LESSWRONG
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by moyamo
19 min read
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Update 2023-09-04: Partial Update: I'm fully funded!

Update 2023-09-21: Full Update. Funding is over.

Update 2023-11-28: Final Update. Platform Launched!

Imagine a world with no ads or paywalls. A world where open-source software gets the same level of funding as proprietary software. A world where people can freely reuse ideas and music without paying royalties. A world where people get paid for writing book reviews. A world where Game-of-Thrones-quality shows are freely available on YouTube. A world where AI safety research gets the same-level of funding as AI capabilities research. Is this a fantasy world? No, this is the world where people use Dominant Assurance Contracts

If you are already convinced you can make this idea a reality by donating to create a Platform for Dominant Assurance Contracts. If you are not convinced read on.

The Free-rider problem

A few months ago I stumbled across this video. (I highly recommend you watch the video, but if you don't have time, I've summarized the video below).

Summary of A Deeper Look at Public Goods

A good is rival if one person's use of a good diminishes another person's ability to benefit from it. Jeans are rival. If I'm wearing a pair of jeans, you can't wear it at the same time. Asteroid deflection is non-rival. If I deflect an asteroid to protect myself, you are saved with no additional cost.

A good is excludable if people who don't pay can be easily prevented from using a good. An example of a good that is excludable is a pair of jeans. You can exclude people by locking the jeans in your closet. An example of a good that is non-excludable is asteroid deflection. You cannot prevent the people who did not pay for the asteroid deflection program from benefiting from the asteroid being deflected.

A good which is both rival and excludable is called a private good. A good which is non-rival and non-excludable is called a public good.

(Additionally, goods which are excludable and non-rival are called club goods, and goods which are non-excludable but rival are called common resources. We won't be focusing on these types of goods, but I've mentioned them for completeness)

 ExcludableNon-Excludable
RivalPrivate GoodCommon Resources
Non-RivalClub GoodPublic Good

Markets are good at providing private goods because

  • by excluding people who don't pay, consumers are incentivized to pay, which incentivizes producers to produce, and
  • since private goods are rival it is efficient to exclude consumers who aren't willing to pay (if the benefit to the consumer was greater than the cost, the consumer would be willing to pay).

Public goods challenge markets because

  • consumers who don't pay can't be excluded, consumers are incentivized instead to free-ride (i.e. benefit from the good without paying) and thus producers have no incentive to produce.
  • Additionally, even if we could figure out a way to exclude non-payers, (e.g. by executing everyone who doesn't pay for the asteroid deflection program), it is inefficient to do so (being non-rival means there are no additional costs to non-payers benefiting).

Examples of public goods

  • Information
    • Journalism
    • Prediction markets
    • Scientific research
    • Educational material
  • Media
    • TV series
    • Movies
    • YouTube videos
    • Books
    • Short-stories
    • Art
    • Podcasts
  • Software
  • Safety
    • Neighborhood watches
    • Vaccines and other public health interventions
    • AI safety
    • Military defense
  • Public spaces
    • Public roads
    • Public parks

Isn't there a clever mechanism to solve the free-rider problem?

This video stuck with me. The fact the public goods are inefficiently provided by the market seems like the main issue with our civilization. Heck, AI Safety is a public good.

The other thing that stuck is that this seems so solvable. Surely, there is a clever mechanism that can fix this issue? So I went to the Wikipedia page of the Free-rider Problem and scrolled to the bottom, and lo and behold it was just sitting there: Dominant Assurance Contracts invented in 1998 by Alex Tabarrok (yes, the same person who presented the video you just watched). There is only one problem: no one is using them.

What is a dominant assurance contract?

(I recommend you watch the first 30 minutes of this video. It's really good, but if you don't have time I wrote a short explanation below that you can read instead).

My short explanation of dominant assurance contracts

Suppose there are 10 villagers on an unpaved street. Bob the Builder will pave the street for $90. Each villager is willing to contribute up to $15 to have the street paved. Additionally, there is there is a $1 transaction cost to contributing (e.g. from time spent signing forms, from credit card fees, from opportunity cost of not earning interest on that money, etc.). 

If the Bob the Builder gets everyone to contribute, each villager will only have to pay $90 / 10 = $9 and profit $15 - $9 - $1 = $5. However, one of the villagers, Free-riding Frank, is hesitant to contribute. Consider Frank's decision table:

(Frank's Profit, Others' Profit)Others Don't ContributeOthers Contribute
Frank Doesn't Contribute(0, 0)(15, 4)
Frank Contributes(-1, 0)(5, 5)
  • If nobody contributes then road doesn't get paved and Free-riding Frank and the other villagers both profit $0.
  • If Frank contributes but the others don't then Frank pledges $15 dollars (the maximum he is willing to pay) and incurs a transaction cost of $1. Since no one else contributed, Bob was unable to collect $90, so refunds Frank the $15. Frank, however, still incurred the $1 transaction cost.
  • If the others contribute but Frank doesn't then Free-riding Frank profits $15, but the others pay $90 / 9 + $1 = $ 11 and so only profit $4.
  • If Frank and the others all contribute then they all pay $9 dollars, incur a transaction cost of $1 and profit $5.

