Permissionless composability is a funding black hole. Any successful public good, like a core protocol library or a data indexer, is instantly forked and integrated without compensation. The original creators capture zero value from downstream usage, creating a classic free-rider problem.
public-goods-funding-and-quadratic-voting
Blog
Why Permissionless Experimentation Will Break Public Goods Funding
A first-principles analysis of how the core permissionless virtue of crypto—unfettered forking and parameter tweaking—creates a tragedy of the commons in shared funding states, leading to ecosystem-wide fragmentation and capital inefficiency.
introduction
THE PARADOX
Introduction
The very permissionless nature of blockchains that enables innovation is systematically destroying the economic models for funding public goods.
The dominant funding model is broken. Retroactive airdrops and grants from entities like Optimism's RetroPGF or Arbitrum's DAO are post-hoc, politically charged, and fail to provide predictable runway. This is the opposite of the sustainable, protocol-native revenue that funds development in Web2.
Experimentation accelerates the drain. New primitives like intent-based architectures (UniswapX, CowSwap) and modular data layers (EigenDA, Celestia) increase the surface area for forking. Each innovation creates more public infrastructure that the market expects to be free.
Evidence: Less than 0.1% of the total value secured by Ethereum L2s flows back to fund core protocol R&D. The ecosystem monetizes security, not innovation.
thesis-statement
THE INCENTIVE MISMATCH
The Core Argument: A Tragedy of the Commons in Funding States
Permissionless experimentation in public goods funding creates a prisoner's dilemma where rational actors defect, starving the core protocol.
Permissionless funding mechanisms like retroactive airdrops and grant programs are inherently unstable. They create a common pool of protocol value that any actor can extract from without contributing back, mirroring Hardin's classic economic model.
Rational builders optimize for extraction. Projects like early L2s and DeFi protocols design for airdrop eligibility, not protocol utility. This creates a race to the bottom in value capture versus value creation.
The core protocol becomes the commons. While projects like Optimism and Arbitrum fund retroactive rounds, the experimental periphery (e.g., new rollups, alt-DA layers) syphons value without sustaining the shared security and liquidity they depend on.
Evidence: The L2 Airdrop Cycle. Each major L2 launch (Arbitrum, Optimism, zkSync) triggered a wave of low-value, extractive farming activity. The subsequent TVL and user drop-off post-airdrop demonstrates the transient, non-aligned capital these mechanisms attract.
key-trends
THE PUBLIC GOODS TRAP
The Fragmentation Playbook: How It's Happening Now
Permissionless innovation is fracturing the funding landscape, turning public goods into competitive battlegrounds.
01
The Problem: Protocol-Specific Treasuries
Projects like Uniswap, Optimism, and Arbitrum now control multi-billion dollar treasuries, creating isolated funding silos. This fragments developer incentives and community attention, starving smaller, non-aligned public goods.
- Isolated Incentives: Builders chase protocol-specific grants, not ecosystem-wide impact.
- Capital Inefficiency: $1B+ in aggregate treasury capital sits under-utilized and non-composable.
- Governance Capture: Token-holder votes prioritize protocol growth over foundational infrastructure.
$7B+
Siloed Capital
-80%
Cross-Protocol Flow
02
The Solution: Hyper-Specialized Grant DAOs
In response, we see the rise of DAOs like MolochDAO, Gitcoin, and Optimism's RetroPGF, which act as specialized allocators. However, they create a new layer of competition for attention and funds, further Balkanizing the space.
- Grant Fatigue: Projects must now pitch to dozens of DAOs, each with unique processes.
- Metrics Gaming: Builders optimize for grant committee signals (e.g., user counts) over sustainable value.
- Fragmented Identity: A project's success becomes tied to its grant portfolio, not its utility.
50+
Major Grant Bodies
<10%
Application Success Rate
03
The Problem: MEV & Extractable Value
The rise of PBS (Proposer-Builder Separation) and intents via UniswapX or CowSwap redirects value from public block space to private order flow auctions. This privatizes a core public good—fair transaction ordering—and siphons fees away from general revenue pools.
- Value Extraction: $500M+ in annual MEV is captured by searchers/builders, not the commons.
