TED Talks Daily - How quadratic funding could finance your dreams | Kevin Owocki

Episode Date: September 30, 2024

What if your $1 donation could result in a $100 contribution to a cause you believe in? That's the promise of quadratic funding: a new kind of crowdfunding model that uses math to distribute funds based on the number of contributors, rather than the amount given. Gitcoin founder Kevin Owocki dives into the principles and pitfalls of this approach to philanthropy, where "many small donors are more powerful than one large donor."

TED Audio Collective that people care about, thanks to the work of Kevin Awoki. In his 2024 talk, he describes a new way to donate in cryptocurrency that works a bit like ranked choice voting, providing donors a supercharged tool to democratically distribute funds. Learn about it after the break. Support for this show comes from Airbnb. If you know me, you know I love staying in Airbnbs when I travel. They make my family feel most at home when we're away from home. As we settled down at our Airbnb during a recent vacation to Palm Springs, I pictured my own home sitting empty. Wouldn't it be smart and better put to use welcoming a family like mine by hosting it on Airbnb?

It feels like the practical thing to do, and with the extra income, I could save up for renovations to make the space even more inviting for ourselves and for future guests. Your home might be worth more than you think. Find out how much at Airbnb.ca slash host. And now our TED Talk of the day. In the summer of 2020, COVID was ravaging the world. And in my hometown of Boulder, Colorado, businesses were having a hard time staying afloat. I worked with the community to raise money for these businesses to help get them through this trying time.

But it wasn't a normal funding campaign. It was driven by a new vision and way of funding that is ultimately more democratic, called quadratic funding. Quadratic funding is really, really new. It was invented by Glenn Weil at Microsoft, Vitalik Buterin of the Ethereum Foundation, and Zoe Hitzig, a PhD economist. In September 2018, they set out to write a paper that would have a new vision for a mathematically optimal way to fund community goods.

Quadratic funding is basically a crowdfunding campaign, but it's not like a Patreon where creators sell subscriptions. And it's not like a Kickstarter, in that it leverages a matching funds mechanism to match contributions from everyday donors. It's a mathematical formula that results in a fairer way to distribute funds. It's basically a matching campaign.

So how does it work? Someone who's civic-minded raises a pool of funding to stimulate a community. This could be a local philanthropist that wants to give back or a civic leader that wants to stimulate economic recovery. Second, projects sign up for a crowdfunding campaign. This could be local businesses that have a civic-minded mission, or it could be any group of neighbor who wants to help out the community.

And then third, you run a crowdfunding campaign in which the everyday citizens in these communities contribute to the projects that are in the campaign. And those contributions are matched by the matching pool. Now, here's the cool thing about quadratic funding that makes it into a funding power tool. When the contributions from the crowd are matched by the matching pool, they're matched more on the basis of the breadth of contributors to each project as opposed to the depth of their contributions. And this is really, really powerful.

Let's run through an example of how. Let's say you have a million-dollar matching pool for a seaside town's restoration campaign. And the first project, a marina, is favored by wealthy donors. It raises 500K from one contributor. The second project raises 500K from 10,000 contributors. Let's say it's something that's more popular in everyday members of the community, like revitalizing the downtown. With quadratic funding, that second project will get way more of the matching pool, even though they

raise the same amount of money, and in one-to-one matching, they would get the same amount from the matching pool. With quadratic funding, 99 percent of the funds will go to that second project. Okay, so this is what makes quadratic funding a tool for funding what everyday members of a community want. It leverages a matching funds mechanism that disproportionately rewards projects with a broader base of support over the ones that are supported by small donors. All right, so now that we have an intuition for how this works, many small donors are more powerful than one large donor. Let's take a look at the math. This equation basically says that the amount coming from the matching pool is proportional to the sum of the square roots of

each contribution, all of that squared. Now, that might sound like a mouthful, but basically, the reason why we call this quadratic funding is that it leverages squares and square roots in order to determine the matching amounts. So let's run through an example so that you develop an intuition for how this math works. Let's say we're running a QF campaign for two different projects, and the first project raises $10 from 10 contributors, so 10 contributions of $1 each.

And the second project, favored by wealthy donors, raises $10 from one contributor. Let's apply the quadratic math to this campaign and figure out who's going to get the most matching. The first thing we have to do is we have to sum the square roots of each contribution. So the square root of one is one, and one plus one plus one equals ten. So that's the first project.

The second project received one contribution of ten dollars. We take the square root of that, and that's roughly three. So you can see in this portion of the formula how it starts to break down the contributions of the larger donors with the square root, but it doesn't affect the small donors as much. Next, let's take the sum of the square roots and let's square those. Ten squared is 100, and roughly three squared is about nine. Here you can develop an intuition for the second half of this formula

and how it's widening the distance between the projects that have a broader base of support and the one favored by a large donor. And finally, we have our matching proportions. 90% of the funding is going to go to the project that has a broader base of support. Okay, so that's how the math works. Many small donors are more powerful than one large donor. And there's a counterintuitive implication of this

that is extremely powerful. If we were doing a $1,000 or $10,000 matching pool in that example, then when you give to that first project, you're allocating tens or hundreds of dollars in the campaign. Okay, so this gets lots of people off their butts to contribute to quadratic funding campaigns. What's better? You give a dollar and a project gets a dollar because of no matching.