Looking at the table and holding the others strategy fixed, Free-riding Frank realizes that the dominant strategy in this game is to not contribute (0 vs -1 and 15 vs 5). Of course, everyone else in the village realizes this too and Bob is unable to raise the funds to pave the road.

Suppose Bob changes the game to a Dominant Assurance Contract. Dominant Assurance Contracts have two conditions:

  • Assurance: Bob will only build the road if all 10 villagers contribute.
  • Refund Bonus: Bob puts up $20 of his own money as collateral. If some villagers do not contribute then Bob will refund all villagers that did contribute what they pledged plus an equal share of the collateral: $2 per villager.

Frank's decision table now looks something like this:

(Frank's Profit, Others' Profit)Others Don't ContributeOthers Contribute
Frank Doesn't Contribute(0, 0)(0, 1)
Frank Contributes(1, 0)(5, 5)
  • If nobody contributes then road still doesn't get paved and Free-riding Frank and the other villagers both profit $0.
  • If Frank contributes but the others don't Frank pays the transaction cost of $1, but since the road was not built, the Bob refunds Frank an additional $2 [Refund Bonus]. Frank profits $1
  • If the others contribute but Frank doesn't the road does not get built [Assurance]. The other villagers incur $1 transaction costs and get an additional $2 refund [Refund Bonus]. They profit $1
  • If Frank and the others all contribute then they all pay $9 dollars and a transaction cost of $1, the road gets built and everyone profits $5.

Looking at the table and holding the others strategy fixed, Free-riding Frank now sees that the dominant strategy in this game is to contribute (0 vs 1 and 0 vs 5). Of course, everyone else in the village realizes this too and the road gets paved!

Challenges of dominant assurance contracts

If dominant assurance contracts are so great, why is nobody using them?

The problem is that the producers of public goods don't know about them.

Example: Element is building Matrix, an open-standards chat app (i.e. a public good). Their business model is to give away the code/standards for free and sell consulting services. Unfortunately, their competitors have undercut them by selling consulting services without contributing back to the code/standards. On HackerNews you can see their CEO complain about it as "The Tragedy of the Commons". Except he is not experiencing the tragedy of the commons. He is experiencing the free-rider problem.

If he doesn't even know what problem he has, he is not going to be able to: google "the free rider problem"; open the Wikipedia page on "the free-rider problem"; scroll to the bottom to find the section titled "Solutions"; and then read about dominant assurance contracts.

People who are trying to produce public goods don't seem to know that that's what they are doing, and that dominant assurance contracts are a way to get funding.

My main goal is to give the idea enough airtime so that when people want to produce public goods, the first tool they reach for is a dominant assurance contract.

Do they work in practice?

Research done in a lab shows that dominant assurance contracts reduce failure rate of assurance contracts from 60% to 40%.

I only know of four attempts done in the wild (tell me if you know about more). 

  • Donation to The Center for Election Science. 
    • Succeeded 
    • Raised $300 in donations from 20 people.
    • Some information was publicly provided about the number of people who pledged before the deadline.
    • Final 3 pledges came in the last half hour.
  • Book Review by Arjun Panickssery. 
    • Failed
    • 9/10 or $225/250
    • No information publicly provided about the number of people who pledged before the deadline.
    • This one failed, but got really close 9/10 or $225/$250 for writing a book review! I want to emphasize how ridiculous it is that it got this close. 9 people were willing to pay $25 for a book review of a book that only costs $18! I think if they used a platform like Kickstarter, a kind soul would have seen that they were only $25 dollars away from succeeding and would have donated.
  • Dark Mode for manifold.markets by Austin. 
    • Failed(?)
    • Tried to raise $2500 of play money.
    • Pledges were publicly visible
    • I'm not sure how to count this one. They failed to raise $2500 worth of play money but then they implemented dark mode anyway. So the public good was provided, even though the contract failed.
  • Berkeley House Dinners by Arjun Panickssery. 
    • Failed
    • Asked for $700
    • Pledges were not publicized before the deadline.
    • Asked for $700 dollars to fund a house dinner. Arjun hasn't done a write-up of the result, but he failed. Also the in the first few days after publication the payment links weren't working.

1/4 doesn't seem so good. Dominant assurance contracts work in theory so what is going on?

Main problems ignored by theory

The theoretical model of Dominant Assurance Contracts assumes away some things that you have to deal with in the real word

  • Perfect information about pricing: In the example problem above, we assumed that 10 villagers were willing to pay $15 to pave the road. In real life you do not have that information and risk over-pricing/under-pricing your contract. Presumably the contracts run in the real world that failed were over-priced.
  • Perfect marketing: In the example problem above, we assumed that villagers who would have benefited knew that Bob the Builder was raising funds. In real life you have to market to potential customers and many potential customers will probably not know about your product. It's possible that the contracts run in the real world failed to reach all potential customers who would have benefited.
  • Game theory/psychology: In the example above Free-riding Frank was fully aware of the other villagers strategy. In reality we don't know how other people are going to behave.
  • Shady: Dominant assurance contracts seems gambling-like/scam-like the same way that crypto-currency does. The top comment on the Berkeley House Dinner Project is "this is a dollar-auction (AKA scam)", and the second top comment is "Surely this is illegal?"

