivalry. Instead, they are positioned on a coordinate system based on varying degrees of exclusivity and rivalry strengths and weaknesses (notably, Charlie stands out as unique, with the competitiveness of the bridge he built being ambiguous and influenced by the level of road congestion). It is evident that the traditional dualism fails to effectively classify and determine which of these examples qualify as public goods.

2. Development of understanding of public goods

The definition of public goods in traditional economics as mentioned above has its shortcomings. While many economists have attempted to enhance these definitions, they are constrained by the limitations of their time and may even contradict each other. This is a common occurrence in the field of economics, where any “absolute truth” tends to evolve into relative truth as the world progresses. To effectively address public goods, it is crucial to establish definitions and classifications that are relevant to the current era, providing valuable guidance for practical decision-making.

In the “Web3 Public Goods Ecological Research Report,” considering the importance of defining public goods for Web3 developers and incorporating various perspectives, two key reference points for public goods have been identified: increasing marginal returns and positive externalities.

2.1 Increasing marginal returns

This reference point is more intricate. The “Report” briefly touched on it due to limited space and energy for discussion. However, it referenced the definition of public goods from “A Flexible Design for Funding Public Goods” by Vitalik Buterin, Zoë Hitzig, and E. Glen Weyl:

The term “public goods” refers to any activity exhibiting increasing returns, where the socially optimal price (marginal cost) for the activity is significantly lower than the average cost of producing the good.

(The so-called “public goods” are those activities with increasing returns. This means that the socially efficient price (marginal cost) charged for the activity is much lower than the average cost of creating the good)

This article has many connections with the rise of public goods funding in Ethereum; in addition, the author of the article does not adopt a non-exclusive and non-rivalrous framework, but uses the contradiction between the increasing returns of items and the marginal cost. To define public goods, the scope of public goods becomes wider. Since this reference point is relatively complex, this article is limited in length and will not be otherwise explained here. If you are interested, you can read the original text of the “Report” of GCC and LXDAO.

2.2 Externality

“Externality” is a crucial concept in economics, referring to the effects of economic activities on third parties that are not accounted for in price or value exchange.

For instance, when a paper mill discharges sewage causing health risks to nearby residents without compensating them or bearing the responsibility through taxes, it creates a “negative externality” on society. On the other hand, individuals who receive vaccines not only protect themselves from infection but also reduce the risk for unvaccinated individuals without charging them. This leads to a “positive externality” on society.

Public goods provide benefits to society without charging users or restricting usage. When considering the additional benefits brought by technological advancements like blockchain, we can define an activity as a public good if it generates certain positive externalities.

3. Pareto optimality

Pareto optimality represents the ideal state of resource allocation where overall societal benefits are maximized given current productivity levels. In this state, no adjustments to societal parameters or internal structures can enhance societal welfare beyond the existing conditions, making it a theoretical societal ideal.

Public goods are intricately linked to the welfare of society as a whole, and Pareto optimality serves as a crucial criterion for evaluating societal welfare. Understanding this concept is pivotal for comprehending the subsequent discussions, which will be elucidated with examples.

A biggest obstacle regarding Pareto optimality is the belief that lower prices of goods lead to greater individual benefits and, consequently, improved overall societal welfare. However, this notion overlooks the dual economic roles in society: producers (supply) and consumers (demand). Low prices predominantly favor consumers while disregarding the benefits of producers, indicating that such low price levels are far from Pareto optimal.

Conversely, high prices are not conducive to achieving Pareto optimality either; only the “right price” strikes the balance necessary for optimal outcomes. To illustrate this concept, let us consider a simple supply and demand curve as an example:

(Supply and demand curve in microeconomics)

Let’s consider a scenario where there is a single commodity in a specific society, and the price of this commodity reflects the overall price level of the society. Figure 1 illustrates the supply curve and demand curve for this commodity. At a price of P=5, suppliers are willing to offer 5 units of the commodity, and consumers are willing to purchase 5 units, indicating a state of equilibrium between supply and demand.

If the price decreases to P=2, it may appear that prices have fallen and societal benefits have increased. However, based on the supply curve, producers will only sell 2 units to avoid losses at this price level. Despite consumers’ desire to buy 8 units, they can only acquire 2 units. Consequently, surplus production resources remain unused, leading to waste and a decline in overall societal income.

