Original author: Shinya Mori

Original compilation: Luffy, Foresight News

There is a phenomenon in todays world where more and more problems such as environment, public health and human rights can only be solved through global cooperation. Digital public goods also fall into this category. Because digital public goods are used by people around the world, there is a need for worldwide cooperation in the provision and management of digital public goods, making choices that benefit not only specific individuals but also people around the world. In fact, political economist Elinor Ostrom won a Nobel Prize for her research on commons management, which showed that resources can be managed by the communities in which they use them (i.e., the commons ) to govern themselves rather than be governed by a government. While it is generally accepted that community management of resources can lead to the tragedy of the commons, she clarified that it is possible to have appropriate governance through specific principles without causing the tragedy of the commons.

The commons Ostrom studies, however, are local communities, such as fishing villages. The digital public goods I mentioned are a global issue. Therefore, coordination with people on a global scale is necessary for a resilient or sustainable regenerative world, but it must not be extractive. In this case, human beings face common problems, and the result of coordination should be a positive-sum game based on cooperation, rather than the traditional zero-sum game based on competition.

Positive sum game and positive externalities

Positive sum game vs zero sum game

What exactly is a positive-sum game? To understand the concept of positive-sum game, you also need to be familiar with its corresponding concept, zero-sum game. The terms zero-sum game and positive-sum game were originally often used in economics. A zero-sum game is a situation in which one partys gain is exactly equal to the other partys loss. In other words, this is a game where the total gains and losses between players add up to zero. An example of a zero-sum game is poker. In the poker game, the money won by one player is equal to the money lost by other players, and the overall profit will not increase or decrease, so it is called a zero-sum game. A positive-sum game is a game in which all participants can increase overall benefits through cooperation. In this game, the total payoff is greater than zero. An example of a positive-sum game is knowledge sharing. When a person shares knowledge or information, the recipient can use it to accomplish something. Since the original providers knowledge is not diminished, both parties benefit. However, a well-known concept in general game theory is that even if both parties cooperate to achieve a better outcome, by making choices that are optimal for each, both parties end up with an unfavorable outcome: the prisoners dilemma. In other words, in order to achieve a positive-sum game, some kind of coordination is required.

Positive externalities lead to positive sum games

One of the coordination mechanisms to achieve positive total returns is positive externalities. Positive externalities refer to the benefits that an economic activity provides to third parties who are not directly involved in the activity. Because of these positive externalities, benefits can extend beyond specific goals, thus achieving a positive-sum game.

Mass positive externalities: public goods

Public goods are known for creating positive externalities. Public goods are non-exclusive, non-rivalrous assets that can be used by anyone for free. Examples of public goods include air and parks, which benefit everyone for free. Therefore, public goods generate positive externalities. For example, a park can serve as a playground for children and a place for community interaction. It can also improve the cultural and environmental standards of nearby residents and serve as a tourist attraction for tourists.

It seems that the more public goods there are, the more positive externalities are generated, leading to a positive-sum state. However, due to the free-rider problem, public goods are difficult to provide and are usually maintained through government taxes and subsidies.

Unwanted positive externalities: anticompetitive goods

Among what are commonly called public goods, some assets are considered anticompetitive. Anti-competition means that the more a certain product is consumed, the greater the benefits it will bring to third parties. Goods that are anti-competitive and exclusive are called network goods, and goods that are anti-competitive and non-exclusive are called symbolic goods. We refer to them collectively as anti-competitive goods. Anticompetitive goods are defined as “goods that are worth more the more they are used or are worth more the more they are shared.” Examples include ideas and knowledge. When one person shares an idea or knowledge, many others can use that idea or knowledge to create new ideas, knowledge, products, or services. It can be said that the more ideas and knowledge are utilized, the more valuable they become. Another example is language; the more people who speak a particular language, the more useful it is. It has been argued that transactions involving goods with these properties do not inherently give rise to the free-rider problem. Anticompetitive products may welcome free riders because the more they are shared with others, the more valuable they become. However, in a market economy, knowledge and ideas may be monetized and made excludable, creating an asymmetry between supply and demand, thereby establishing a business model. In any case, anti-competitive goods will undoubtedly generate more positive externalities and achieve a positive-sum game.

The relationship between positive externalities and scale

The extent of positive externalities is thought to vary with the size of the good itself. “Scale” here refers to goods that are used or consumed by more people. Referring to the previous example, for a public product such as a park, if one or two people are using it, it is comfortable. Even if a third person uses the park, it is still comfortable. However, if hundreds or thousands of people use the park at the same time, it may no longer be comfortable and may have a negative impact. On the other hand, for anti-competitive goods such as knowledge and ideas, externalities come into play if scale increases, thereby increasing the value of the knowledge or ideas. It can be seen that there is a close relationship between positive externalities and commodity scale. Furthermore, it is widely believed that the provision of these goods leads to the free-rider problem, leading to an undersupply of goods. Therefore, it is thought that the expansion of positive externality effects will cease.