Solution to pricing problem

I believe the pricing problem can be solved by prediction markets. Book Review, Dark Mode and Berkeley House Dinner all had prediction markets on whether they'd reach their target. The markets were at 90%, 10%, 45%. These probabilities seem consistent with how much money each of the projects raised.

Before we launch a project we could run a multiple-choice prediction market on manifold: "The Project will raise $X", "The Project will not raise $X", "The Project will not launch or will launch with a price different from $X". Only if "The Project will raise $X" is sufficiently high, will we launch the project.

Solution to marketing problem

This problem is not unique to dominant assurance contracts. So it can be solved in the same way everyone else does it.

A cool idea is to partner with someone with expertise in marketing. The advertiser can put up the collateral for the refund bonus. If the project succeeds the producer can give them a cut of the funds raised. In this way, the advertiser is incentivized to make the project to succeed.

Solution to game theory/psychology

I think having a progress bar showing how many people have pledged so far is incredibly important to reach the target.

  • If the project is not on track to reaching it's goal, speculators will pledge in order to claim the refund bonus.
  • If the project is on track to reaching it's goal, prosocial people are likely to pledge so that the project gets funded.
  • If the project is close to reaching it's goal, but time is running out. Potential free-riders will wait until the very last moment, but eventually concede and pledge their money.

In some sense, with a progress bar, the refund bonus rewards people for providing information on whether the project is likely to reach it's funding goal.

I suspect the Book Review project would have worked if there was a progress bar.

Solution to looking like a scam.

Personally I think framing it as "You get a Refund Bonus as gratitude for supporting our project which we are very sorry we are unable to deliver" rather than "If you pledge you could win $5!!!!! Buy now!!!!" can make it seem less like a scam.

Having a progress bar also makes it seem less like a scam since it makes it easier for people to predict if the project is going to succeed or fail.

Summary

If you price your project correctly (with the help of prediction markets), market it successfully, phrase the refund bonus in a way that it does not seem like a scam and have a progress bar with a list of people who've already pledged, then it's very likely that it will reach it's target because:

  • it's rational for people to pledge, furthermore,
  • the refund bonus rewards people for providing information on whether the project will reach it's funding goal.

Other potential problems

  • Fraud: It's possible that the project is just a scam, and that the producer disappears with the money.
  • Information asymmetry: It's possible that the producer is unable to deliver the product because of incompetence or produces a product of lower quality than customers expected.
  • Collateral: The need for collateral that producers need to put up makes risk-averse producers less likely to try, cancelling out the increase in the success rate. 
    • Potential solution: If we can get success rate close to 100% then the platform can put up the collateral.
    • Potential solution: Entrepreneurs will be willing to invest if they think they can make a profit (i.e. someone who is risk tolerant can underwrite the collateral).
  • Exclusion: "Won't people just fund their projects with dominant assurance contracts and then bundle ads or exclude non-payers (e.g. with restrictive copyright) anyway to maximize revenue (e.g. cable TV with ads)?":
    • Possibly, I think our job is to create a culture where we release things for free and without ads, similar to the current culture in open source software.
    • If dominant assurance contract become popular there is less of a case for patents and copyright so it will be easier to convince policymakers that they should no longer exist.
  • Fees: The happy-path of the financial system is that money flows from consumers to produces. With a refund bonus, money can flow from producers to consumers. The infrastructure for dealing with this use-case is poor and expensive.

Okay so what am I buying?

You're collectively paying for $629 dollars for 1 month of my time to make this idea a reality. (I don't live in the Bay Area so my cost of living is low). I don't really need the money. I'm doing this as a experiment to test that dominant assurance contracts work. I'll likely ask for additional funding in the future to implement more features after the first month, and for specific expenses as they come up.

The plan is to create a website where public-good producers can create a page that

  • Has a description of the project.
  • Has a progress bar showing how much and who have pledged.
  • Handles payments with PayPal
  • If the project doesn't reach the funding goal, the customers are automatically refunded with a refund bonus. If the project does reach it's goal, the producer gets the money in their PayPal account.
  • The producer will put up the refund bonus as collateral using PayPal.

The website is essentially already done (my prototype just has my project hard-coded). I just need to flesh it out so that other people can upload their projects. 

The main thing I'm going to doing is looking for people who want to create public goods and getting feedback from them on the platform (if that's you please join the Refund Bonus Discord or contact me in some other way)

Additionally I want to try some cool things which might not work out like

  • Use prediction markets to price the project.
  • Bring in investors/advertisers who will put up the collateral on behalf of the producers and take a cut if the project succeeds.

But why can't I just let other people pay and free-ride?

You haven't been paying attention. Unless I've priced this contract wrong, if you don't pay it doesn't happen. If you don't pay, I don't meet the goal, everyone gets refunded, I go back to my boring day job, and we continue to live in a world where public goods are under-provisioned.

