Adventures in ETHland: Quadratic Funding for Urban Services

Where the mountains of Central California meet the rolling sand dunes of the Pacific, ETHland is a growing city founded by the Web3 community; an experiment in decentralized living. Incorporated in 2030, the town's settlers brought their families and friends, raising money to build their own houses on the beach. The beginnings saw great peace, as there was little to argue over; farmable land was plentiful, resources were bountiful, and collaboration and cooperation flowed.

By 2040, the city had grown to 500, bringing with it a growing set of problems; land became scarce. And with scarcity of land came scarcity of tolerance. Abraham complained that Vivian’s house blocked his view of the sea. Naphtali’s pet Fox would roam through Rosa’s backyard, attacking her chickens. Ron’s igloo was broken into by his nemesis Gustavo, who stole his dog sled; even though the whole town saw Gustavo roaming the dunes on the sled the next morning, there was no system in place to get it back.

So the residents of the city decided to elect a council of five representatives to oversee Ethland’s operations. Of course, Ethland isn’t a traditional city; it’s full of innovators eager to try out new forms of governance. Instead of collecting taxes, the residents can donate their money towards public goods; instead of taxpayers, Ethland has tax-donors.

Around that time, the new city began to attract a lot of press. Big donors like the World Cities Foundation and UN Habitat were eager to contribute money to this experiment in urban city living. But with big money came big problems. The council was too busy to read proposals; they realized they would have to hire an entire other team, which would cost hundreds of ETH in city resources. What’s more, ETHland’s population worried that the council would be subject to bias. The local paper leaked a discussion by the council suggesting they allocate most of the funding to laser drone robots to clean the roof of City Hall, and laughing at a proposal to use the money to provide counseling to the city’s growing population of mentally ill manatees. The residents were outraged.

ETHland’s issues speak to a larger problem in funding public goods. Providing counseling services to mentally ill manatees may not be in the interest of large donor organizations, who prefer to donate to projects that make headlines; the city councilmembers might think that roof-cleaning drone robots will portray ETHland as an innovative smart city, while neglecting the real problems the area faces; after all, the manatees don’t donate taxes so why should they receive those services. But the majority of Ethland’s residents strongly believe in the importance of looking after wildlife, seeing it as vital to building a sustainable city. And then there’s also the free rider problem; public goods which are non-excludable will receive less funding by government authorities, even if their benefits extend to the broader population. Without quadratic funding, large donors get the final say, and human bias bows to the powerful.

This parable highlights the underlying ethos behind clr.fund, and the power of quadratic funding more generally. In quadratic funding, donations from UN Habitat and the World Cities Foundation would be put into a matching pool, and paired with the proposals which receive the most small donations, creating a flywheel which amplifies the power of small donors. Designed by Vitalik Buterin, Zoë Hitzig, and E. Glen Wey, and inspired by principles of Liberal Radicalism, Quadratic funding applies principles from quadratic voting to charitable donations. In the case of the Ethereum network, clr.Fund ensures that donations towards the Ethereum network match the interests of the Ethereum community.

The foundational paper of Quadratic Funding states that the model “as applied to urban public funding decisions, could allow communities…to fund projects that would struggle to get funding under centralized systems”. Of course, such a system is not without its flaws; questions remain about potential collusion and the system relies on a large funding pool. But when it comes to public governance and providing centralized services to decentralized networks, projects like clr.fund are applying this powerful model with far-reaching applications. The mentally-ill manatees can rest assured.