ZoneBitcoin EditorialYou have probably already heard of Open Source projects major ones like Mozilla Firefox, Open Office or even Libre Office. Well, these are software programs that take a lot of time and money to develop.
Indeed, it is not always easy to raise funds in the conventional way for projects with open source codes for everyone. Many have tried crowdfunding, but it quickly showed its limits.
It is with the aim of circumventing its limits that a new financing approach has been designed: quadratic funding. Although the name may be intimidating, Quadratic Funding is a mathematical innovation in the field of crowdfunding that makes it fairer and more accessible.
If you would like to know more about this new collective form of financing, this article is for you.
What is quadratic funding?
Quadratic financing was originally proposed in 2020 by Vitalik Buterin, together with Zoë Hitzig and E. Glen Weyl in a research paper entitled “ A Flexible Design for Funding Public Goods'. The aim is to find out how to finance public goods projects. The authors draw inspiration in particular from the "quadratic vote" which allows individuals to have a voice depending on their level of engagement in voting.
In the world of blockchain, the quadratic funding is the mathematically ideal method for supporting community initiatives. It gives priority to contributions from a large community rather than those of a small fortunate group.
Quadratic financing is then a method of participatory financing which is based on a complex mathematical formula. It aims to be more democratic, more equitable and more inclusive in order to support public goods, such as open source software, scientific research and public art projects. These are generally projects that differ from commercial projects which are subject to traditional financing.
Compared to classic crowdfunding, quadratic funding seeks to group small individual contributions with larger counterparts. Thus, the contribution of each donor is offset by the total amount collected and the number of distinct contributors.
For the rather complex calculation, there are calculators that do the math. We can cite the calculator WTFisQF, for example.
How are the projects financed?
Once the individual projects have been listed, interested parties can review all grant offers. Then they can select which ones they want to support. This can particularly be a single project or several projects at a time. Furthermore, the attractive aspect of this program lies in the fact that Even the smallest contribution, say $1, can have a significant impact. And this is the great advantage of Quadratic Funding.
To go further in our explanations, let's take a very simple example.
👉 First, let's assume there are two projects, A and B. Then, ten donors, including individuals, each contributed $1 to project A. That's a total of $10 that this project raised.
👉 As for project B, it receives two donors who each contributed $6, for a total of $12. However, although it generated less money, project A will receive more matching funds than project B, according to the principle of quadratic funding. THE power of small contributors is thus strengthened, allowing them to have a say in how community funds are used.
In addition, this process allows the most supported programs to benefit from the funding they deserve without interruption. In fact, the more people who follow the project, the more likely it is to go far.
How does quadratic funding democratize crowdfunding?
Unlike conventional fundraising, quadratic funding does not only favor large donors. In other words, quadratic funding is based on a simple formula that combines modest donations to provide additional funding for well-supported initiatives.
This formula aims to level the playing field and give more weight to modest contributions. In this way, public benefit projects are supported based on the feelings of the community rather than the desires of a privileged group of wealthy donors.
Distribution of funds according to the quadratic formula
By democratizing allocation, quadratic funding allows project leaders to have equitable resources. Open source programs and other public goods receive funding based on their appeal and benefit to the community.
In this way, small initiatives and smaller associations which do not have the support of large donors, but which are nonetheless crucial to the community, are not necessarily doomed to failure.
Quadratic funding can also promote collaboration and teamwork among developers. In particular, it allows them to pool their resources and work on joint projects.
How can Web3 benefit from and benefit from Quadratic funding?
Although quadratic funding is still an uncommon concept, it is becoming increasingly popular. The project Bitcoin (GTC) is a remarkable example of the possibilities offered by quadratic funding. The latter allowed him to have the support of the Ethereum community (in particular by Vitalik Buterin) and important contributors like the investment company Az16.
Just considering the contribution made by the Ethereum community, it is already estimated at more than 4 million dollars! And that's not the most interesting thing. In reality, all projects carried out by individuals from around the world can benefit from quadratic funding.
So, do you have a valuable project and you don't know where to start financially? Think about this method of financing without further delay! If your ambition is worth it, then you might just gather the necessary resources you need.
The role of blockchain
Blockchain technology can improve the efficiency of quadratic financing. Indeed, smart contracts can automate the entire financing process. This would then reduce the risks of abuse and manipulation of the system.
Better yet, it would also be possible to create dedicated tokens that would represent contributions to a project and that would allow better tracking of expenses afterwards. These tokens representing the interest of a contributor can also be used as "currencies" or represent "shares" of the company. In this case, we would get closer to the equity-funding model.
