Network Common Goods

A Shift Towards Collective Value Creation

In this essay, I will explore the concept of Network Common Goods, an approach designed to overcome the limitations inherent in Public Goods as applied to Blockchain Networks, offering a more comprehensive framework for understanding and supporting blockchain ecosystems. This idea, which combines the open accessibility characteristic of traditional Public Goods with the expansive, network-driven value of Network Goods, represents a shift in how we think about funding and supporting the goals of crypto networks, protocols and organizations.

Public Goods

2023 was a big year for “Public Goods” to enter the zeitgeist in the Blockchain community and we saw a larger and more expansive embrace of it from many different types of organizations, big and small. Public Goods initiatives came from creative orgs such as Nouns and Metalabel, mission driven ones like Gitcoin and Ethereum Honduras and from those supporting network protocols such as Purple and Optimism. Public Goods reached a crescendo in 2023 with Optimism’s Retroactive Public Goods Funding Round 3, where 650 individuals and organizations applied to receive a total of 30M OP.

With that growth came many debates on what constitutes a Public Good and who is qualified to create them. Questions were asked about weather Venture Capital backed companies can provide Public Goods or should be qualified in participating in Public Goods funding programs. What about projects that make revenue? What if that revenue is less than the value of the Goods being provided? How can you determine that value?

As Spencer Graham wrote, “Retroactive Public Goods Funding is a well-meaning label, but in practice it has been woefully misunderstood. “Public goods” is especially misleading, since it causes people to think only of pure public goods and miss the majority of what the program is trying to fund.” Public Goods, a definition created in 1954, needs an upgrade to stay relevant in an accelerating world of progress and networks.

In 1954, Paul Samuelson in a paper titled “The Pure Theory of Public Expenditure” coined the term Public Goods to address a notable deficiency in classical market theory which predominantly centered around private goods. The paper created a new category of goods – public goods – characterized by their non-excludable and non-rivalrous nature. Samuelson expanded the existing market theory framework to include a broader range of economic interactions.

In economics we encounter a dichotomy between two fundamental types of goods: private goods and public goods. Private goods, which include items like smartphones, cars, and your morning coffee, are defined by their excludability and rivalry. Excludability means that providers of these goods can prevent those who do not pay from accessing them, and rivalry implies that the consumption of these goods by one individual diminishes their availability to others. The market, with its price mechanism, efficiently allocates these resources, balancing supply and demand.

On the other side of the spectrum are public goods, which are non-excludable and non-rivalrous. A classic example is a lighthouse: its guiding light is available to all ships, regardless of whether they have contributed to its upkeep. The non-excludability characteristic means that no one can be effectively barred from using these goods, and their non-rivalrous nature implies that one individual’s use does not diminish another’s.

This leads to a market inefficiency: the free-rider problem. In a private markets, individuals have little incentive to pay for public goods, expecting that others will bear the cost. This scenario often results in the under-provisioning or complete absence of these goods, as private entities find no profit in their provision. Therefore, to correct this market failure, there is a need for collective action, typically in the form of government intervention. Governments can fund the provisioning of public goods through taxation, ensuring that their benefits, critical for societal welfare and often with far-reaching implications, are universally accessible. This intervention is not just a matter of rectifying market inefficiencies; it's about harnessing economic mechanisms for the broader benefit of society.

Public Goods funding in Crypto

While the concept of Public Goods is a useful tool that permits Government intervention to correct for market inefficiencies, decentralized Blockchain Networks have taken up the banner of Public Goods to fund open source software, protocol research, art, memes and other growth initiatives that benefit the Network and all those who use the Network. These goods are non-excludable and non-rivalrous to people who use the Network and often provide more value to the Network than they receive in revenue. These mechanics can help bootstrap a protocol's cold start problem where users do not want to use a protocol without apps and app developers do not want to build software for a protocol without users. They can also help compensate open source developers, researchers and educators who would otherwise have a difficult time being paid a fair value for the value they are creating for the Network. Finally, Public Goods funding offers the promise of a less extractive business model for entrepreneurs who can raise money to tackle hard problems without the extractive economics of traditional Venture Capital investments.