But won't someone else do this?

It seems unlikely. The Dominant Assurance Contract paper came out in 1998. And 25 years later, I seem to be the first person to commit to getting it off the ground. You will probably have to wait a while before someone else comes.

The final call to action

If you want to live in a world with no ads or paywalls; a world where open-source software gets the same level of funding as proprietary software; a world where people can freely reuse ideas and music without paying royalties; a world where people get payed for writing book reviews; a world where Game-of-Thrones-quality shows are freely available on Youtube; a world where AI safety research gets the same-level of funding as AI capabilities research, then please pledge some money towards this.

Also please join the Refund Bonus Discord or contact me in some other way if your interested in:

  • Finding people who want to make public goods, putting up collateral on their behalf, marketing their project, and taking a cut if they reach their funding goal.
  • Receiving funding for producing public goods. Even if you don't want funding, but already produce public goods I'm still interested to talk.
  • Buying public goods on the platform.

Isn't this just Kickstarter?

Yes, but 60% of Kickstarters fail. That is very bad odds. Research done in a lab shows that dominant assurance contracts reduce failure rate from 60% to 40%. I think this area is very neglected compared to the upside.

"Don't Contribute" is still an equilibrium on Kickstarter

If we go back to our earlier example, without a refund bonus, due to transaction costs, both "Don't Contribute" and "Contribute" are both equilibriums (0 vs -1 and 0 vs 5). The refund bonus removes "Don't Contribute" from the equilibrium.

(Frank's Profit, Others' Profit)Others Don't ContributeOthers Contribute
Frank Doesn't Contribute(0, 0)(0, -1)
Frank Contributes(-1, 0)(5, 5)

Sure, but this is just a small improvement on Kickstarter. It doesn't seem revolutionary.

I don't think enough people are working on this problem. Alex Tabarrok publish his paper on dominant assurance contracts in 1998. Kickstarter was founded in 2009, 11 years later. To this day their are no platforms for dominant assurance contracts to fund public goods.

Most things funded on Kickstarter aren't even public goods! Their stated mission is to "help bring creative projects to life". They are even trying to solve the free-rider problem! They just happen to be using a similar mechanism.

I agree dominant assurance contracts are a small improvement, but small improvements add up and almost nobody is working on this! 

But why aren't people using Kickstarter to fund public goods right now?

They are. Here are some successful open-source projects funded by Kickstarter:

Here is an unsuccessful project

Akira got 38% of their target funding. I'd be willing to bet that if they use dominant assurance contracts they would have succeeded.

Apparently 79% of projects that raised more than 20% of their goal were successfully funded. The refund bonus provides the necessary kick (hehe) that gets twice as many projects over the line.

Again, I think the main problem is that people don't know that assurance contracts (dominant or otherwise) can be used to fund public goods.

But you have no moat. Kickstarter will just copy you.

Yes! I'm not trying to make a bazillion dollars. I just want more public goods! If Kickstarter copies this idea that would be great! Less work for me!

Wait, you said something about AI Safety but this doesn't apply because...

...  AI Capabilities just scale with compute, where as we don't know how to scale AI Safety. The problem is not funding, and even if it there was a dominant assurance contract for "$1 000 000 000 to solve the alignment problem" there is no guarantee that whoever gets the money will solve the alignment problem.

Yes, there is a information problem when funding research things like AI Safety. We don't have the information on whether the researcher's research will be any good. But guess what: information is a public good! That means that it's currently underfunded. Dominant assurance contracts can bridge that funding gap.

How do we fund information? Of the top of my head a bunch of things come to mind

  • We can fund prizes that will be given to someone who answers a particular research question.
  • We can fund someone to do an analysis of which researchers or research directions seem most promising.
  • We can fund prediction markets on something like "P(doom|give Bob $100,000)" vs "P(doom|don't give Bob $100,000)".

Alternatives and their problems

Of course, there are other ways to fund public goods, but they all have their own problems.

Ads

Probably the main method to privately produce public goods is by running ads on goods you give away for free. The main issue with this is that ads pay a fraction of a cent per view. That means that you can only fund low-quality/cheap goods. To see this, compare videos on YouTube with series on HBO.

Taxes

With taxes you face a symmetric problem to the free-rider problem: the forced-rider problem. Think of someone who doesn't use a car, but still pays taxes to maintain the roads.

Funding public good through taxes also suffer from lack of market-pricing mechanism. Government spending doesn't have to pass the market test that a dominant assurance contract has to pass, creating wasteful spending.

Impact Certificates

Impact certificates suffer from the free-rider problem. There isn't any incentive (other than altruism) to buy an impact certificate. One can just free-ride on the results of the impact project, and let the initial investor go bankrupt.

I think impact certificates are trying to solve the problem of information asymmetry rather than funding. It's possible that they could be combined with dominant assurance contracts in some way, but I'm not sure how.

