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Economics Of Public Goods
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TLDR below. This is not financial advice.
In general, you can think of goods as two main categories: private goods and public or common goods.
What are common goods?
Public Goods: There is a little bit more of a barrier here as you need to fit certain criteria to join this space like a country club where you need to get memberships or you need to have X amount of qualifications or X amount of attributes to be able to join this public goods community.
Common goods: On the other hand, common goods are goods that are for everyone to use so you don't need to be a superstar or a supermodel and everyone like you and me can just join and enjoy it. Examples of common goods in the real physical world are parks, libraries, and oxygen. These are infrastructures given either by the world like water or built by a country system or a nation-state like parks and libraries.
Lesson one in economics is that there's no such thing as free lunch and there's an opportunity cost to everything.
Incentive Misalignment: How do common goods fall into this category of no such thing as free lunch?
Common goods are very difficult to maintain. For example, water is free for everyone to use but look at all the water pollution that occurs. If you look at who is cleaning up the water or who is taking care of these common goods you will see that not many people are doing that because they are not incentivised to do it. Economics is mainly about incentives and how these affect different people's behaviors. In that sense, one of the biggest problems with common goods is that there is an incentive misalignment and people are not incentivised to want to take care of things.
Incentive Alignment: How do we align the incentives?
Today you see a lot of volunteers taking care of public goods and a lot of non-profit organisations cleaning the beaches or organising meetups to take care of plants or to reduce pollution which is great because we are part of society and it is time for us to give back. But here is where the problem lies — people are not incentivised to do that and non-profit organisations are reliant on donations to do these things and so it is not very fair to these volunteers.
The biggest benefit of token-based ecosystems is that we get to bootstrap the community from a grassroots level and people get to come together and create the assets. These assets that we are creating — be it a protocol or additional infrastructure — are basically common goods. They are digital common goods because anyone can use them. An email protocol, for example, is a public good and anyone gets to use it to send email to anyone. So I get a lot of Nigerian princes trying to give me BTC via email and the email protocol does not discriminate if this is a scam or not a scam. Anyone gets to use the protocol and that is great. When you look back at all these different protocols we are doing like DeFi applications and NFT protocols, the underlying protocols are the common goods that we're talking about.
In the physical world, common goods are destroyed because no one has the incentive to take care of them. Today in the DeFi world it can be different because we have an incentive to want to take care of them. Participatory economics functions via a token-based ecosystem where the token is an incentive to affect people's behaviors and encourage them to do good in these public goods that we are creating.
How can we apply participatory economics in a more tangible sense?
This is where I want to talk to you a little bit about Commons Stack DAO which is run by Griff the CEO of Commons Stack. Commons Stack is aligned with token engineering which is another big wonderful community focusing on the engineering of these token models and together they have created this DAO that focuses on building and creating and supporting public goods and common goods that will be beneficial to anyone in the ecosystem.
When we are creating economic systems and designing economic models it is all about figuring out the different parameters or different things that can be changed to design and create these ecosystems. Participatory economics is about people who are in the system being able to participate and make changes and have their say.
This sounds like democracy, but a big difference is that in a democracy changes are made on the basis of preset parameters, whereas here we are talking about a grassroots level where participants are able to come in to vote to make changes and define the design and define the changes that can be done, and then can make other kinds of changes as it grows.
This is quite different from a lot of DeFi protocols for instance where the protocols founding team of 5 to 8 people decide on what things should be done and they have a multi-sig wallet and that is it. At Commons Stack, it is slightly different because firstly you curate people who have expertise in the space and really know what they are doing so that they have an incentive to want to build a better world by supporting these infrastructures that will be funded. Then these people come together to choose and design the different parameters within the ecosystem. Once that is done it will define the token allocation of everyone in the system so you have 100% skin in the game. This DAO will then be used to fund other protocols that are aligned to its incentive and this is how incentives can be aligned and it is all governed by the token.
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Common goods are goods that are for everyone to use like parks, libraries, and oxygen. In the physical world, common goods are destroyed because no one has the incentive to take care of them. Today in the DeFi world it can be different because we have an incentive to want to take care of them. Participatory economics functions via a token-based ecosystem where the token is an incentive to affect people's behaviors and encourage them to do good in these public goods that we are creating.