You give a dollar, or a project gets two dollars because of one-to-one matching. Or you give a dollar, and a project gets hundreds of dollars because the matching pool was well-funded, and that project got enough small donors supporting it. Okay, so because of these matching multiples, we're starting to see lots of people contribute to quadratic funding campaigns when we run them.

And because of that, we're able to develop a high-resolution view of what constituencies that run quadratic funding campaigns actually care about. And by care about, I don't mean that they hit a like button. They actually gave a dollar of their own money to their projects in their community on the basis of what they see in their community. In analog democracies, we get a signal every couple years

and an up-or-down vote of what people actually care about. But with quadratic funding, we can get a more frequent, if we run these campaigns every three or six months, and more high-resolution view of what matters to everyday citizens. And then we can take the projects that are supported in the quadratic funding campaign and build relationships between those in power and those who are doing the most good in their communities. And now back to the episode. Quadratic Funding isn't just for downtowns that want to revitalize after a pandemic. And it's not just for seaside projects that want to revitalize themselves either. Any community that wants to

fund what matters to everyday people can use a quadratic funding campaign to do so. The cycle can be kicked off by a philanthropist that wants to give back but isn't sure to what. A digital community that wants to fund what matters to everyday people can use quadratic funding. And it can be used by cities, states or countries that want to revitalize their democracies. Know any of those? Quadratic funding scales. In just about six years,

it's been used to fund 60 million dollars worth of community goods through 270,000 unique contributors and four million unique contributions. It has funded 4,000 creators, extending a civic lifeline to the people who have the most legitimacy in these communities. The tech to do quadratic funding is available today. In the last year, my team at Gitcoin has developed open source software that anyone can pull down and run a quadratic funding campaign in their community today. Now, I've got to address the elephant in the room for a second. You may have guessed by the name of my startup, Gitcoin, with a G, that I am indeed a crypto bro.

I plead guilty. Crypto doesn't have the best reputation and probably deservedly so. But I'm a part of the crypto movement that cares deeply about community goods, things like open source software. And we want to see those things funded. You wouldn't throw out all of the internet because of a couple of bad websites, so please don't throw out all of crypto because of scam bankman freed. My flavor, Crypto Bro, cares deeply about community goods and quadratic funding. It's an example of something good that was pioneered in crypto and is now starting to go mainstream. If you want to run a quadratic funding campaign in your Ethereum-based community, you can use Gitcoin Grants, our software, to do that. But if you don't care about the whole crypto thing, we've built a tool called SimpleGrants.xyz that will allow you

to fund what matters in your community using quadratic funding in US dollars, euros, Japanese yen, or any of the hundreds of currencies that we support. This tool is available as open-source software, which means that anyone can download it and run it without needing anything from me. But if you need something, me and my team are available to talk about best practices and help you support your community. Now, I don't want to oversell quadratic funding. It's not perfect.

Or I guess said another way, it works under very specific scenarios. First, you need someone who's going to put up the matching pool. Second, that person has to be comfortable with other people distributing the funds. Third, we need the ability to stop people from falsifying identities. And fourth, we need to stop the ability to collude with each other. Basically, situations where if you contribute to my project, I'll contribute to yours. That's collusion.

But these are solvable problems, and I know that because I've solved them hundreds of times through trial and error in the quadratic funding campaigns that I've run. American sociobiologist Edward Wilson once said, the real problem with humanity is we've got paleolithic emotions, medieval institutions, and godlike technology. I think that with all of the amazing technology that we've got available today, we

should be able to upgrade our institutions and use technology for the civic good, fund what matters to everyday people. Quadratic funding is one way we can do that. It's not the only way, but it's part of an ecology of 21st century digital democratic tools that are going to allow us to support the voices of a general diverse population and create community engagement and collective action, and all in a way that feels more like using a slick app than going to the DMV. I want to see us fund what matters to everyday people in the 21st century and upgrade our institutions to be digitally native. Quadratic funding is one way we can do that. Thank you for coming to my TED Talk. Down at our Airbnb during a recent vacation to Palm Springs, I pictured my own home sitting empty. Wouldn't it be smart and better put to use welcoming a family like mine by hosting it on Airbnb?

It feels like the practical thing to do. And with the extra income, I could save up for renovations to make the space even more inviting for ourselves and for future guests. Your home might be worth more than you think. Find out how much at airbnb.ca slash host. That was Kevin Awoki at TED 2024. If you're curious about TED's curation, find out more at ted.com slash curation guidelines. And that's it for today.

TED Talks Daily is part of the TED Audio Collective. This episode was produced and edited by our team, And that's it for today. TED Talks Daily is part of the TED Audio Collective. This episode was produced and edited by our team, Martha Estefanos, Oliver Friedman, Brian Green, Autumn Thompson, and Alejandra Salazar. It was mixed by Christopher Fazi-Bogan. Additional support from Emma Taubner and Daniela Balarezo. I'm Elise Hugh.

I'll be back tomorrow with a fresh idea for your feet. Thanks for listening. Looking for a fun challenge to share with your friends and family? TED now has games designed to keep your mind sharp while having fun. Visit TED.com slash games to explore the joy and wonder of TED games.