Club Goods

A Club Good is a good that is non-rival but excludable. An example would be a subscription to HBO or Microsoft Office. It costs practically nothing on the margin to give an additional person access to HBO or Microsoft Office (all the costs were upfront in production) so these goods are non-rival. However, since HBO and Microsoft charge for these goods they are excludable.

Of course, there is piracy. So the first problem is that it's actually difficult to turn a public good into a club good, and so the free-rider problem persists.

Secondly, it's inefficient to exclude people. If you would pay $5 to watch Game of Thrones but the HBO subscription is $15, then $5 of surplus is being lost (it costs HBO $0 to let you watch Game of Thrones).

Patreon

This is a type of club good.

From personal experience, I think this works okay for art where the patrons have a parasocial relationship with the artist. This seems to work less well for impersonal stuff like software.

Additionally, it's easy for Buccaneer Bob to sign up to your Patreon and then upload your products to a piracy website. Free-riding Frank won't bother to sign up to your Patreon, he'll just download your products off a piracy website.

If you price a dominant assurance contract correctly, Free-rider Frank is forced to pay.

Micropayments

The idea with micropayments is something like "cost per marginal unit is a fraction of a cent so we should make it possible for people to pay fractions of cents." I think this doesn't work because the cost of fraud is higher than a fraction of a cent. Also, the cost of me thinking "Is this worth 0.01c?" is higher than a fraction of a cent. It's just better to treat such things as non-rival.

Assurance Contracts/Kickstarter

The main issue with an assurance contract without a refund bonus is that "not contributing" is an equilibrium, especially if their are substantial transaction costs. I already explained this above.

Summary

Public goods are under-provisioned by the market due to the free-rider problem. Dominant assurance contracts solve the free-rider problem. Nobody is using dominant assurance contracts. To solve this problem, and simultaneously test if dominant assurance contracts work, I created a dominant assurance contract to fund a platform for creating dominant assurance contracts.

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[-]Yair Halberstadt2013

I don't think this actually solves the freerider problem. It solves the coordination problem.

In your toy example Bob was able to specify that he wouldn't build anything unless everyone signed the contract - if this is possible you don't really need the dominant assurance part, as it's still worth it for the freerider to sign up, so long as they assume there's a decent chance others will as well (and if they don't, that's going to discourage non-freeriders as well).

In real life though, this is impossible. Instead the contract is along the lines of "I will do this so long as at least X people sign up, or we get Y dollars of funding".

In that case it's only worth it for the freerider to sign up if either.

  1. They estimate with high probability the limit will only be reached iff they sign up (but this is the case even with a standard Kickstarter, dominant assurance isn't necessary).

Or

  1. They estimate with high probability that the limit won't be reached (in which case they're on average just milking the contract for free cash)

There's still no incentive for the freerider to sign up if the limit would otherwise be reached.

Instead what this solves is the coordination problem. Prosocial people want to fund various markets, but it's a waste of time doing this if nobody else joins in. The dominant assurance contract makes this worth it either way, so it's easier for markets to get off the ground to the point where it looks like they'll probably make it.

Reply
[-]Yoav Ravid132

After reading the comments and re-reading the article, I think it's a little confused. The central conclusion, that this crowdfunding model is more effective and would help us fund more things we want, is correct (as I also argued in my own post). But I think some of the reasoning and examples are wrong. I'll try to explain.

Free riding is the wrong framing in most cases

In your road example, you changed the condition from a funding goal ($90), to a backer-amount goal, in order to force everyone to pay if they want to have a road. I think this is both undesirable and irrelevant in most cases:

  • Irrelevant: Except in small and well defined communities, most crowdfunding campaigns target a large population that's hard to quantify and single out. And most campaigns don't need everyone who would benefit to back them, only enough of them. If you tried to do a campaign where everyone who would benefit from the it has to back it for it to succeed, it would definitely fail.
  • Undesirable: The fact that a good is public doesn't mean that everyone benefits from it the same amount, because not everyone values it the same amount. In your example, the villagers probably value the road differently (perh
... (read more)
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1moyamo
I agree with this comment except for these two points I don't think he is going to do it regardless. Presumably if he doesn't get enough money he has to shut-down his company completely or reduce the amount he spends on open-source and focus on the more profitable consulting side of the business. If DACs were used they could invest more in the open source. Private goods already have a mechanism to solve this problem: investment. That's why I think DACs are not that relevant for private goods.
2Yoav Ravid
In the case where he has a minimum amount below which he is unwilling to continue development, then I agree a DAC would help raise that amount. Investment solves the funding problem, it doesn't solve the problem of making sure you have enough buyers. And if you can't solve the latter then you might not be able to get investors either (cause they also want to know you have enough buyers). That's the problem Kickstarter solves, and DACs would solve even better, in addition to funding.
[-]jefftk133

Dominant assurance contracts seems gambling-like/scam-like the same way that crypto-currency does. The top comment on the Berkeley House Dinner Project is "this is a dollar-auction (AKA scam)", and the second top comment is "Surely this is illegal?"

I don't see anywhere in your post where you address the question of whether this is actually legal, though? An offer that if someone gives you money then (depending on factors outside of that person's control) you may give them double their money back sounds like the kind of thing societies tend to regulate heavily. For example, in the US, I think it is possible that this would pass the Howey test to be considered a security?

