Positive Sum Design with Crypto

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

We have never had to deal with problems of the scale facing today’s globally interconnected society. No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly.

-　Elinor Ostrom [1] [2]

Currently, there are increasing phenomena that can only be approached by collaborating worldwide, such as environmental issues, public health, and human rights problems. Digital public goods also fall into this category. Since digital public goods are used by people all over the world, it is necessary to collaborate with people globally when supplying and managing digital public goods. Choices must be made that are not just beneficial for a specific individual, but beneficial for people all over the world. In fact, political economist Elinor Ostrom won the Nobel Prize for her research on the management of the commons, which showed that resources could be self-governed by the community of users themselves, that is, the commons, rather than being managed by the government or the market. While it is commonly believed that the management of resources by the commons leads to the tragedy of the commons, she clarified that it is possible to govern appropriately without causing the tragedy of the commons by particular principles.

However, the commons that Ostrom dealt with were rooted in local communities such as fishing villages. The digital public goods I mentioned earlier are a global issue on a planetary scale. Therefore, coordination with people on a global scale is necessary for a regenerative world which can sometimes be resilient or sustainable, but it can not be extractive [3]. In this case, since humanity is facing common problems, the result of coordination should lead to a positive sum game based on cooperation, rather than the traditional zero sum game based on competition.

Positive Sum Game & Positive Externalities

Positive Sum Game vs Zero Sum Game

What exactly does a positive sum game refer to? To understand the concept of a positive sum game, it is also necessary to be familiar with its counterpart, the zero sum game. Terms like a zero sum game and a positive sum game are originally often used in economics. A zero sum game refers to a situation where one party's gain is exactly equal to another's loss. In other words, it's a game where the total gains and losses among players add up to zero. An example of a zero sum game is poker. In poker, the money won by one player is equal to the money lost by other players, and the overall profit of the game does not increase or decrease, which is why it is called a zero sum game. On the other hand, a positive sum game refers to a game where all players can increase the overall benefit by cooperating. In this game, the total gains are greater than zero. An example of a positive sum game is the sharing of knowledge. When one person shares knowledge or information, the recipient can use it to accomplish something. Since the original provider's knowledge does not decrease, both parties benefit. However, it is a well-known concept in general game theory that even though better results can be obtained if both parties cooperate, by making individually optimal choices (to betray), both parties end up with a disadvantageous outcome: the prisoner's dilemma. In other words, some sort of coordination will be necessary to achieve a positive sum game state.

Fig. 1 [4]

Positive Externalities lead to Positive Sum Games

One of the coordination mechanisms that enable a positive sum is 'positive externalities.' Positive externalities refer to the benefits that a certain economic activity provides to a third party who is not directly involved in the activity. Due to these positive externalities, benefits can be extended beyond the specific target, leading to a positive sum game.

Popular Positive Externality: Public Goods

Public goods are known for creating positive externalities. Public goods are assets with the characteristics of non-excludability and non-rivalry, meaning that they can be used by anyone for free. Examples of public goods include air and parks, which everyone can benefit from without charge. Therefore, public goods generate positive externalities. For example, a park can serve as a playground for children and a place for community interaction, but it can also improve the cultural and environmental standards for the nearby residents and serve as a tourist attraction for visitors.

It seems that the more public goods there are, the more positive externalities are generated, leading to a positive sum state. However, the supply of public goods is difficult due to the free-rider problem, and public goods are typically sustained through government intervention with taxes and subsidies.

