Quadratic Funding and Matching Funds Requirements

TL;DR

This paper analyzes the quadratic funding mechanism's efficiency, strategic incentives, and matching funds requirements, using empirical evidence from Gitcoin Grants to highlight rapid exhaustion of funds and strategic contributor behaviors.

Contribution

It provides a detailed examination of the quadratic funding mechanism's efficiency and strategic incentives, supported by empirical analysis of real-world contribution data.

Findings

Matching funds requirements scale rapidly with more projects and equal contributions.

Funds are exhausted early in funding rounds, leaving room for efficiency improvements.

Contributors tend to give small, scattered donations, and reciprocal backing suggests strategic behavior.

Abstract

In this paper we examine the mechanism proposed by Buterin, Hitzig, and Weyl (2019) for public goods financing, particularly regarding its matching funds requirements, related efficiency implications, and incentives for strategic behavior. Then, we use emerging evidence from Gitcoin Grants, to identify stylized facts in contribution giving and test our propositions. Because of its quadratic design, matching funds requirements scale rapidly, particularly by more numerous and equally contributed projects. As a result, matching funds are exhausted early in the funding rounds, and much space remains for social efficiency improvement. Empirically, there is also a tendency by contributors to give small amounts, scattered among multiple projects, which accelerates this process. Among other findings, we also identify a significant amount of reciprocal backing, which could be consistent with the kind of strategic behavior we discuss.