So, what is the relationship between positive externalities and scaling in the networked world? It is considered to be divided into three main types.

Positive externalities and scale relationship

(i) As the scale expands, positive externalities increase monotonically, but after exceeding a certain scale, the role of positive externalities begins to weaken.

Web 2.0 services are of this type. Web 2.0 services bring benefits to more people through network externalities, but many of them operate according to market principles, which are based on competition and there are always winners and losers. Their goal is to win the game and generate more revenue and returns based on market principles, with positive externalities being secondary. Meta (formerly Facebook) is an easy-to-understand example. Meta has demonstrated value through social networks such as Facebook and Instagram being used by many users, but on the other hand, it has established a dominant position in the social networking industry by acquiring competing projects or developing similar services. Here, while they operate under the influence of network externalities, their basic game is a zero-sum game in the market. Therefore, it can be said that coordination between other services is difficult. In addition, Web 2.0 has the characteristic of centrally storing user data, which often leads to issues of user privacy protection. In the case of Web 2.0 services, scaling increases the number of users, thereby exposing privacy issues caused by holding data about those users. While some Web 2.0 services are free and can be used by anyone and can be considered public goods, Web 2.0 tends to be centralized and potentially includes the possibility of exclusivity, so it is not a true public good. In fact, there was a controversial case in which X (formerly Twitter) suspended the account of former President Trump, which points to the potential inclusion of exclusivity in Web 2.0 platforms. There is no credible neutrality about it.

The relationship between positive externalities and scale in centralized systems

(ii) As the scale increases, positive externalities increase monotonically, but the effects of positive externalities converge to a constant value as the scale increases.

OSS is a typical example of this situation. OSS is software with open source code that allows anyone to use, modify, and distribute it, and the value increases as more people use it. Thus, OSSs may initially be considered public goods due to their non-rivalrous and non-excludable nature, but they are more appropriately viewed as anti-competitive goods. Taking the open source operating system Linux as an example, we can see that Linux is used in various services due to its open source characteristics. In fact, cloud services such as AWS, Google Cloud, and Microsoft Azure all adopt Linux, which expands its use as mainstream cloud infrastructure. In addition, standardization efforts such as Linux Standard Base (LSB) enhance compatibility between different Linux distributions. Therefore, the value of Linux itself increases as it becomes more widely used and as many complementary features are developed. However, it is generally believed that the supply of OSS faces a free-rider problem, resulting in insufficient supply and difficulty in sustaining supply. This seems to contradict the anticompetitive nature of OSS assumed here, but as a general rule we acknowledge the existence of the free-rider problem. In this way, as the scale continues to expand, positive externalities will eventually converge to a certain level.

The relationship between positive externalities and scale of OSS

(iii) As scale increases, positive externalities continue to increase monotonically.

This situation is the subject of this article, and we refer to this design as a positive-sum design. It is believed that positive-sum design can be achieved through cryptographic protocols. Let’s consider why cryptocurrencies can achieve positive-sum design.

The relationship between positive externalities and scale in positive sum design

Zhenghe design

The proposition of this article is that in order to continue the positive-sum game, a design is needed that continuously generates positive externalities as the scale expands. In fact, some advocate the importance of the positive-sum state. It discusses how this positive-sum design can be achieved through cryptocurrencies.

A brief description of the relationship between positive externalities and scale

Reduce negative impacts

When Web 2.0 services expand in scale, privacy protection issues often arise, and the European GDPR can be regarded as one of the movements to address privacy protection issues. However, the emergence of blockchain technology has significantly changed this situation. Blockchain allows data to be stored and managed across multiple nodes rather than a single central server, which can enhance data transparency, security, and fault tolerance. Having a private key gives users full control over their data, assets and identity, enabling autonomous management. This can be seen as a complement to the negative impact that blockchain technology has had on the expansion of Web 2.0 services. It provides an architectural-level solution, rather than passing laws and regulations like GDPR, which relies heavily on the design of the protocol itself.

In the case of open source software, undersupply may occur due to the free-rider problem, leading to general difficulties in sustainable supply. Typically, governments intervene through taxes and subsidies to solve the free-rider problem, but crypto protocols can maintain their coffers through protocol revenue or the issuance of native tokens. As will be mentioned later, funding OSS through protocol revenue has the potential to solve the free-rider problem.

Some examples of positive sum design

As mentioned in the previous section, blockchain and smart contracts can solve traditional coordination problems, and their distinctive features are the ability to create programmable designs and adjust incentives. In particular, the ability to create your own economic systems through programmable design can continually generate positive externalities. Blockchain-based protocols tend to have these properties. Here we list designs that consistently generate positive externalities to maintain a positive-sum game.

