What is quadratic funding?

Quadratic funding is investment in public goods that is proportional to how many people want to invest in something — not how much money is invested in a thing.

This can work in a community where everyone truly aims for the best of the whole community — not what is best for the richest and most powerful participants. It is currently being used in the development of digital public goods on the Internet, a project called Gitcoin.

It can work as well in any project aiming to do public good — however you need some mechanism to ensure the identity of the investors. Here’s a simple example how it works, compared to traditional matching:

Traditional matching

• Grant 1 gets $100.
• Grant 2 gets $100.
• At the end of the round, both grants get $100 in matching.

Quadratic matching

• Grant 1 gets $100 from 1 funder.
• Grant 2 gets $100 from 10 funders.
• At the end of the round, Grant 1 gets $10 in matching, Grant 2 gets $190 in matching.

Here’s how Vitalik Buterin, the founder of Ethereum, explains it in a recent podcast [1]:

“Quadratic funding is this interesting mechanism that basically says anyone can donate money to public goods through the mechanism but to compensate for this under provision that you talk about, the mechanism provides a subsidy to every public good. And that subsidy depends not just on the amount that was contributed but also on the total number of people who contributed, right. For example, if there’s two projects, they both got a hundred dollars but one of them got say, $80 from one person and $20 from another person. And the second project just got $1 from each of a hundred people, the second public good is much more public than the first public good. And the tragedy of the commons on the second one, is, much greater, right.

And so the facts that the second one managed to get to a hundred dollars despite the 100 way tragedy of the commons, implies that it’s a really important project. And so the quadratic funding mechanism actually gives a much greater subsidy to the $1 from each of a hundred people project than it does from the project that got just a hundred dollars from a split between two people. And so we’ve been experimenting with quadratic funding. There’s this thing called Gitcoin grants that happens a few times a year and that’s had about seven or eight rounds by now, I forget the exact number, just for public goods within the Ethereum ecosystem. And that’s worked really well. That’s been one of the interesting experiments that I’ve been following.”

[1] https://tim.blog/2021/03/09/vitalik-buterin-naval-ravikant-transcript/