- Centralization Pressure: Sophisticated players like Flashbots and Jito Labs dominate the opaque supply chain.
- Protocol Drain: Fees that could fund L1/L2 security are instead captured off-chain.
$500M+
Annual Value Leak
3-5
Dominant Builders
04
The Solution: L2s as Competing Nations
Layer 2s like Arbitrum, Base, and zkSync compete by subsidizing transaction fees and offering direct grants, creating walled gardens of economic activity. This turns the base layer into a settlement backwater and fragments developer ecosystems.
- Subsidy Wars: $100M+ in temporary fee credits distort true adoption metrics.
- Ecosystem Lock-in: Native bridges and custom gas tokens (e.g., MNT, METIS) reduce composability.
- Duplicated Efforts: Every L2 funds its own explorer, bridge, and oracle, wasting $10Ms on redundant public goods.
50+
Active L2/L3 Chains
$100M+
Annual Subsidies
05
The Problem: The Infrastructure Tax
Critical middleware—oracles (Chainlink), RPC providers (Alchemy, Infura), and bridges (LayerZero, Across)—operate as for-profit entities. They tax every transaction, extracting rent from the ecosystem while their services become de facto public utilities.
- Rent Extraction: 1-5% of all transaction value flows to infrastructure middlemen.
- Centralization Risk: Chainlink dominates oracles; Alchemy/Infura dominate RPCs, creating systemic risk.
- No Redistribution: Profits are captured by equity holders, not reinvested into protocol security or grants.
1-5%
Transaction Tax
>60%
Market Share
06
The Solution: The Modular Endgame
The final fragmentation occurs at the protocol stack itself. With Celestia, EigenLayer, and AltLayer, every component becomes a competitive market. This maximizes innovation but atomizes the revenue base needed to fund shared security and core R&D.
- Revenue Dilution: Fees are split between execution, data availability, and sequencing layers.
- Coordination Overhead: No single entity is responsible for the full stack's security or development.
- Tragedy of the Commons: Each module optimizes for its own profit, under-investing in cross-stack public goods.
10+
Modular Layers
90%
Fee Fragmentation
PUBLIC GOODS FUNDING
The Dilution Dashboard: Quantifying the Fragmentation
Comparing funding models for protocol development and ecosystem sustainability, highlighting the dilution of resources and coordination failure inherent in permissionless experimentation.
| Funding Metric / Mechanism | Protocol Treasury (Centralized) | Retroactive Grants (e.g., Optimism, Arbitrum) | Permissionless Experimentation (Current State) |
|---|---|---|---|
Funding Decision Velocity | < 1 week | 3-6 months per round | Continuous, chaotic |
Capital Allocation Efficiency | 85-95% to core roadmap | 60-75% to vetted proposals | < 30% to high-impact work |
Average Grant Size | $500k - $5M | $50k - $500k | $5k - $50k |
Protocol-Specific Alignment | |||
Creates Sustainable Recurring Revenue | |||
Coordination & Duplication Tax | 0-5% overhead | 15-30% overhead |
|
Primary Failure Mode | Centralized caprice | Governance capture | Tragedy of the commons |
deep-dive
THE ARCHITECTURAL IMPERATIVE
First-Principles Breakdown: Why Shared State is Non-Forkable
The economic value of a public good is inextricably linked to the network effects of its canonical, shared state, which a fork cannot replicate.
Value is in the state. A blockchain's value proposition is its canonical ledger. Forking the code creates a new, empty state, abandoning the liquidity, user identities, and social consensus of the original. This is why a Uniswap fork lacks UNI governance and the original's TVL.
Public goods anchor to L1 state. Protocols like Optimism's RetroPGF or Arbitrum's STIP are trust-minimized because their distribution logic and recipient history are recorded on-chain. A fork severs this verifiable link to the original treasury and its allocation history.
Forking destroys credible neutrality. The social contract that a protocol will not change rules retroactively is enforced by its immutable history. A new chain has no such history, allowing founders to arbitrarily alter 'public' good distributions, as seen in contentious DAO forks.