Interact with other projects: tasks and competitions

This type is more of a tool for consistently generating positive externalities. By interacting directly with other protocols, it can directly create positive externalities. These services do not end with the agreement itself, but direct users to other services. For example, in the task protocol RabbitHole, various tasks are released for different protocols, and users can obtain rewards by completing these tasks. This mechanism allows users to participate in other protocols through RabbitHole in a game-like manner, driven by financial incentives and gamification elements. This mechanism promotes beneficial actions by other protocols, thus generating positive externalities. Code 4 rena, also known as AuditDAO, is a protocol that allows the community to audit the protocol code. When using Code 4 rena, users review the code of other protocols, which encourages beneficial actions for other protocols. Participating in hackathons and competitions can also lead users to develop products using a certain protocol or find solutions to problems in the protocol, thereby creating valuable actions for various protocols. Specific projects include RabbitHole, Layer 3, buidlbox, Code 4 rena, Jokerace, Phi, etc.

Easy to fork: SDK

This is one of the most significant features of OSS. In OSS, the source code is open and anyone can download, customize and use it according to their own preferences. This is the advantage of OSS, in fact, by forking the code, various new protocols have been created. For example, there is a protocol called Moloch DAO, which is a DAO that funds Ethereum infrastructure as an important digital public good and is governed by shareholders. Forks of the Moloch code led to the creation of Moloch-based protocols, such as MetaCartel. Forking in OSS is essentially forking a code base, but development kits and codeless tools are created to make forking easier. DAOhaus is a tool used to fork Moloch. Using DAOhaus, we can easily build a protocol with Moloch-like functionality. Other examples include the Cosmos SDK, which allows the creation of Layer 1 blockchains with Tendermint consensus, and the OP Stack, which allows the creation of Optimistic Rollups (the same type as Optimism). These development kits make it easier to leverage the benefits of OSS and facilitate the creation of positive externalities. Specific projects include DAOhaus, Nouns Builder, Cosmos SDK, OP Stack, Conduit, Gitcoin Grants Stack, Zora, etc.

composability

Composability may be a familiar term in the crypto space, especially in the DeFi space, where it has become commonplace, hence the term money Lego. Many protocols are composed of existing smart contracts, and this is especially true in DeFi. A similar trend has been observed in governance; for example, Governor Alpha Bravo, one of the on-chain governance contracts launched by Compound, even outside of DeFi, uses Compound’s governance contracts. In addition, the disadvantage of the Governor Alpha and Governor Bravo contracts is that projects with different needs must fork the code to customize according to their own needs, which may bring a high risk of introducing security issues, so OpenZeppelin built the “Governor” contract as Modular OpenZeppelin contract system. Modular governance tools like Zodiac can also be seen as an extension of this idea.

This is possible because the focus is on creating relatively small modular components. If these components are open source and lightweight, it will be easier for other protocols to adopt them, just like bricks are more versatile than the grand castle they build. In fact, on Ethereum, the ERC 20 token standard is more accessible than the Ethereum Virtual Machine (EVM). By building protocols in modular components, they become more composable, making them more friendly to other protocols and creating a positive-sum environment.

By the way, the Ethereum Improvement Proposal (EIP) on the Ethereum platform is licensed under the CC0 (Creative Commons Zero) license. CC0 is a Creative Commons license that waives all rights to a work, allowing third parties to remix and build upon it for free without permission, including for commercial purposes. Proposers on Ethereum completely relinquish their copyright, enabling others to propose the same ideas on a different blockchain, or create new proposals based on them without permission. The adoption of CC0 facilitates more seamless collaboration, more easily generates network externalities and contributes to positive-sum games.

public goods funding

This is probably the most unique aspect of cryptocurrencies. While traditional OSS projects find it challenging to create their own economic ecosystems, cryptocurrencies enable programmable design of economics and the establishment of their own treasury.

Ethereum has been thinking about funding public goods since its early days and has conducted various experiments over time. The Ethereum Foundation, Gitcoin all have funding programs, Gitcoin is running quadratic funding provided by Glen Weyl, Vitalik Buterin, and Zoe Hitzig, DAOs like Moloch DAO contribute to the Ethereum ecosystem, and various projects based on The Moloch protocols funded DAO - which provides grant programs and retroactive public goods funding - is primarily run and piloted by Optimism as a third round. These initiatives involve not only directing funds toward their own protocols, but also investing in peripheral tools that support their protocols. This approach is an attempt to solve the insufficient supply of public goods caused by the free-rider problem. However, some appear to prefer expanding their own products rather than funding public goods. Indeed, even funding aimed at expanding product ecosystems can continue to generate positive externalities, but creating more positive externalities may require an approach that goes beyond the ecosystem.

in conclusion

Public goods and anticompetitive goods are known to generate positive externalities. The continuous creation of positive externalities through scale is necessary to cultivate a positive-sum state, and this article summarizes methods for approaching a positive-sum state. While cryptocurrencies can solve traditional coordination problems, the focus should not be on reducing negative effects but on seeking greater positive effects. It is important for us to design protocols that consistently generate positive externalities to maintain a positive-sum game, and cryptocurrencies enable this. Additionally, I believe that positive-sum design may lead to regenerative economies, antifragile protocols, and resilient societies.

Special thanks to Scott Moore, Toby Shorin, and Naoki Akazawa for their feedback, review, and inspiration.