You know how charity works? People that need money get it through donations of generous benefactors.

Well, there’s something similar in the crypto world, but it is WAY better, and it utilizes a special formula to be able to give even the smallest donations large power. This special formula is actually called the “mathematically optimal way to fund Public Goods.”

In this article, we are going to explain what the heck quadratic funding is, how it’s much better than any other charity matching program, and even a step-by-step tutorial of how you can use it.

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## Quadratic Funding Formula

First off, let’s go over the formula. It’s very, very complicated if you don’t have any math experience, but I’m going to make it as simple as possible.

Let’s go through an example and see exactly how quadratic funding works.

First off, every quadratic funding grant has a set amount that will be divided up to the projects that are approved. We are going to use an example of $20,000. This money is provided through donations either from philanthropic works or members who want to support the community.

Next, for this example, let’s choose three projects that are useful. In this case, we are going to pick ourselves (WBC), the channel that inspired us (Finematics), and also a Youtuber named Taiki Maeda, who creates great videos about yield farming.

Let’s assume we all raise some money, but through a different amount of donations by a different number of donors.

First, we (WhiteboardCrypto) raised $3000 by 600 people donating $5 each.

So to run through the formula we first take the square root of 5. This is 2.236. If the next donation was $10, we would then add the square root of 10 to 2.236, but it’s not, so for the purposes of this video we will stick with another $5 donation.

So now we take 2.236 and add it to 2.236. Then we do this for all the donations, adding up all the square roots of their values. Once you’ve added them all up, you square the total.

Don’t worry, I’ve done the math for you, and it comes out to be 1,798,281. This 1.8 million is the total voting power for Whiteboard Crypto.

Next, Finematics is a reputable channel so they acquired heftier donations, but less people donated. He raised $5000 by 200 people donating $25 each. If we apply the same formula to Finematics, he gets a nice round number of 1,000,000 voting power.

Finally, the supporters of Taiki Maeda are very generous, so 7 people donated $1000. This means his voting power is 48,841.

Let’s see how much of that initial $20,000 in grant money gets distributed. We simply use a ratio of each project’s voting power compared to the total voting power of all projects, and that fraction or ratio is the same proportion of the funds they will receive.

We have to find the total number of voting power across all projects, which would be 1,798,281 + 1,000,000 + 48,841. So the total is 2,847,122. Then for WhiteboardCrypto’s share, we had 1,798,281 of the voting power, so we would receive 1,798,281 / 2,847,122 of the $20,000. This equates to $12,632 in free grant money.

Finematics had 1,000,000 voting power. So 1,000,000 divided by 2,847,122 equals 35%, multiply this by $20,000 and Finematics gets $7024.

Lastly, poor Taiki had 7 donors, and even though they were generous, 48,841/2,847,122 times our $20,000 earned him $343 of extra free money from the grant.

Remember, the total of the original donations also goes to the project, so we would receive our original $3000 and the $12,632, for a total of $15,632.

Finematics would get his original $5000 and the $7024 of grants, for a total of $12,024.

Finally, Taiki would have his original $7000, and the extra $343 of grant money for a total of $7343.

Project | Original Amount ($) | Grant Money ($) | Total Amount ($) |
---|---|---|---|

WBC | 3,000 | 12,632 | 15,632 |

Finematics | 5,000 | 7,024 | 12,024 |

Taiki | 7,000 | 343 | 7,343 |

Even though Taiki had some generous donations, we had way more total donors, and because of this, the grants gave a majority of the grant fund to us. This way each “donation” has a vote in the grant being split up, but each separate donation doesn’t lose value, because it still goes to the project.

The idea here is that the free grant money gets distributed to projects based on how many donors each project has, not how wealthy each donor is.

## How to Protect Against a Spam Attack

This brings about a good question you might’ve already had: “Why not just create 10,000 accounts using some code and take home all the money yourself?”

Well, quadratic funding platforms usually have some form of a verification process to make sure each donor only counts as one person. This means each person only gets one vote in the donation pool, and you can’t scale using bots.

Verification can be lengthy, sometimes including connecting other accounts. So that quickly solves that problem.

Moving on, I want to teach you something that’s relevant to Quadratic Funding.

## Types of Goods

Quadratic funding is mostly for **public goods**. To understand what “public goods” means, we need a quick lesson in economics.

**Private goods:** Goods that are not available to everyone, and also competitive. For example, computer GPUs are private goods. They are not free, and they are also very competitive because there are only so many of them out there.

**Common Goods:** Goods that are available to everyone, but competitive. For example, where I live it is free to fish, and you can even scoop up some dirt if you want. These goods are available to everyone, but they are competitive. Shoutout to my grandpa for showing me a rare fishing spot.

**Club goods:** Goods that aren’t available to all, but aren’t competitive. For example, movie theaters and private golf courses are considered club goods because the members don’t have to compete within them, but they aren’t available to everyone.

Skillshare is a perfect example of club goods. If we created a private membership for members who want to support this channel and have access to private tutorials, then that membership would be a club good.

**Public Goods:** Goods that are available to everyone, and not competitive. As a perfect example, this channel is a public good because it is available for free to anyone who wants to watch, and you could watch every video a million times, and you will still be able to watch the next one. Other examples are air, national defense, and any open-source software.

Usually, public goods struggle for funding because they are usually free for everyone and are not competitive, so quadratic funding is a perfect way to raise money for these projects.

## Gitcoin Grants

There are a few Quadratic Funding platforms out there, but the most well-known and by far the most successful is called Gitcoin Grants, which is associated with Github.

## Tutorial

We aren’t going to type out the tutorial because it won’t make a lot of sense. Rather, please watch the video to see how to use Gitcoin Grants. If you hit play, it should start you at the right time.

*Note: This video was created in 2021 and the funding round that it shows is no longer available. Thank you to everyone who took part! The video can still be useful for learning how to interact with the platform, though.*

## Conclusion

Quadratic funding is one of a few different methods to fund public goods. Retroactive public goods funding is another popular one, but that’s a topic for another article.

A lot of funding was distributed through the 2022/3 bear markets to projects that kept working and building their goods. So, these funding opportunities have not gone away and have continued to help projects who needed it most.

Thanks for reading, we hope you learned something, and we really hope you enjoyed it.