Conversely, if the price is raised to P=7, a similar outcome occurs. Therefore, P=5 represents the “appropriate price,” enabling society to achieve Pareto optimality. Any deviation from this price fails to enhance societal welfare.

Public goods are provided free of charge, resulting in their prices being lower than the “appropriate price.” Essentially, free public goods do not maximize societal benefits. It is essential to implement measures that allow providers of public goods to gain certain benefits to facilitate the sustainable development of public goods and enhance overall societal welfare.

What public goods mean for Web3

Web3 holds significant transformative value for networks and digital assets in the modern era, with concepts like public chains and smart contracts inherently embodying the characteristics of public goods. Public goods not only establish the groundwork for the Web3 ecosystem but also imbue it with profound humanistic and technological implications.

1. Public goods foster trustlessness

Trust has always been a scarce commodity, particularly in the digital age. In the Web2 realm, both online and offline economic entities must establish trust relationships before engaging in transactions, incurring substantial costs in the process. Within the Web3 ecosystem, public goods such as public chains and smart contracts operate on blockchain technology. Every transaction and smart contract execution is recorded on the blockchain, accessible for anyone to view and verify. This eliminates the need to establish trust prior to transactions, epitomizing a key aspect of blockchain technology: trustlessness. This trustlessness, rooted in transparency and immutability, facilitates the advancement of public goods within the Web3 ecosystem.

2. Public goods facilitate permissionless access to Web3

Resources and services in the Web2 landscape often come with restricted access. In contrast, public goods in the Web3 domain ensure equal access for all individuals to resources and services. This permissionless approach, supported by smart contracts, separates approval and verification rights from centralized entities, enhancing decentralization within the network and ensuring the security of the Web3 ecosystem. Moreover, permissionless access allows broad participation in the Web3 ecosystem, promoting its openness and inclusivity and driving the advancement of the Web3 ecosystem.

3. The complexity of public goods

In addition to the aforementioned positive implications, the public goods ecosystem in Web3 introduces an unparalleled level of complexity. This complexity arises not only from technological advancements but also from the decentralization, openness, and globalization inherent in Web3. The complexity is primarily manifested in the following aspects:

(1) Interconversion of Various Items: Within the Web3 landscape, a wide array of digital assets and services such as Tokens, smart contracts, DAOs, and DApps can be interconverted and interconnected. All of these entities fall under the category of public goods. While this interconversion enhances flexibility and opportunities, it also introduces intricate risks and challenges.

(2) Incomplete Decentralization: Decentralization is a fundamental principle of Web3 in theory; however, in practice, Web3 organizations often exhibit a multi-centered rather than fully decentralized structure. While this incomplete decentralization offers a degree of flexibility and freedom for public goods, it also complicates the coordinated allocation of resources. This duality poses both challenges and allure for public goods.

(3) (3) Diversity and Interoperability: The abundance of public chains, DApps, and Tokens in the Web3 ecosystem contributes to its diversity but also presents interoperability challenges. Ensuring seamless interaction and collaboration among different public goods, while mitigating the risks of isolation and fragmentation, is a pressing issue that necessitates urgent resolution for Web3 public goods.

4. Monetization of public goods (evil curve of income)

The income-evil curve is a research methodology and tool introduced by Vitalik Buterin in 2022 for evaluating the potential detrimental effects of different monetization and commercialization strategies on public goods.

As per the previous definition, public goods exhibit positive externalities, implying that they generate societal benefits not reflected in their pricing. Monetizing or commercializing public goods involves diminishing these positive externalities and introducing a form of charging for their beneficial impact.

While such actions may benefit the owners of public goods, they can diminish overall societal benefits by eroding positive externalities. This self-serving behavior at the expense of public welfare is termed as the “evil degree” in the income-evil curve. This curve offers a fresh criterion for assessing public goods, particularly suited for the Web3 environment. The income-evil curves for the six examples depicted in Figure 1 are illustrated in Figure 3.

The ordinate in the curve represents the degree of evil. Analysis reveals that varying degrees of evil lead to different actual personal benefits due to the distinct attributes of the goods owned by the six individuals. The breakdown is as follows:

Alice: A higher degree of evil corresponds to a higher asking price. However, the optimal point for actual income is at the lowest degree of evil, selling ETH at the market price.

Bob: Selling airline tickets at market prices reflects the lowest level of evil. Deviating from this by setting low prices reduces Bob’s income and limits access for urgent ticket buyers, falling short of Pareto optimality. Increasing prices for higher income also deviates from optimal welfare, with the latter part of the curve showing a super-linear trend.

