Web3 Explained: Introducing Gitcoin and GTC

Gitcoin and GTC Explained

Since Bitcoin launched in 2009, the cryptocurrency space has introduced numerous new, innovative, and exciting models to raise funds.

From initial coin offerings (ICOs), initial exchange offerings (IEOs), and initial DEX offerings (IDOs) to farming pools and security token offerings (STOs), projects within the industry use many different ways to acquire the capital needed from investors to help them get the ball rolling.

Despite the benefits of these fundraising models, they are not a good fit for open-source solutions that aim to create value that at free or at inexpensive costs. And although they have historically helped many initiatives in the past, traditional forms of grants are also ineffective in this field.

However, one project has developed a viable solution for this problem. In this article, we will explore Gitcoin. This crowdfunding platform distributes capital democratically and effectively to public goods projects, builders, contributors, and developers in the Ethereum ecosystem by leveraging the concept of quadratic funding.

What Is Gitcoin?

Launched in November 2017, Gitcoin is a crowdfunding platform for public goods projects within the Ethereum ecosystem that utilizes a new and unique way to distribute funds democratically.

Unlike more traditional forms of funding where contributions are matched with crypto projects at a 1:1 ratio, Gitcoin leverages the concept of quadratic funding to limit the influence of whales and big investors, all the while rewarding donors who care more about a given initiative compared to others.

On Gitcoin, projects can receive donations from individuals. Based on these results, a matching pool, backed by large-scale investors, philanthropists, and successful Ethereum projects, subsidizes these contributions to allocate them more efficiently and democratically between ecosystem participants.

Instead of direct funding, Gitcoin’s matching pool, which is managed autonomously by a special algorithm, distributes the most capital to projects with the most contributors. The amount of donations received on the matching pool only plays a secondary role.

Initially, Gitcoin was launched by software engineer Kevin Owocki. However, Owocki handed over the project’s governance to the community later on. As a result, Gitcoin currently operates as a decentralized autonomous organization (DAO).

Gitcoin provides a much-needed solution to the problem of funding public goods through open-source Web3 applications that are publicly accessible and that create value for everyone within the Ethereum community.

What makes Gitcoin even more exciting is that it isn’t focused on funding projects exclusively. In addition to decentralized and Web3 initiatives, Gitcoin also provides economic incentives to individual developers with the goal of supporting them when they transition their open-source side gigs to full-time endeavors. At the same time, the platform also serves as a hub for blockchain developers to connect and learn the ropes from others in the same field. Alternatively, developers can simply use Gitcoin’s platform to learn new skills. 

Interestingly, one of Gitcoin’s biggest supporters is Ethereum co-founder Vitalik Buterin, who has been closely following the project’s development and regularly posting about it.

Despite ICO projects stealing the show from Gitcoin from late 2017 to early 2018, the crowdfunding platform has experienced quite some success since its launch.

As of December 12, Gitcoin facilitated the distribution of $41.9 million, with the amount of funding received by Ethereum projects and developers increasing significantly every year.

While the median contribution is as little as $1.34 ($17.22 on average), Gitcoin closed 12 successful matching rounds, distributing nearly $25 million of grants to projects and over $5.5 million bounties to developers.

In addition to this, prominent projects like Tezos, Uniswap, Polygon, Polkadot, and Zilliqa are all partnered with Gitcoin, and over 310,000 developers are active on the platform every month.

5 Concepts You Should Know to Understand Gitcoin

Now, you know what Gitcoin is along with its primary purpose.

However, to better understand how the project works and why it is unique, it’s essential to explore five concepts that Gitcoin utilizes and that is closely related to how its platform works.

Let’s see them!

Public Goods

Instead of private goods (e.g., an apple, a smartphone, an apartment) that individuals purchase and consume, Gitcoin is all about providing funding for public goods. But what exactly is a public good?

A public good is a commodity or a service that is non-rivalrous and non-excludable. In this context, non-rivalrous means that one person’s use does not reduce its availability or prevent its access for others. For that reason, it can be utilized by numerous people at once.

At the same time, it is non-excludable since it is available for all citizens of a nation (or all users within Ethereum’s ecosystem in Gitcoin’s case) without exceptions. As a result, a public good is usually available for free, with its costs covered by the state through taxation.

Public goods vary by nation as each government has its own priorities regarding its spending. Based on these preferences, a public good can range from national defence and street lighting to state healthcare, public education, open-source software, and something as simple as air and water.

In some cases, something can be considered a public good even though it is not completely non-rivalrous and non-excludable. The road infrastructure of a city is a good example, which anyone can use freely but too many people using it can lead to traffic jams that decrease its quality. A post office can also be viewed as a public good despite the fact that citizens have to cover the costs of sending mail.