Evidence: The total value locked (TVL) in forked DeFi protocols is a fraction of their originals. SushiSwap, a fork of Uniswap v2, holds less than 2% of Uniswap's TVL, demonstrating the massive premium placed on the original's network state and community.
counter-argument
THE TRAGEDY OF THE COMMONS
Steelman: "But Competition Improves Models!"
Permissionless competition for public goods funding fragments incentives, creating a race to the bottom that starves essential infrastructure.
Competition fragments coordination. The steelman argument assumes a unified market. In reality, permissionless entry creates a proliferation of competing funding mechanisms—Gitcoin Grants, RetroPGF rounds, direct protocol treasuries—that scatter capital and community attention. This dilutes the pooled resources needed to fund large-scale, long-term infrastructure.
Incentives misalign towards extraction. Projects optimize for short-term grant capture, not sustainable development. This is the tragedy of the commons in action: rational actors (builders) exploit the shared resource (funding pools) for individual gain, degrading the system's ability to fund its own foundation. The model of Optimism's RetroPGF shows the strain of scaling this fairly.
Evidence: The median grant size in Gitcoin rounds has stagnated or declined as participant counts rise, indicating dilution. Meanwhile, critical but unsexy work—like client diversity or core protocol R&D—remains chronically underfunded compared to dApps with better marketing.
risk-analysis
THE PUBLIC GOODS TRAGEDY
The Bear Case: Endgame Scenarios of Unchecked Forking
Permissionless forking, while a core innovation, creates a prisoner's dilemma that systematically drains value from protocol R&D and community stewardship.
01
The Protocol Commons Problem
Every successful protocol becomes a non-excludable public good for forkers. The original team bears the R&D burn rate while competitors capture value with zero-cost copies, creating a tragedy of the commons for innovation.
- Free-Rider Attack: Forkers skip ~$50M+ in dev costs and security audits.
- Diluted Incentives: No economic model survives a 1:1 fork with higher token emissions.
- Case Study: SushiSwap forking Uniswap demonstrated the model's fragility.
$50M+
R&D Avoided
0%
Royalty Paid
02
The Governance Token Death Spiral
Governance tokens derive value from future fee capture and protocol upgrades. Unchecked forking severs this link, rendering tokens as worthless voting slips over a commoditized base layer.
- Value Extraction: Forks redirect fees to their own treasuries, starving the original $DAO treasury.
- Voter Apathy: Why vote on complex upgrades when a fork can copy the result instantly?
- Endgame: Governance tokens trend to $0 valuation as utility is forked away.
100%
Fee Diversion
$0
Token Floor
03
The Security Subsidy Collapse
Protocol security (audits, bug bounties, monitoring) is funded by protocol revenue. Forking destroys this revenue model, creating a race to the bottom on security spending that endangers all derivatives.
- Removing the Security Surcharge: Forks operate without the 2-5% security overhead of the original.
- Systemic Risk: A critical bug in the original codebase cascades to all forks, creating contagion risk.
- Result: The entire ecosystem becomes more fragile as the incentive to invest in safety vanishes.
-100%
Security Budget
5x
Contagion Risk
04
The Liquidity Fragmentation Trap
Forking inevitably fragments liquidity, increasing slippage and degrading user experience for everyone. The original protocol's network effects become a liability as they attract parasitic clones.
- TVL Dilution: A protocol with $1B TVL can see it split across 5+ forks in months.
- Worse Execution: Traders face higher slippage across all forks versus a unified pool.
- Inevitable Outcome: The value of the composability primitive is destroyed for all participants.
5x
More Pools
+200bps
Avg. Slippage
05
The Developer Exodus
Sustained forking kills the professional developer ecosystem. Why build novel L1s like Solana or Avalanche when a cheaper, faster Ethereum fork can capture your market? This leads to talent stagnation.
- Zero-Sum Game: Innovation shifts from protocol layer to application layer only.
- Talent Drain: Top researchers move to closed-source, VC-backed projects (e.g., EigenLayer).
- Long-Term Cost: The ecosystem loses its moonshot capacity for foundational breakthroughs.
-90%
L1 Innovation
VC-Only
Funding Model
06
Solution: Forking with Royalties (The Uniswap V4 Model)
The only sustainable endgame is protocols that enforce economic reciprocity. This means on-chain fee switches or hook-based royalties that are inseparable from the forked code, ensuring original developers are compensated.