Unpopular Positive Externality: Anti-Rival Goods

Among the assets commonly referred to as public goods, some are considered to have the characteristic of anti-rivalry rather than non-rivalry. Anti-rivalry refers to the property where the more a good is consumed, the more benefits it brings to third parties. Goods with the properties of anti-rivalry and excludability are called network goods, and those with anti-rivalry and non-excludability are called symbolic goods. For the purpose of this discussion, we will collectively refer to them as anti-rival goods. Anti-rival goods are defined as “goods whose value increases the more they are used and goods whose value increases 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 ideas and knowledge become more valuable the more they are utilized. Another example is language; the more people use a particular language, the more useful it becomes. There are views that inherently, transactions involving goods with these properties do not give rise to the free-rider problem. Anti-rival goods may welcome free-riders because the more they are shared with others, the more valuable they become. However, in the market economy, there is a background where knowledge and ideas are monetized and made excludable, creating asymmetry between the supply and demand sides, and thus establishing a business model. In any case, dealing with goods that have anti-rivalry properties will undoubtedly generate more positive externalities and lead to a positive sum game.

Fig. 2 [5]

The Relationship Between Positive Externalities and Scale

It is considered that the range of effects of positive externalities changes as the goods themselves scale. Here, “scale” refers to the goods that are used or consumed by more people. Following the previous examples, in the case of a public good such as a park, if one or two people are using it, it remains comfortable, and even if other third parties use the park, it can continue to be used comfortably. However, if hundreds or thousands of people use the park simultaneously, depending on the size of the park, it may no longer be comfortable, and negative aspects may emerge instead. On the other hand, in the case of anti-rival goods such as knowledge and ideas, if the scale expands, network externalities come into play, increasing the value of that knowledge or idea. Thus, it can be confirmed that there is a close relationship between positive externalities and the scaling of goods. Additionally, it is generally said that the provision of these goods leads to the free-rider problem, resulting in an undersupply of the goods. Therefore, it is thought that the expansion of the effects of positive externalities will come to a halt.

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

Brief summary of the relationship between positive externalities and scale

(i) As the scale expands, positive externalities increase monotonically, but beyond a certain scale, the effects of positive externalities begin to diminish.

This type corresponds to Web 2.0 services. Web 2.0 services have brought benefits to more people through network externalities, but many of them operate on the principles of the market, which is based on competition, where there are always winners and losers. Their goal is to win the game based on market principles, generating more revenue and returns, and the generation of positive externalities is secondary. Meta (previously Facebook) is an easy example to understand. Meta has demonstrated value by being used by many users through social networks like Facebook and Instagram, but on the other hand, it has established an overwhelming position in the social networking industry by acquiring competing projects or, when acquisition is difficult, by developing similar services. Here, while they are functioning with network externalities, the essential game they are playing is a zero-sum game set in the market. Therefore, it can be said that coordination between other services is difficult. Additionally, Web 2.0 has the aspect of centrally holding user data, which often raises issues regarding user privacy protection. In the case of Web 2.0 services, scaling up increases the number of users, which exposes privacy protection issues due to the data held about those users. Although some Web 2.0 services are free and available to anyone, which could be considered public goods, Web 2.0 is often centralized, potentially including the possibility of excludability, so it may not be truly public goods. In fact, there was a case where X (previously Twitter) suspended the account of former President Trump, which caused controversy, showing that Web 2.0 platforms potentially include excludability. Credible neutrality does not exist there.

(i) Positive externalities and scale in a centralized system(Web2.0)

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

In this case, OSS can be considered representative. OSS is software with source code that is made public, allowing anyone to use, modify, and distribute it, and the value of the OSS increases as more people use it. Therefore, OSS might originally be considered a public good due to its non-rivalrous and non-excludable property, but it would be more appropriate to consider it an anti-rival good. Taking the open-source Operating System (OS) Linux as an example, we can see that Linux has been used in various services due to its open-source property. In fact, cloud services such as AWS, Google Cloud, and Microsoft Azure have adopted Linux, which has expanded its use as a mainstream cloud infrastructure. Furthermore, standardization efforts like the Linux Standard Base (LSB) have strengthened compatibility between different Linux distributions. Thus, the value of Linux itself has increased as it has been used more widely and as many complementary functions have been developed. However, it is generally said that the supply of OSS faces the free-rider problem, leading to undersupply and making sustainable supply difficult. This may seem to contradict the anti-rival property of OSS assumed here, but as a general rule, we acknowledge the existence of the free-rider problem. In that case, as the scale continues to grow, the positive externalities produced will eventually converge to a certain level.