Open-Source Software

In the digital world, open-source software (OSS) is an important public good since it is released under a license that allows anyone on the globe to use, modify, and distribute the app or its source code for free and without any restrictions.

While it offers consumers free, community-managed alternatives to enterprises’ centralized (and often very expensive) software to save money, developers also have much more freedom with OSS as they don’t have to rely on third-party vendors to code and run their apps.

For dApps within the DeFi, NFT, Web3, and broader crypto spaces, OSS is crucial to operating the solutions in a decentralized and transparent way.

However, open-source software has one big caveat. While it’s an important public good that provides tremendous value, it doesn’t have a viable business model that rewards developers for the work they have put into creating, testing, fine-tuning, and maintaining applications. For that reason, most of them treat their OSS solutions as a side gig while working at their full-time jobs.

Funding Web3 and Crypto Projects

Before quadratic funding was introduced, public goods projects in the cryptocurrency industry had to resort to other, more traditional methods to acquire capital. Examples of such include:

  • Token issuance and offerings: In crypto, projects can easily issue their own native tokens to power their platforms with increased functionality, to raise funds, and to monetize their services, which can be combined with different coin offerings (e.g., ICOs, IEOs, IDOs, token farming events).
  • VC funding: As the traditional way to raise funds, projects often acquire capital from venture capitalists and angel investors, which they can combine with public token sales, throughout different rounds.
  • Direct grants: For public goods projects in crypto, direct grants are among the best ways to get the funding needed to kickstart development. Here, a committee enlisted by a grants program reviews the applications and selects the most promising ones, which will get funded directly.

Of course, the above methods offer excellent ways for many projects to acquire the necessary funding to get the ball rolling and turn their ideas into a reality.

On the other hand, token sales and VC funding could introduce monetization methods and coin distribution models that convert the project’s initial idea of a public good into a private good as the final product.

At the same time, many promising projects could fail to acquire funding through direct grants due to the limited fund of the program (so only the ones with the very best concepts were selected). Furthermore, the appointment of a credible and neutral committee is crucial to ensure that the selection and reviewal process is fair.

Quadratic Voting

Before we jump right into what quadratic funding is, let’s first take a look at quadratic voting, which is a concept utilized by Gitcoin.

Developed by Microsoft researcher E. Glen Weyl, quadratic voting is a collective decision-making procedure that seeks to overcome some of the greatest issues of democratic governance, such as voting paradox and majority rule.

Instead of voting simply for or against an issue, quadratic voting is an excellent way for participants to express how strongly they feel about the topic in question. This mechanism helps protect the interests of groups that are small but that care very deeply about a certain issue.

In addition to democratic institutions and “traditional” elections, quadratic voting can also be utilized in the corporate world and by decentralized protocols to achieve more efficient governance.

The concept of quadratic voting is rather easy to understand. Instead of getting one vote per participant, everyone gets a specific amount of credits to allocate between different issues. But there is a crucial part here – and this is why it’s called “quadratic.”

If you cast more than one vote on an issue, the cost of the further votes will increase quadratically, not linearly, based on the following formula:

Cost to the voter = (Number of votes)^2

Source: Towards Data Science

For example, if you have $100 credits to allocate across 10 issues, one vote on an issue costs you $1. You could decide to spend $10 in total by giving $1-1 credit for all matters. However, if you care more about an issue compared to another, you could cast two additional votes for $4 or $9 for a total of three votes. And if something is extremely important to you, you may even decide to spend all your $100 credits on it (10 votes).

While quadratic voting also has some downsides, such as increased complexity and potential vulnerability to Sybil attacks, it has been proven successful in multiple cases, like when the governance procedure solved a crucial deadlock, allowing Colorado lawmakers to choose the most important bills for the next two years.

Quadratic Funding

In addition to the methods we have explored earlier, quadratic funding is a new way to fund public goods, which Gitcoin utilizes for distributing grants to boost the growth of projects, developers, and other market participants that create significant value for every user within the Ethereum ecosystem.

As discussed, quadratic funding is based on quadratic voting, optimizing the latter concept for grants and project funding instead of governance processes.

In essence, quadratic funding seeks to create a system in which the amount of voting influence (e.g., votes to get an initiative funded) a participant purchases is proportional to how much they care about the actual project.

This comes in contrast to two funding models: the first, where one dollar is worth one vote, and the second, where one person can cast one vote over how money should be allocated.

While the prior gives too much influence for people who care a lot (or who are wealthy), allocating one vote to each participant will lead to a result where those who care only a little about a project will have the biggest say (and too much influence).

Similar to quadratic voting, the price of each unit of influence above the first vote increases in the quadratic funding process. For example, if one unit costs $0.01, the second can be $0.02, the third $0.03, and so on.

