How do decentralized networks surface value? There is an interesting dynamic in blockchains that anything that is built directly onchain is always open sourced. Obviously it's possible to build private businesses around that model, but the more public infrastructure is built on a blockchain the more use it is likely to get and the more demand there will be for the cryptocurrency.
With this logic in mind it benefits L1s and L2s to incentivize builders and creators to develop the infra and tools that would grow the network. The question though is how do you incentivize this at scale? While infra on a blockchain can lead to greater overall demand for the network that doesn’t necessarily mean that the piece of infra itself would generate returns for the builder. And if there’s no return for the builders what would motivate them to put time and energy into benefiting the network?
What if networks decide to reward builders based on the amount of txs that utilize their infra? The problem here is that the amount of txs doesn’t always correlate with the value to the network. You can imagine “farmers” building infra that is unnecessarily complicated and primarily designed to generate lots of txs but creates little value for the network. Such infra may even be regarded as malicious if it clogs the network with garbage. So merely counting txs doesn't surface value.
Another approach may be to allow the community to vote on builders to get funding. We now have Quadratic Funding, which combines voting and funding, where the more contributions a project gets the more funding it is likely to get from a matching pool. What this approach still misses is that builders are rewarded more on the popularity of their project than on its impact to the network. This also requires builders to spend more time engaging the community than building something impactful that benefits it.
And then we have retroactive funding. Here the idea is that projects are only rewarded once their impact on the network is assessed. Having the certainty of an impact-based reward allows builders to get investors to fund the project with the expectation of the reward from the network.
This approach – famously implemented by @optimism – is quite promising, but it’s not there yet; first, the system needs to be scalable. If there are a few hundred projects to review, maybe a group of a hundred or so reviewers can handle it. But what happens if there are many thousands of projects? Second, currently the goal is to reward builders from sequencer fee profits. But the impact of projects on the network cannot be fully captured merely by the increase in fees. If we want to have a real ‘impact = profit’ model we need a feedback loop that captures the value of the contribution to the network. And for that we need to engage the network's social layer.
So using specific metrics doesn’t work to surface value because those can be easily gamed. Using popularity doesn’t work for similar reasons. But rewarding projects retroactively based on their impact is a promising path if the review process is scalable.
Why not then scale the review process by putting the right incentive structure in place?
Thanks to the open social graph, we have an abundance of data on user interactions (& onchain activity). A network can use this data to reliably determine which users are highly aligned with it. It can then offer these users an incentive to look for and review network activities (and dev work) that grow the ecosystem.
If the network rewards users proportionately to the value they surface, it can get users to proactively surface all contributions based on their impact - much like investors proactively look for undervalued stocks in the market. If users try to game the system however they can lose reputation - and future earnings.
Developers are much more likely to focus on value creation for a network if they see that the network rewards contributors based on the impact they make (and not based on engagement farming for grant votes, or maximizing some arbitrary metric).
The networks that can best surface contributor value are therefore the ones who will attract the most talent and get the most growth.
The best path to get there would be by combining retroactive funding (where the impact is clear) with a social coordination layer that is aligned with the network, and has an effective incentive structure to surface value at scale.