(ii) Relationship between positive externalities and scale in OSS

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

Such a relationship between scale and positive externalities is the main theme of this post, and we shall refer to such a design as Positive Sum Design. It is considered that Positive Sum Design can be realized through crypto protocols. Let's consider why crypto can realize Positive Sum Design.

(iii) Relationship between Positive Externalities and Scale in Positive Sum Design

Positive Sum Design

The assertion of this post is that "to continue a positive sum game, a design that continues to generate positive externalities with the expansion of scale is necessary." Indeed, some people are advocating the importance of being a positive sum state [6] [7] [8]. And it discusses the aspect that this Positive Sum Design can be made possible through crypto.

Brief summary of the relationship between positive externalities and scale

Reducing Negative Aspects

Privacy protection concerns often arise when Web 2.0 services scale up, and the European GDPR can be seen as one of the movements addressing privacy protection. However, the emergence of blockchain technology has significantly changed this situation. Blockchain allows for the storage and management of data across numerous nodes instead of a single central server, which can enhance data transparency, security, and fault tolerance. Possessing a private key enables users to have complete control over their data, assets, and identity, thus achieving self-sovereign management. This can be viewed as blockchain technology complementing the negative aspects that arise with the scaling of Web 2.0 services. It offers a solution at the architectural level, rather than through laws and regulations like GDPR, heavily relying on the design of the protocol itself.

In the case of OSS, there can be an under-provision due to the free-rider problem, making sustainable supply generally difficult. Typically, government intervention through taxation and subsidies is used to address the free-rider problem, but crypto protocols can maintain their own treasury by generating protocol revenue or issuing native tokens. As will be mentioned later, this provision of funds to OSS through protocol revenue holds the potential to resolve the free-rider problem.

Toward More Positive Sum - Introduction Some Examples of Positive Sum Design

As mentioned in the previous section, blockchain and smart contracts can solve traditional coordination problems, and their remarkable feature is the ability to create programmable designs and adjust incentives. In particular, the ability to create one's own economic sphere through programmable design allows for the continuous production of positive externalities. Blockchain-based protocols tend to have these properties. Here, we will list the designs that continue to produce positive externalities to sustain positive sum games.

Interactions with Other Projects: Quests and Contests

This type is more of a tool to continuously produce positive externalities rather than the protocol itself. By directly interacting with other protocols, it can directly create positive externalities. These services do not end within the service itself but lead users to other services. For example, in the quest protocol RabbitHole, various quests are issued for different protocols, and by completing these quests, users can receive rewards. This mechanism allows users to engage with other protocols through RabbitHole in a game-like manner, driven by economic incentives and gamification elements [9] [10]. Such mechanisms promote beneficial actions for other protocols, thus generating positive externalities. Code4rena, also known as AuditDAO, is a protocol that allows the community to audit the code of protocols. When using Code4rena, users audit the code of other protocols, which encourages beneficial actions for these other protocols. Participating in hackathons and contests also leads users to develop products using a certain protocol or find solutions to problems within a protocol, creating valuable actions for various protocols. Specific projects include RabbitHole, Layer 3, buidlbox, Code4rena, Jokerace, Phi, and others.

Ease of Forking: SDKs

This is one of the most significant features of OSS. In OSS, the source code is open, allowing anyone to download, customize, and use it to their liking. This is a strength of OSS, and indeed, by forking the code, various new protocols have been created. For example, there is a protocol called Moloch DAO, which is a DAO to fund Ethereum infrastructure as an essential digital public good and is managed by shareholders. Forking the code of Moloch has led to the creation of protocols based on the Moloch, such as MetaCartel. Forking in OSS is fundamentally about forking the codebase, but development kits and no-code tools have been created to make forking easier. DAOhaus is one such tool for forking Moloch. Using DAOhaus, one can easily construct a protocol with functions similar to Moloch. Other examples include the Cosmos SDK, which allows the creation of Layer 1 blockchains with the Tendermint consensus, and the OP Stack, which enables the creation of Optimistic Rollups, the same type of Optimism. These development kits make it easier to leverage the strengths of OSS and facilitate the creation of positive externalities. Specific projects include DAOhaus, Nouns Builder, Cosmos SDK, OP Stack, Conduit, Gitcoin Grants Stack / Allo Protocol, Zora, and others.