Based on this, your last unit of influence’s cost equals the total number of influence units you purchased multiplied by the cost of the first vote ($0.01). For example, if you cast 100 votes on a project, the last one will cost $1 (100*$0.01). And, if you want to calculate the total costs, you have to take the square of your total votes and divide it by 2. For our example:

Total Cost = (100^2/2)*$0.01 = $50

Basically, when choosing which projects to fund, this empowers smaller donors to make a difference while limiting the influence of whales.

For example, using the same formula and costs, a large investor contributing $500,000 would only have 10,000 votes (if all votes cost the same price, he would have 50 million votes), which reflects how much he cares about a project, but also gives room to small-scale contributors.

How Does Quadratic Funding Work on Gitcoin?

From the perspective of the projects applying for grants for the public goods they produce on a platform like Gitcoin, there is a mechanism that allows anyone to raise funds and contribute. This keeps track of the contributions and distributes them automatically to each project based on a quadratic funding-based formula in a period.

Without going too deeply into the mathematics side, the calculation of the payments goes like this:

  1. Take the square root of each contribution
  2. Add them together
  3. Take the square of the result

Based on this formula, projects with more contributors than one receive additional funding (as the result is greater than individual donations), which in Gitcoin’s case, is covered (subsidized) by a matching pool where private philanthropists, crypto projects, and other organizations have previously funded.

So, basically, crypto projects acquire funding on Gitcoin from two separate sources:

  • Individual donations that go directly to projects
  • A central (but not centralized) matching pool that subsidizes project funding based on Gitcoin’s quadratic funding algorithm

Simply put, on Gitcoin, the number of contributors matters more than the amount they donate to a project.

For example, if a project receives $10 on average from 100 donors, it will get a much larger subsidy than a project that collects $1,000 from two contributors.

As discussed earlier, this allows Gitcoin to limit the influence of wealthy investors and large organizations on the fundraising process. At the same time, the platform’s quadratic funding formula is designed to reward those initiatives that have the greatest support from the community.

Together, these two features enable a more democratic and efficient crowdfunding process that is a good fit for public goods projects creating value for Ethereum ecosystem participants.

What Is GTC and How Does it Fit Into the Gitcoin Ecosystem?

Based on Ethereum’s ERC-20 standard, Gitcoin Token (GTC) is Gitcoin’s native coin designed to enable community governance via the crowdfunding platform’s DAO and allow holders to propose and vote on changes, upgrades, and decisions related to the future of the project.

Interestingly, while the project has been around since 2017, Gitcoin only launched GTC a few months ago, in May 2021, with the goal to decentralize its ecosystem.

When creating GTC, Gitcoin forked the governance systems of Uniswap and Compound Finance, with only one significant modification. In addition to active participants in the governance mechanism, holders can delegate their GTC to others, which is a mechanism that incentivizes higher voter turnout.

Featuring a total supply of 100 million tokens (currently, a little less than 15 million GTC is in circulation), GTC lacked any public or private sales. Instead, it was distributed to ecosystem participants via the following model:

  • 15 million GTC (15%) via a retroactive airdrop to past Gitcoin users
  • 50 million GTC (50%) to the Gitcoin DAO, held in the organization’s treasury that is directly governed via on-chain voting
  • 35 million GTC (35%) to stakeholders, including the project’s team, investors, future employees, and strategic partners

Despite the fact that Gitcoin clearly stated on its website that they see no economic value in GTC (the team only created it to decentralize the governance process), the cryptocurrency’s price has been on the rise since its launch in May.

As it is a relatively new coin, GTC has been subject to a high level of volatility, experiencing multiple major ups and downs this year. However, the digital asset’s price dynamics remained positive in the long run.

After surging to $10.15 from the initial $3.3 between May 26 and November 25, GTC had a short yet significant bull run, reaching an all-time high at $25.7 on November 27. However, the cryptocurrency entered correction territory after.

As the coin is trading at $10.35 (as of December 12), it features a year-to-date ROI of 213% in 2021, which is an excellent performance considering that the coin is only a few months old.

Gitcoin: Incentivizing the Creation of Valuable Public Goods via Quadratic Funding

Gitcoin is an exciting and unique project within the cryptocurrency space.

Unlike most initiatives in the industry that focuses primarily on generating profits, the crowdfunding platform wants to advance Web3 and decentralized technologies by raising and distributing capital efficiently and democratically to public goods projects that benefit the whole Ethereum ecosystem.

By developing the concept of quadratic funding and leveraging it to incentivize value creation among Ethereum projects, Gitcoin has achieved quite some success so far, with prominent projects and people supporting the initiative that has been distributing a growing amount of funds each month.

The good news is that you can gain exposure to Gitcoin right away by trading GTC on AAX. Log into your account or register for a new one to get started!

Tags

Choose a language