NFTs

Capital Allocation: The Next Growth Frontier 

3 Mins read


From Present Mechanisms to Future Possibilities.

In an era where technology continues to reshape our world, capital allocation stands as a critical component in driving innovation, growth, and development.

Capital allocation is a simple concept: it’s the act of deciding how to distribute funding or resources. If you’ve ever paid bills, taxes, or repaid friends for a meal, you’ve allocated capital.

Capital allocation can become a full time job: governments and grant-making organizations spend vast amounts of time and money figuring out the process, logistics, and decision-making involved in allocating capital. At scale, capital allocation inevitably becomes mired in gatekeeping, rivalrous decision making, and a lack of transparency and accountability.

The Promise of Crypto in Capital Allocation

The traditional methods of allocating capital are giving way to revolutionary approaches enabled by blockchain technology and the decentralized web (Web3).

Crypto, with its programmable smart contracts and inherent properties of trustlessness and tamper resistance, presents unparalleled advantages in capital allocation. These systems allow for a more efficient, democratic, and transparent distribution of resources. They eliminate the need for intermediaries, reducing costs and speeding up transactions.

The open-source nature of blockchain technology fosters a collaborative environment where anyone can learn from, fork, and improve existing systems. This results in a rapidly evolving landscape of innovation, where the collective effort of the community accelerates the development of new and improved capital allocation mechanisms.

A New Paradigm: Onchain Coordination

We are witnessing a transformative period—a springtime for onchain coordination—where the old paradigms of capital allocation are decaying, and a new, more effective system is emerging.

A few examples of this new frontier –

  • Retroactive Public Goods Funding – a new paradigm for allocating capital, pioneered in the Optimism ecosystem, that has distributed over $100m in the last year. Retroactive Public Goods Funding is based off of the insight that it is easier to tell what has been valuable in hindsight.
  • Quadratic Funding – a new paradigm for allocating capital, invented by Glen Weyl and Vitalik Buterin, that has distributed $60m so far. Quadratic Funding is a new, more democratic way of allocating capital to web3 ecosystems.
  • Gift Circles – invented by Charles Eisenstein + pioneered by CoordinApe, Gift Circles are a way to give DAO contributors a say in who gets compensated – effectively pushing decisions about compensation from bosses to the edges.
  • Direct-to-Contract rewards are incentives that are automatically distributed to users who complete specific tasks or achievements onchain.
  • An Assurance Contract is where people agree to contribute money to a project, but only if enough others also commit to funding it.
  • Community Currencies are local currencies designed to complement the national currency within a specific community or region. They aim to boost local economic activity, encourage spending within the community, and strengthen social ties.
  • A Cookie Jar is an optimistic governance mechanism that relies on high social trust and low amounts of funds at stake. It helps DAOs reduce governance overhead (no one has to vote on Cookie Jar proposals) and track contributions transparently.

Gitcoin’s Role and Vision

As a member of Gitcoin DAO, I have had the privilege of exploring and contributing to this new design space. Gitcoin has been at the forefront of experimenting with innovative grant-making mechanisms, primarily focusing on Quadratic Funding (QF), which aims to distribute funds in a fair and effective manner. Our journey from zero to millions of dollars distributed annually through grants is a testament to the potential of these new methods.

Gitcoin’s ambition extends beyond just Quadratic Funding. We are pioneering the democratization of new mechanisms like Retroactive Public Goods Funding (RetroPGF), aiming to scale these models and explore the untapped possibilities of onchain capital allocation. Our goal of funding $1 billion in grants is not just an aggressive growth target but a starting point for what’s possible in the broader Web3 ecosystem.

The Future of Capital Allocation

The potential for capital allocation extends far beyond the scope of grants. It represents a transformative opportunity to address coordination failures, foster better collective action, and bring centuries-old capital allocation strategies onchain. The internet revolutionized information distribution, and if crypto succeeds, it will revolutionize the distribution of scarce resources, upending and improving traditional capital allocation processes. I explore this design space in my new book, the Onchain Capital Allocation Handbook, which is available for a free download here.

Exploring this frontier together allows us to collectively map and manifest this new design space. We are not only mapping this design space; we are manifesting it. We are in a strange loop of (1) discovering & (2) creating this beautiful design space. By following this loop recursively, we are memeing it into existence.

Conclusion

Capital allocation is as old as civilization, but its execution at scale has always been challenging. The advent of blockchain technology offers a solution, providing a transparent, efficient, and democratic way to distribute resources. This new frontier of onchain coordination is not just an evolution; it’s a revolution that promises to redefine how we allocate capital, fostering a more inclusive and innovative future.

As we stand on the cusp of this transformation, it is an exciting time to be involved in the Web3 space. The journey is just beginning, and together, we can explore and shape the future of capital allocation, making it more effective, transparent, and accessible to all.

Kevin Owocki is the cofounder of Gitcoin and author of the Onchain Capital Allocation Handbook, which is available for a free download here.


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