#63: Funding public goods using decentralized finance
Starting to break down how DeFi is a tool for good
Yesterday, I wrote about how Ethereum can be used to fund public goods.
A quick recap: A public good is something for the benefit of all people that does not exclude non-payers. A public good is usually maintained by the government through subsidies and taxes. Think parks, roads, libraries.
And writing, too. Writing is a public good. Like all public goods, writing tends to be underfunded. Same with open source software. People stop writing and people stop building open source software because short-term wealth can be acquired elsewhere.
Governments are usually the entities that fund public goods, but the coolness and innovation of crypto is that tokens can be used as a funding mechanism. Not just any willy-nilly tokens, though. Any developer can learn how to create a token, but not any developer can design a successful tokenomics system.
The bread and butter, the real value of using crypto to fund public goods, is in the design of the token system: tokenomics. Tokenomics, also called cryptoeconomics, or mechanism design, is a nascent field that includes economics and maths.
The most successful crypto projects are ones that have not only found product/market fit, like a regular startup, but that have also created a token with a carefully designed tokenomics systems to reward participants for their contributions.
Let’s look at two examples.
Foster, as I have written about before, is a writer’s collective. Something like 80% of its 800+ members actively use the Chrome extension to submit drafts and also to edit other people’s drafts. Many members give and receive THANKS (a non-crypto token to show appreciation for editing help, kind of like Reddit Karma/upvoting.) The Discord community is always super engaging, an astounding number of people send notes of gratitude to the Foster team each day, Foster is a Y Combinator company, yada, yada, yada…Foster has definitely achieved product/market fit.
Foster doesn’t need to form a crypto organization, a DAO. It could choose to start charging members, using a traditional business model for financial sustainability. Maybe Foster could even IPO on the stock market one day. But this approach would be commoditizing writing: a public good. If Foster wants to offer its products for free, for a long time, even after its funding runs outs, then, I argue, it needs to explore designing a tokenomics system.
I can best demonstrate the value of a tokenomics system through MetaFactory. Note, these thoughts are still very raw and I plan to use my writing to sharpen them.
I did some work for MetaFactory: I wrote a story about the DAO, and as a reward I received some iRobot tokens. (iRobot is a DAO within Metafactory that is focused on the sustainability of ROBOT, Metafactory’s token).
Drew, the co-founder of MetaFactory, told me this:
iROBOT is our liquidity token, meaning you now have a position in our liquidity pool and can earn fees. It’s a 70/30 split of ROBOT/ETH.
To level-set with you: I have been around the Ethereum block for a while, but decentralized finance is an area that I have not spent enough time playing around in. It’s a shame because a lot of exciting crypto innovation is a result of DeFi, so I thought I would use this opportunity to dip my toes in.
The best way to learn about crypto, as with anything, is to try it yourself. I’m learning, right alongside you.
iRobot is maintained in a Balancer pool. I had never used Balancer, so I started by reading their white paper. I learned that Balancer takes the concept of an index fund and turns it on its head: instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders, who rebalance your portfolio by following arbitrage opportunities.
This means I can add my iRobot tokens to the pool and collect fees as a reward for traders using my tokens for arbitrage.
I also read a blog post from Balancer where I learned that:
Balancer is an automated market maker. An automated market maker (AMM) is a tool used to provide liquidity in decentralized finance (DeFi). They are used to enable the automatic trading of digital assets. They do this by using liquidity pools as a replacement for traditional buyer and seller markets.
Ah, okay. Traditional buyer and seller markets I am familiar with. I have used Coinbase Pro to buy and sell crypto, and their UI has a sleek view of the order book —the running list of all buy and sell orders.
Scratching an order book altogether is really cool because it means that you don’t have to rely on professional market makers to quote prices and expected volume. It’s all automated with fewer gatekeepers. You also don’t even need to create an account.
Balancer uses Uniswap, a leading decentralized exchange that I have used before. Uniswap makes buying and selling crypto a sleek and sexy non-custodial process.
Balancer takes Uniswap to the next level by adding liquidity pools.
Ok —awesome. I feel like that was enough DeFi for today. I’ll pick this topic back up again.
Don’t hesitate to reach out with any questions, friends. Take care!