Is Quadratic-Funding the future of crowdfunding?
Associations and non-profit organizations frequently organize collection campaigns via crowdfunding. As part of these, they pay an amount equivalent to that collected, generally on a dollar for dollar basis.
Certainly, many people participate in such campaigns, but the division counterparties is sometimes unbalanced. For example, an individual contribution of 1 euros would receive the same fee as a thousand individual contributions of a few euros.
It is this problem in particular that quadratic funding corrects. Indeed, as we have already indicated, a special formula is used here to decide the how contributions are matched. This method ensures that there are no external influences and that the compensation is fair. It is based solely on mathematical calculations.
Platforms using Quadractif Funding
- Gitcoin Grant : This is a platform that uses the quadratic formula to allocate funds. On Bitcoin, projects which receive a high number of small contributions are then highlighted. This encourages the financing of more modest, under-represented projects.
- Clr.fund: Clr.fund is a protocol for efficiently allocating funds to public goods that benefit the network Ethereum according to the preferences of members of the Ethereum community. The platform aspires to decentralization, absence of permission, absence of trusted third parties and pseudonymity.
- Pomelo Grants : Inspired by the Gitcoin project, it is an open source crowdfunding platform where contributions are matched from a funding pool from the EOS Foundation.
Classic crowdfunding platforms
Here is a list of platforms on which it is possible to raise funds, via classic crowdfunding. On these platforms, anyone can make micro-donations in bitcoin.
- Geyser Fund : It is a reference platform when it comes to bitcoin crowdfunding. This involves supporting projects linked to the development of bitcoin. Whether it be video game projects, training schools, funding for humanitarian causes such as support for victims in Sudan, The realisation of documentaries, all kinds of projects are presented on Geyser.
- OpenSats : This is also a popular platform among bitcoiners who wish to finance and support projects exclusively dedicated to bitcoin. Please note that OpenSats is more of a platform for open-source projects. You can thus finance manufacturers of open source physical wallet, payment software like BTCPayServer, etc.
What are the advantages and disadvantages of quadratic funding?
Quadratic funding can be a useful tool to inspire different types of contributions, promote excellence in work and reduce the influence of large donors. However, to avoid potential problems, special attention should be paid to a number of parameters. These are design, implementation, impact assessment and risks of abuse.
Benefits
The main advantage of quadratic funding is that it encourages a wide range of people to participate. By offering matching funds for modest contributions, quadratic funding can incentivize all types of investors regardless of their financial resources.
In short, quadratic funding offers a fantastic opportunity to unite community members around deserving public causes. It has the merit of giving a voice to everyone, whatever their financial situation. This also allows for the inclusion people who have reduced and limited capital.
Quadratic funding can also promote creating high quality works. Projects that receive a large number of comments will be highlighted to raise more funds.
It is also a way to reduce the power of large donors, while giving a voice to small donors too. In this way, the evolution of projects is no longer guided only by profit, but rather by excellence.
This way of proceeding offers great transparency, which is one of the main strengths of quadratic financing platforms. These clearly indicate how funds are allocated, allowing users to track the progress of supported projects.
However, although quadratic funding has several advantages, it also has some disadvantages.
The inconvenients
No system being infallible, quadratic funding also has its share of disadvantages. Firstly, it is difficult to know which project deserves to be supported or not. All projects have almost the same chance of receiving funds and the most urgent can easily be overturned by the most aggressive in terms of marketing. Finally, we return to classic problems crowdfunding platforms current.
Secondly, dishonest people can try to abuse the quadratic funding system. They can in particular try to make donations or come together to collect their own contributions.
Apart from these points, the presence of prejudices also represents a real problem. Presumably, it is entirely possible that donors rely on discriminatory criteria to decide whether or not to support a project.
Finally, setting up a quadratic funding system is not within everyone's reach. This requires specific infrastructure which can be expensive. It takes a lot of effort to develop and maintain the platform, inform and then attract potential donors. These different parameters constitute an obstacle which can prevent people or organizations with the financial means from participating in the campaign.
What you must remember
Quadratic funding is an essential method for supporting open source or community projects. Although this type of fundraising is still very new, it has the potential to revolutionize how these types of projects are financed.
In addition, in a world where blockchain is gaining ground every day, quadratic financing could facilitate development of several innovative solutions and support humanist projects all over the world.
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