Reply
9moyamo
This is the Howey test 1. An investment of money 2. In a common enterprise 3. With the expectation of profit 4. To be derived from the efforts of others I think it fails 3 and 4 simultaneously. There is no "expectation of profit to be derived from the efforts of others". If the contract succeeds then others make an effort but you do not make a profit. If the contract fails you make a profit, but not from the efforts of others.
3jefftk
Not a lawyer, but I'm not sure it's so clear cut. If I buy because I expect the contract not to tip, I'm expecting profit (3) derived from your efforts in setting up the contract (4).
3moyamo
Maybe we shouldn't call it a Refund Bonus but something like "Attention Compensation". I would say that you are expecting to profit (3) derived from your efforts of reading the contract and agreeing to pledge and then not actually getting what you paid for (not 4). Personally I think it's irrational to give money expecting a DAC to fail. make-yass made a post about this. I think the long-run social equilibrium is that people realize that it's dumb to gamble on DACs failing and don't do it.
2SebastianG
In traditional charitable enterprises, we just call it "a donor gift."
6Yoav Ravid
Agree, this is important. When I wrote about this I didn't consider that it might be illegal. I'm quite ignorant of the law, but I recently wrote my thought on legality of refund bonuses here. tl;dr, I think it's legal, but there's a bunch of things you have to do for it to be legal. And I now think this is the main reason no crowdfunding platform has ever used refund bonuses, not that they don't know about it or don't think it's a good idea. I would really like if someone law-savvy would write up an explanation of the legality of refund bonuses. I'd even be willing to contribute money towards that.
4Viliam
I am not a lawyer, but I think that sometimes the problem can be avoided by returning something other than cash. Sometimes, just having an expiration date makes the difference. You give me $1; if the project fails I give you a $2 coupon you can spend in Walmart you need to spend before December 2023. (Of course, ask a lawyer about the details. I am just pointing at a possible angle of approach.)
2dkirmani
Does “Kickstarter but they refund you if the project doesn’t meet its goal” exist? I think not — that might get you some of the gains of a DAC platform. Also, what does PayPal’s TOS say about this? I seriously considered building something similar, and Stripe only approves “crowdfunding” if you have their written approval.
7jefftk
That's just Kickstarter. You already only pay if the project hits its funding goal.
[-]Seth Herd75

This is a interesting idea, but your example oversells it substantially. Future iterations need to not do this, or you'll sound like a huckster and not get support.

If all ten people on the street have to contribute, everyone knows for sure that they won't get what they want if they don't contribute. No payback is necessary; free riding is impossible. That's the easy case. When you just need some amount of money rather than every single individual to contribute, it's quite possible to free ride.

But why can't I just let other people pay and free-ride? 

Y

... (read more)
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[-]moyamo60

Partial Update

I'm fully funded! In fact, as of writing. I have nearly 3x more funding than I asked for! The money really started rolling in after Alex Tabarrok plugged my project on marginal revolution, which I did not expect.

I'm not sure why people continued to give me money after the project was fully funded but I'm very thankful. (Of course, the more money I get the longer I can work on the project increasing the chance of success). The fundraising only officially ends 15 September, so I'm not going to give a full report until then.

I was hoping to do so... (read more)

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[-]Dawn Drescher60

Wonderful that you’re working on this! I’m with AI Safety Impact Markets, and I suspect that we will need a system like this eventually. We haven’t received a lot of feedback to the effect yet, so I haven’t prioritized it, but there are at least two applications for it (for investors and (one day, speculatively) for impact buyers/retrofunders). We’re currently addressing it with a bonding curve auction of sorts, which incentivizes donors to come in early, so that they’re also not so incentivized to wait each other out. The incentive structures are differen... (read more)