However are these actually Public Goods? Can anyone make the claim the software that runs on a Blockchain Network is non-excludable and non-rivalrous? They fundamentally exclude people not using blockchains and in many cases exclude those who can not afford transaction fees. Are they non-rivalrous if a project has to decide between deploying to Base or Arbitrum? As Vitalik Buterin notes "when the abstract category of non-excludable non-rivalrous public goods interacts with the real world, in almost any specific case there are all kinds of subtle edge cases that need to be treated differently."

While we can all agree "Public Goods are Good", the term does not adequately capture the realities of funding blockchain ecocsystems or the goals of the Organizations providing the funding. This necessitates an exploration into more adaptive economic models that resonate with the ethos of blockchains and more closely aligns with the distinctive characteristics and strategic imperatives of Blockchain Networks.

Network Goods

The term "Network Goods" is closely associated with the concept of network externalities or network effects, which were extensively studied and popularized by economists in the late 20th century. It is challenging to pinpoint a single individual who coined the term "network goods", but the concept evolved from the broader theory of network effects. Network goods are products or services whose value increases as more people use them. This concept is relevant in various fields, including digital information goods, supply chain management, and trade.

Numerous scholars have contributed to the subjects relevant to the economic theory of networks. Robert Metcalfe, the architect behind Ethernet, is recognized what we now reference as Metcalfe's Law. This principle states that the value of a telecommunications network escalates exponentially with each additional user, a concept that sets the groundwork for the term "Network Goods".

Other important works include Joseph Farrell and Garth Saloner who studied network effects within business and industry, Michael L. Katz and Carl Shapiro's work on network externalities in spaces saturated software and Jean Tirole's study on industrial organization and network effects. Each of these scholars have contributed to our grasp of how networked systems create value.

Network effects, occur when the value of a product or service increases as more users join and use it. This is at the heart of Network Goods. For example, a social media platform becomes more valuable as more people join, offering a broader range of connections and content. This increase in value is directly proportional to the increase in users.

There are two types of network effects: direct and indirect. Direct network effects are observed when the value of a network good increases in direct relation to the number of users. Classic examples include communication services like social networks or messaging apps. Indirect network effects, on the other hand, happen when the value of a good or service rises due to the availability of complementary products or services. For instance, a gaming console becomes more valuable as more games are developed for it, which is more likely when the console has a large user base. Blockchain benefit from both direct and indirect network effects.

When successful, Network Goods create a tipping point, where once a critical mass is achieved, the network value skyrockets, leading to a rapid increase in users. This is why Blockchain Networks and protocols are in constant search of Network Goods both direct and complimentary.

Sustainability and evolution are crucial for Network Goods. Over time, maintaining and enhancing network value is essential. This may involve continuously improving the product, expanding the user base, or introducing new features to retain existing users. This necessitates continued investment in the Network.

Network Goods and Their Limitations in Crypto

Network Goods, which gain value as more people use them, closely align with the goals of many Blockchain "Public Goods" programs. However, they are not without their limitations and conflict with crypto values.

The network value associated with these goods leads to unique market dynamics. Early dominance can be a significant advantage, as a larger initial user base can create barriers to entry for competitors, sometimes leading to a 'winner-takes-all' market scenario. The risk of monopolistic dominance and the absence of inherent non-rivalrous and non-excludable properties, which are critical for fostering an open and egalitarian crypto ecosystem, present challenges that need to be addressed. In short, Network Goods tend to converge on monopolies. Additionally, the network value of a product can overshadow its quality. Users might choose a product not because it’s the best available, but because it’s the most widely used. Traditional Network Goods are also well suited for typical software funding mechanisms such as Venture Capital and Private Equity where value is returned to the investors through extractive techniques.

Therefore, while Network Goods can share certain traits with Public Goods, their specific economic characteristics make them distinct from typical public goods. This distinction is important to consider when evaluating their role and impact within the broader Blockchain landscape.

While they do reinforce many of the goals of Blockchain Networks and Protocols, notably, increasing the network value, they are at odds with the ethos of open, decentralized protocols where value accrues to all participants in the network including the end user.

Network Common Goods: A Hybrid Approach Tailored for Crypto

The concept of Network Common Goods arises as a concept that marries the open nature of Public Goods with the value creation of Network Goods. This hybrid model is particularly well-suited to cryptocurrency ecosystem funding, ensuring open access and non-exclusivity while leveraging the value that comes from widespread participation and network effects.