Composability

Composability might be a familiar term in the crypto space, particularly in the realm of DeFi, where it's become commonplace, hence the term "money legos." Many protocols are composed of combinations of existing contracts, which is especially evident in DeFi. Similar trends are observed in governance; for instance, one of the well-known contracts for on-chain governance, Governor Alpha & Bravo was introduced by Compound, and protocols desiring on-chain governance, even outside of DeFi, use Compound's governance contracts. Furthermore, Governor Alpha and Governor Bravo contracts have the downside that projects with different requirements have had to fork the code to customize it for their needs, which can pose a high risk of introducing security issues, so OpenZeppelin built “Governor” contracts as a modular system for OpenZeppelin Contracts. Modular governance tools like Zodiac can also be seen as extensions of this idea.

This is possible because there is an emphasis on creating relatively small, modular components. If these components are open-source and small, they are easier for other protocols to adopt. To draw a parallel with the physical world, it's like saying that bricks are more versatile than the grand castles they build. Indeed, on Ethereum, the ERC20 token standard is more accessible than Ethereum Virtual Machine (EVM). By constructing protocols in modular components, they become more composable, making them user-friendly for other protocols and fostering a positive-sum environment.

On a side note, Ethereum Improvement Proposals (EIPs) on the Ethereum platform adopt the CC0 (Creative Commons Zero) license. CC0 is a license provided by Creative Commons that relinquishes all rights to a work, allowing third parties to remix and build upon the work without permission and for free, including for commercial purposes. Proposers on Ethereum fully waive their copyright, enabling others to propose the same ideas on different blockchains or base new proposals on them without needing permission. The adoption of CC0 facilitates more seamless collaboration, making it easier to generate network externalities and contribute to a positive sum game.

Public goods funding

This aspect is perhaps the most unique to crypto. While traditional OSS projects have found it challenging to create their own economic ecosystems, crypto enables the programmable design of economics and the establishment of owned treasuries.

The issue of funding public goods has been considered since the early days of Ethereum, with various experiments conducted over time. There have been grant programs by the Ethereum Foundation, Gitcoin which is running Quadratic Funding provided by Glen Weyl, Vitalik Buterin, and Zoe Hitzig, Grants DAOs like Moloch DAO that contribute to the Ethereum ecosystem and various Grants DAOs based on Moloch's structure, protocol-provided Grants programs, and Retroactive Public Goods Funding, primarily undertaken and experimented as Round3 by Optimism. These initiatives are not only about using their funds for their own protocols but also about investing in the surrounding tools that support their protocols. This approach is an experiment in solving the under-provision of public goods due to the free-rider problem. However, some seem to be more incentivized by the expansion of their own products rather than funding public goods. Indeed, even funding aimed at expanding one's product ecosystem can continue to generate positive externalities, but to create even more positive externalities, an approach that extends beyond one's ecosystem may be necessary.

Conclusion

Public goods and anti-rival goods are known for generating positive externalities. With scaling, the continuous creation of positive externalities is necessary to foster a positive sum state, and this article has summarized the means to approach a positive sum state. While crypto can resolve traditional coordination problems, the focus should not be on reducing negative aspects but rather on seeking greater positives. It's important for us to design protocols that can continuously produce positive externalities to maintain the positive sum game, and crypto enables it. Furthermore, I think positive sum design may lead to a regenerative economy, anti-fragile protocols, and society with resistance.

There are no winners in a coordination game that is a positive sum game.