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1moyamo
Thanks for you comment, it's very helpful. It would the producer of the public good (e.g. for my project I put up the collateral). Possibly? I'm not sure why you'd do that? I disagree that a Refund Bonus is a security. It's a refund. To me it's when you buy something, but it comes broken, so the store gives you a voucher to make up for your troubles. I'm in South Africa but from what I can tell, if you work with US dollars and do something illegal the FBI will come after you, so I wouldn't be confident that only South African law applies. This is actually a cool idea. I don't know how I'd manage to get people's details for giving refund without co-operating with the fundraising platform, and my impression is that most platforms are hesitant to do things like this. If you know of a platform that would be keen on trying this, please tell me! I don't quite understand this point. You could work on AI Safety and donate to animal charities if you don't want to free-ride. You're right. I didn't want the title to just be "Dominant Assurance Contracts" because I assumed that most people have never heard of them and tried to come up with something more interesting, but maybe enough people on lesswrong have heard of them so I should probably be more straight forward.
4Yoav Ravid
Then perhaps we should call it 'Refund Compensation' instead. I'd much rather if refund compensation didn't fall under securities laws and everyone could offer it hassle-free.
2moyamo
I really like that. It draws attention to the fact that the "bonus" is compensation for time and effort spent on trying to buy a product that was never delivered.
2Dawn Drescher
Oh, got it! Thanks! I thought you’d be fundraising to offer refund compensation to others to make their fundraisers more likely to succeed. But if the project developer themself put up the compensation, it’s probably also an important signal or selection effect in the game theoretic setup. Yeah, courts decide that in the end. Howey Test: money: yes; common enterprise: yes; expectation of profit: sometimes; effort of others: I don’t know, not really? The size of the payout is not security-like, but I don’t know if that matters. All very unclear. Profit: I imagine people will collect statistics on how close to funded campaigns can still be a day before they close so that they still fail in (say) 90% of the cases. Then they blindly invest $x into all campaigns that are still $x away from that threshold on their last day. I imagine the courts may find that if someone goes to such efforts to exploit the system, they were probably not tricked into doing so. Plus there is the question of what effort of others we could possibly be referring to. But even if the courts in the end decide that you’re right and it’s not a security, the legal battle with the SEC alone will be very expensive… They keep expanding their own heuristic for what they think is a security (not up to them to decide). They’ve even started to ignore the “expectation of profit” entirely (with stablecoins). But perhaps you can find a way to keep the people who run the fundraisers in the clear and keep your company in South Africa (where I know the laws even less though). If the fundraisers are on a mainstream blockchain, the transactions are public, so you (outside of the US) could manage the refund compensation on behalf of the project developers and then pay refunds according to the public records on the blockchain. That way, no one could prove that a particular project developer is a member in your system… except maybe if they make “honeypot” contributions I suppose. Perhaps you can have a separate f
1moyamo
Oh cool, that's a good idea. Then you can piggy back off existing crowdfunding platforms instead of making your own one. Do you have a link? It sounds cool. I want to check it out. I think I see your point. I agree that DACs don't solve this type of free-riding.
[-]Yair Halberstadt66

Love the idea (contributed 10 dollars), but I don't love the title - it feels a little clickbaity (I expected an article about asteroid deflection, not about DACs).

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3Yoav Ravid
Yeah, something descriptive like "A platform to fund public goods using dominant assurance contracts" or "A refund bonus crowdfunding platform to subsidize public goods" would be better in my opinion (and the jargon wouldn't be a problem in this community).
[-]waveBidder50

I'm somewhat flabbergasted that no one has mentioned radicalxChange or quadratic funding. They're a solution that doesn't force the producer to take on all the risks of failure, at the cost of needing a centralized pot of money.

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2Yoav Ravid
The cost of needing a centralized pot of money is a big cost, and the requirement to have several projects at once, make it a solution to a very different class of problems. That's probably the reason it wasn't mentioned, but still, thanks for mentioning it because I didn't know about it. Upvoted. It would be interesting, though, to try to combine the two ideas. You can add an option to the platform described in the post to pledge money to a centralized pool that's used to match pledges people make (and if they're refunded than the refund bonus on your matching pledge goes either to the pool or back to you). That way can you support the production of highly desired goods without having to actually choose by yourself which goods. 
[-]DirectedEvolution42

I think DACs face two challenges.

  1. The cost/benefit ratio for the population of potential projects is bimodal. They're either so attractive that they have no trouble seeking donors and executors via normal Kickstarter, or so unattractive that they'll fail to secure funding with or without a DAC.
  2. Even if DACs were normal, Bob the Builder exposes himself to financial risk in order to launch one. He has to increase his funding goal in order to compensate, making the value proposition worse.

For these reasons, it's hard for me to get excited about DACs.

There is pr... (read more)

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3Yoav Ravid
1. Why do you believe so? 2. No, he gets compensated for the increased risk by the increased probability of funding. There's no need for him to increase the funding goal.
[-]dr_s40

This all works if Frank is a fully rational agent that only pursues a Nash equilibrium. But most people aren't that rational (or pursue different values). Would I want asteroid deflection to depend on a DAC? Hell no, because that implies there's a need for unanimous paying in for the sake of deflecting the asteroid, and I know someone's going to not pay anyway for weird obscure reasons like that they worship the asteroid as a god or something.