Charlie：If the bridges and roads are slow, any toll collection will hinder many people in need and bring negative benefits to society, and the higher the degree of evil, the greater the benefits Charlie himself will get; if the bridges and roads are congested, appropriate tolls will alleviate the problem. Congestion, too high or too low charges will reduce the overall benefits of society, so the shape of the graph mirrors Bob’s scenario..

David and Eve: David and Eve offer similar products. Charging for their products will increase their individual income while reducing societal income, showing a positive correlation. The key distinction lies in their monetization methods: David’s podcast relies on charging through advertising breaks, where not all advertising costs may be passed on to listeners. In contrast, Eve directly offers paid songs, making her songs more costly for listeners. As a result, Eve’s income-evil curve is steeper.

Fred: Fred’s products are distinctive. Monetizing them typically involves selling patents or through auctions, posing a risk of transforming what was originally open-source into exclusive products under the monopoly of certain entities. Such a shift can lead to significant negative externalities, resulting in a steeper income-evil curve for Fred.

A commodity with positive externalities contributes more to societal welfare when the owner relinquishes the right to monetize it, offering it for free use to all. Consequently, if the degree of evil correlates positively with personal gain, the commodity can be classified as a public good. In the aforementioned examples, soothing bridges, podcasts, songs, and the ZK encryption algorithm can be categorized as public goods.

In the Web3 realm, Token existence simplifies the monetization of public goods. However, this can lead to a shift towards market-driven pricing rather than reflecting their true social value, potentially distorting their worth and undermining their essence as public goods.

The monetization of public goods poses a dilemma: low evil degrees limit development, while high evil degrees jeopardize the ecosystem. Resolving this paradox necessitates external interventions, such as appropriate funding, to support public goods development without compromising their intrinsic public nature and value.

Furthermore, in the Tokenized public goods realm of Web3, the distribution of income from public goods becomes a complex issue. Determining how benefits should be allocated between Token holders and community members presents a crucial challenge. Establishing a new governance model to address this issue and ensure equitable and transparent distribution of public goods benefits emerges as a core challenge within the Web3 ecosystem.

Web3 Public Goods Redefined

Reflecting on the preceding article, GCC’s “Report” initially outlined the traditional economic definition of public goods, followed by a modern interpretation of public goods and a reference to Vitalik’s income-evil curve. Building upon these foundations, this report delves into the concept and comprehension of public goods within the Web3 ecosystem, aiming to redefine and elucidate Web3 public goods, and subsequently identify funding targets. How can one ascertain whether a Web3 project or asset qualifies as a public good? This assessment can be approached from three perspectives:

1. Exclusivity and competition

Exclusivity and rivalry remain pivotal criteria for evaluating public goods. However, when assessed through a dualistic lens, pure public goods are scarce, making it challenging to determine funding targets. In delineating the income-evil curve, Vitalik categorizes funding priorities into four groups based on the two-dimensional spectrum of exclusivity and rivalry:

（1）Completely Non-Competitive: These items can only derive value by reducing their non-exclusivity, such as original open-source algorithms or codes.

（2）Completely Non-Competitive Public Goods: These items can obtain value without compromising their non-exclusivity, like podcasts generating advertising revenue.

（3）Moderately Competitive Items: These items can receive funding to prevent excessive pricing, such as airline tickets.

（4）Fully Regulated Market Items: These items do not necessitate funding and function as private goods, exemplified by ETH tokens.

2.Externality

In the Web3 ecosystem, many items such as public chains, smart contracts, and oracles have positive externalities. The paid use of these items can often bring benefits to people other than the payers. They have positive externalities and can be considered It is a public good in a broad sense.

3. Degree of decentralization

The production and governance rights of public goods should be decentralized and in the hands of the public, otherwise failures will occur due to the degree of evil at a single point, threatening system security and reducing the value of public goods to the entire ecology and community.

To sum up, Web3 public goods must ensure non-exclusiveness, non-competition, and positive externalities. In principle, they should also have a certain degree of decentralization. This is a requirement for any good Web3 project or asset.

Current Web3 public goods ecology

(Web3 public goods ecological diagram - author: zhoumo of Uncommons)

Based on the complexity of Web3 public goods,The GCC report divides the current Web3 public goods into upper, middle and lower reaches.The upstream is the infrastructure of Web3, such as public chain, storage, SDK and related code; the midstream includes middleware and services; the downstream is the applications that directly interact with ordinary users. The “Web3 Public Goods Ecology Research Report” introduces the Web3 public goods ecology in great detail.Due to space limitations of this article, this part of the content is briefly described in the table(X in the table means not described in the report).

