Decoding Impact DAOs (Part 1) — Public Goods Problem

The challenge in creating and sustaining public goods is that they are usually under-provided by the market because individuals can free-ride on the provision of the good by others. For example, if I know that national defense will be provided whether or not I contribute to its funding, I may be less likely to contribute.

This free-rider problem often leads to a lack of funding for public goods, which can lead to sub-optimal levels of provision. This can create a situation where the cost of maintaining a public good outweighs the benefits, and eventually the good is no longer available to anyone. This is especially true in the context of digital public goods if alternative opportunities exist that are far more lucrative for an individual.

The solutions thus far

In a few cases, charitable providers of public goods seek contributions from individuals to directly fund their priorities. In modern society, public goods provision has primarily been owned by nation-states using taxation. State-sponsored mechanisms often suffer from high overheads and a rigidity in adapting to the evolving demands of users. The democratic systems that determine which public goods should be prioritized also tend to be dominated by the will of the majority versus the potential for value creation.

As a result, some of the most complex problems impacting communities at scale are a result of coordination failures in sustaining and thriving public goods. These are failures in design, like missing incentives for involved stakeholders to drive collective action. These are also failures in execution, such as information asymmetry, unchecked corruption, and a lack of measures of effectiveness.

Current political institutions, welfare structures, financial systems, and philanthropic initiatives have not been able to overcome the failures in coordination.

The opportunity

Can we build novel coordination mechanisms that provide a focal point for contributors to create public goods while also rewarding those involved? Can we empower such vested communities with tools for sustainable shared management of resources with transparency and autonomy? Can we create economic games that make collective value creation regenerative?

At General Magic, we believe the answer is a resounding “YES!”. To enable this future, we work with communities, the Impact DAOs, committed to creating positive externalities in their environment. In the next article in the series, we will dive further into understanding how Impact DAOs use blockchain as the “trust anchor” to build the public goods of the future and understand how programmable money creates novel primitives for this coordination.