A definition:

Network Common Good: A good that is non-rivalrous and non-excludable in consumption, and creates value due to positive network effects above and beyond the sum of individual users' willingness to pay.

To break this down:

  • Non-rivalrous and non-excludable are the key properties of a public good based on the economic definition. A network common good retains these properties.

  • Value creation "above and beyond the sum of individual users' willingness to pay" captures the concept of positive externalities and increasing returns to scale from network effects.

  • The network effects make the whole greater than the sum of its parts in terms of value. The network aspect is key.

So in summary, a network public good exhibits the non-rivalrous and non-excludable properties of a textbook public good, with the addition of value creation through network effects that exceeds individual valuations.

Essential Characteristics of Network Common Goods

Open Access and Collective Benefit

At its heart, a Network Common Good retains the characteristics of traditional Public Goods – non-rivalrous and non-excludable – as applied to a network, ensuring that the benefits of it's resource are accessible to all without diminishing others' ability to use it. This principle is fundamental in maintaining the integrity of decentralized systems.

The Power of Network Effects in Value Creation

Network Common Goods go beyond user count; they include the interactions and collective engagement of their users. This is not just about adding users, but about deepening connections and collaborations, which in turn enhances the utility and value of the entire network.

Redefining Value Through Impact

With Network Common Goods, value creation transcends the aggregate of individual users' willingness to pay. It embodies a principle where positive contributions to the network are reciprocally rewarded. This approach aligns with the philosophy of "Impact = Profit," where contributing positively to the collective leads to direct benefits.

The Necessity of Network Common Goods Funding in Crypto

In Blockchain Networks, many critical projects and infrastructures lack a direct profit motive, akin to public utilities in the traditional sense. Network Common Goods funding is essential for supporting these projects, ensuring their development and continuity without forcing them into profit-centric models that might not align with their core objectives.

Addressing the Commons Dilemma in Cryptocurrency

The decentralized nature of cryptocurrencies can lead to a 'Tragedy of the Commons' scenario, where individual incentives might overlook or underfund crucial communal resources. Network Common Goods funding acts as a safeguard, ensuring that these community-centric resources are nurtured and sustained for the benefit of the entire ecosystem.

Encouraging Innovation and Sustainability

Network Common Goods funding in crypto is about more than just maintaining the status quo; it's a catalyst for innovation and long-term sustainability.

Shifting the Paradigm: Valuing Community and Ecosystem Health

This funding model represents a paradigm shift in the crypto space, moving away from a narrow focus on Pure Public Goods to a broader perspective that values the health of the entire ecosystem as measured by Network Value.

Blockchain Network Development with Network Common Goods

In this exploration of Network Common Goods, we've explored where Public Good and Network Goods intersect which has given rise to a new concept: Network Common Goods. This approach not only encapsulates the essence of open accessibility intrinsic to Public Goods but also embraces the expansive, network-driven value characteristic of Network Goods. It redefines our understanding and support mechanisms for the blockchain ecosystem.

Reflecting on 2023's significant embrace of Public Goods in the blockchain community and the debates that ensued, it's evident that a shift in perspective is necessary. This evolution underscores the need for an upgraded framework, one that transcends the classical definitions and aligns with the accelerating pace of progress in the blockchain space.

Network Common Goods emerge as a comprehensive solution, bridging the gap between traditional economic theories and the realities of Blockchain ecosystems. By synthesizing the non-excludable and non-rivalrous properties of Public Goods with the network-enhanced value creation of Network Goods, this concept offers a more holistic framework for understanding and supporting blockchain initiatives.

This is not just a theoretical construct; it has practical implications for funding and sustaining crypto networks, protocols, and organizations. It calls for a reevaluation of funding mechanisms, moving beyond the confines of traditional Public Goods models to embrace the unique characteristics of the crypto ecosystem. This includes addressing the Commons Dilemma inherent in decentralized systems and fostering a funding model that catalyzes innovation and ensures long-term sustainability.

As we look towards the future of Blockchain Networks, the integration of Network Common Goods into our conceptual and operational frameworks helps in aligning our economic models and funding strategies with the goals of blockchain ecosystems. In embracing Network Common Goods, we open the door to a more inclusive, ecosystem-focused, and innovation-friendly environment, setting the stage for thriving Blockchain Networks that benefits all participants.

special thanks to @nor for feedback on an ear draft.

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