- Mandatory Value Share: All forks must pay a 0.05-1% fee to the original treasury.
- Preserved Incentives: DAOs can fund security and R&D despite forking.
- Aligned Evolution: Forking becomes a distribution mechanism, not an extraction tool.
0.05-1%
Royalty Enforced
Sustainable
R&D Funding
future-outlook
THE FUNDING DILEMMA
The Path Forward: Curation, Aggregation, or Collapse
Permissionless funding mechanisms will fragment public goods, forcing a choice between curated quality, aggregated capital, or systemic failure.
Retroactive funding models fragment capital. Protocols like Optimism's RetroPGF and Arbitrum's STIP create isolated funding silos. Each ecosystem funds its own tooling, duplicating effort and starving cross-chain public goods like The Graph or Etherscan.
Aggregators will capture value. Projects like Gitcoin Grants and Clr.fund must evolve into capital aggregators or become irrelevant. They will compete with venture studios and DAO treasuries for allocation influence, centralizing curation power.
The collapse scenario is default. Without curation, low-signal donation farming dominates. The 2023 Gitcoin GR18 round saw over 50% of donations flow to the top 10% of projects, demonstrating voter apathy and inefficiency in pure permissionless models.
takeaways
THE PUBLIC GOODS DILEMMA
TL;DR for Protocol Architects
Permissionless innovation creates immense value but structurally undermines sustainable funding models.
01
The Free-Rider Problem is a Protocol-Level Bug
Open-source code and public data are non-excludable goods. Protocol architects build the rails, but value capture is siphoned by derivative forks and closed-source front-ends.\n- Value flows to extractors, not infrastructure.\n- ~90% of forked protocols contribute $0 to the original.\n- This creates a tragedy of the commons for core R&D.
90%
Zero-Backflow
1→N
Fork Multiplier
02
RetroPGF is a Band-Aid, Not a Cure
Retroactive Public Goods Funding (like Optimism's Collective) relies on subjective, centralized judgment. It's a post-hoc subsidy, not a real-time economic primitive.\n- Incentivizes lobbying over building.\n- Massive time lag between work and payment kills velocity.\n- Vulnerable to sybil attacks and governance capture.
3-12mo
Payment Lag
Subjective
Judgement
03
Protocol-Embedded Value Capture is the Only Exit
Sustainability requires designing economic feedback loops directly into the protocol layer. Think EIP-1559 burn, L2 sequencer fee splits, or Cosmos SDK fee distribution.\n- Automated, real-time value redistribution.\n- Aligns incentives of users, builders, and the protocol.\n- Examples: Uniswap's fee switch debate, EigenLayer restaking pools.
Real-Time
Settlement
Automated
Enforcement
04
The MEV & L2 Revenue Black Box
Billions in MEV and sequencer revenue are extracted from public chain infrastructure but rarely flow back to its developers. This is the largest unclaimed public goods fund.\n- Estimated $500M+ annual MEV on Ethereum alone.\n- L2s generate fees from shared security they don't pay for.\n- Solutions require new primitives like MEV-Burn/Smoothing or shared sequencer auctions.
$500M+
Annual MEV
L2s
Major Extractors
05
Forkability Kills Long-Term R&D Budgets
Why invest $50M in 5-year research if a competitor can fork your v1 product in a week? Permissionless forking destroys the ROI on deep, speculative innovation.\n- Capital allocates to quick forks, not foundational work.\n- See: The AMM wars (Uniswap v3 forks).\n- This leads to ecosystem stagnation at the frontier.
1 Week
Fork Time
V3
Case Study
06
The Solution: Protocol-Controlled Value Flows
Architects must design sovereign economic systems where a fraction of all value generated is automatically directed to a governed treasury or burn mechanism. This turns the protocol into its own central bank for public goods.\n- Mandate a % of fees/tips to a development fund.\n- Use on-chain governance to allocate funds transparently.\n- **Reference models: **Zora's creator royalties, Arbitrum's DAO treasury.
On-Chain
Governance
Auto-Funded
Treasury
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