1.Upstream

2.Midstream

1. Downstream

Web3 public goods ecological outlook

1. Public chain ecology provides the foundation

Blockchain technology ensures trustlessness through data immutability and transparency. Public chains, tokens, and smart contracts form the basis for Decentralized Autonomous Organizations (DAOs) and on-chain governance. The growing recognition of the importance of sustainable development for Web3 public goods has led to increased funding from foundations and projects. This trend is expected to become more pronounced in the future.

2. Public goods-a new model for Web3 products

In Web2, product development requires establishing barriers for high exclusivity and competitiveness using products, data, and technology. Conversely, Web3 product logic emphasizes strong user engagement to gain a competitive edge, necessitating non-exclusivity and non-competitiveness. Open-source public goods play a pivotal role in shaping Web3 products, fostering an open business model over a closed one.

3. Paths to realize the sustainability of public goods

Public goods, with their positive externalities, often struggle to sustain themselves as their value is not fully reflected in their earnings. Various external assets or income sources are essential to ensure their sustainability. Several paths to sustainability for Web3 public goods include:

(1) Donation: Donations continue to be a prevalent method for funding public goods. Initially, the feasibility of monetizing a public good can be assessed using the income-evil curve, with a preference for public goods with limited monetization potential.

However, donations face two primary challenges. Firstly, there is a lack of direct returns, potentially leading to a depletion of funds and rendering public goods unsustainable due to insufficient contributions from donors. Secondly, post-donation, there is often a lack of transparency in fund utilization and management, resulting in underutilization of funds. The QF mechanism empowers community members to determine fund allocation, addressing the issue of selecting funding targets. Nevertheless, the effective use and management of funds remains a persistent challenge. Donations are particularly suitable for cold-start startup projects lacking established funding channels.

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(2) CSR Income: CSR, or Contract Secured Revenue, as defined in EIP6968, involves dividing Gas into three components: the basic network fee for burning, the miner reward fee, and the contract development reward fee. By allocating a portion of Gas fees to contract developers, they are incentivized to dedicate more time and effort to public goods, thereby enhancing the quality and accessibility of public goods. CSR income is applicable to contract-based public goods.

(3) Public Chain Gas Support for Public Goods: While CSR is limited to on-chain public goods funding, the PGN initiative by Gitcoin introduces an alternative approach. PGN suggests allocating a portion of node Gas to support public goods, making it suitable for cold-start, off-chain public goods.

(4) Retroactive Funding: This funding model, proposed by Optimism, involves financing public goods after their value has been verified. It aims to prevent misallocation of funds and enhance fund utilization efficiency. However, retroactive funding does not address the initial funding challenges of cold-start public goods and faces difficulties in quantifying and standardizing the assessment of “valuable” contributions. This approach is applicable to public goods that have already made significant contributions to the ecosystem.

(5) DAO+Token Model: Leveraging the foundational technology of blockchain, including smart contracts and tokens, this approach allows mature public goods to issue tokens through Initial DEX Offering (IDO). This strategy addresses funding challenges while enabling Token holders to engage in transparent governance within the DAO, steering the future development direction of public goods and sharing in the benefits. This model is tailored for public goods that are well-established and operational. In principle, it represents a path that relies least on external funding and boasts the most robust endogenous sustainability.

4. Existing challenges

Several challenges must be addressed to achieve the sustainable development of public goods, including:

(1) Inadequate public awareness and attention towards public goods;

(2) Lack of clarity and transparency in the governance process of public goods;

(3) Limited influence of most public goods, leading to difficulties in securing adequate donations;

(4) Low efficiency in fund utilization;

(5) Challenges in quantifying the impact of public goods.

Apart from these challenges, there are numerous significant and minor issues in achieving the sustainable development of public goods. Nonetheless, the substantial positive influence of public goods on the Web3 ecosystem underscores the importance of exploring pathways for their sustainable growth. The fundamental principles of Web3 offer appropriate mechanisms and ample funding avenues for public goods development. Various potential solutions rooted in Web3 are addressing challenges encountered on the journey towards sustainable public goods development. The presence of smart contracts and Tokens injects new optimism into the advancement of public goods.

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