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1moyamo
So the idea is that you only force the people to pay who actually are willing to pay. Obviously in the real world, you don't know who these people are. In the post I wrote: So in the real world an asteroid deflection DAC risks being over-priced (and then we all die from an asteroid) or under-priced (some people free-ride). I still think this is an improvement over other mechanisms.
4dr_s
I think any mechanism that involves "we all die from an asteroid because we were trying to make sure no one benefitted unduly from our asteroid-deflecting plan" as a possible outcome is obviously flawed. Though obviously this might work for lesser problems, I think in general it needs something else to refine the mechanism and allow for some fluctuations. Otherwise the contract really is just a way to ensure that people respect their commitment to pay X, which you can also do already by simply having e.g. a penalty to pay if you don't do your part after signing the contract.
1M. Y. Zuo
I agree, if an actually dangerous asteroid came onto the collision course, and if DACs being popularized even gave the appearance of reducing the chance of a successful deflection by a tiny fraction, due to the aforementioned new failure possibility, then it's very likely that many many people and organizations will want to go after whoever popularized it. If they're still alive. Loss aversions is much stronger then any possible gratitude for benefits brought by DACs when ramped up to such an extreme scale. Which in fact, after a bit of reflection, might ironically make the worst possible supporting example for popularizing DACs and nearly the best possible counter example. Sorry OP. (I would estimate as much as 5% of the population would actively seek out revenge against whoever impaired the possibility of saving their children and family by even the slightest amount, when put under such extreme duress, and humans would be unable to take revenge against gravity so they would need to direct their blind fury elsewhere...)
2dr_s
I think calling it "loss aversion" here implies an irrational bias that isn't even there. The loss from an extinction level impact is near infinite, so honestly I would say wanting to avoid it at all costs is rational. If someone can shell out the money needed unilaterally then freeriding isn't a worry. Heck, if you can gather the money from people under threat of force (which after all is kind of how taxes work now) it's probably well morally justified, as long as you keep the sum reasonable. It's just a very extreme situation in which "but what if someone freerides" definitely shouldn't be the top concern.
[-]CronoDAS40

I have a bad feeling about this. I think that correctly pricing these contracts will be very hard to do. If a lot of contracts fail and people lose their collateral, then people are going to stop putting up collateral. Also, some people won't care about any particular public good and might make a pledge anyway in the hope of getting a refund bonus and will be upset when they "lose" their money or might even try to sabotage an open contract.

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2Yoav Ravid
Why is it harder to price than a normal Kickstarter? Is it choosing the refund rate (e.g 10% or 20%) that you think is hard?
2Ericf
A normal Kickstart is already impossible to price correctly - 99% either deliberately underprice to ensure "success" (the "preorders" model) or accidentally underpriced and cost the founders a ton of unpaid overtime (the gitp model) or they overpriced and don't get funded.
2CronoDAS
Maybe "harder to price" isn't what I should have said. Before you offer a dominant assurance contract, you need to have an accurate estimate of how much your project is worth to your potential funders. If your Kickstarter doesn't get funded, you don't lose (much) money, so you can just make the offer and see what happens. However, if you need $1000 to do a project but it turns out that people are collectively valuing it at only $500, then if you do offer to do the project using a dominant assurance contract, then either the project doesn't get funded and you get screwed, or the project does get funded and (some of) the funders get screwed.
1moyamo
So initially I wanted to price at $829 but https://manifold.markets/moyamo/how-much-money-will-my-metacrowdfun only gave me like 30% chance of succeeding. So I changed the price to $629 which gave me 45% chance of succeeding. There are people willing to take financial risks for profits. The way I think of it is that there is a co-ordination problem. People want public goods, some people want to provide it, but they have difficulty coordinating. So either the project gets funded: yay people get the public good they wanted. Or it does not and people didn't really want that public good anyway (and you pay the cost for poorly predicting peoples preferences and sucking up their attention). So to me it's more of a win-win.
[-]Yoav Ravid40

I'm very interested in assurance contract websites (I wrote two of the first LW posts about them, 1, 2) and refund bonuses - I would go ahead and say that I'm at the top of your target audience in this sense - but I didn't read this post yet because you haven't made it clear in the title or the first paragraph that it's about those things. So I suggest making it clearer and then maybe more people will see it.

Anyway, now that I know it's about these things, you got a strong upvote. Also, just yesterday I created a manifold question on whether, by 2026, a cr... (read more)

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[-]lincolnquirk41

I like the idea of getting more people to contribute to such contracts. Not thrilled about the execution. I think there is a massive product problem with the idea -- people don't understand it, think it is a scam, etc. If your efforts were more directed at the problem of getting people to understand and be excited about crowdfunding contracts like this, I would be a lot more excited.

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1moyamo
Thanks for the feedback. I think you hit the nail on the head. I agree that this is the main problem. That was the point of this post? It's possible that I'm doing a bad job at this. Do you have any suggestions for what I should be trying to do instead?
4lincolnquirk
In my view you have two plausible routes to overcoming the product problem, neither of which is solved (primarily) by writing code. Route A would be social proof: find a trusted influencer who wants to do a project with DACs. Start by brainstorming various types of projects that would most benefit from DACs, aiming to find an idea which an (ideally) narrow group of people would be really excited about, that demonstrates the value of such contracts, led by a person with a lot of 'star power'. Most likely this would be someone who would be likely to raise quite a lot of money through a traditional donation/kickstarter-type drive, but instead they decide to demo the DAC (and in doing so make a good case for it). Route B is to focus on comms. Iterate on the message. Start by explaining it to non-economist friends, then graduate to focus groups. It's crucial to try to figure out how to most simply explain the idea in a sentence or two, such that people understand and don't get confused by it. I'm guessing you'll need to follow both these routes, but you can follow them simultaneously and hopefully learn cross-useful things while doing so.
1moyamo
For Route B, I'm not sure I can find a super compelling sentence, that's why I thought it would be easier to just have something I could point to (Hey look at all these cool things we managed to raise money for, I can help you raise money too!). For Route A, I'd would be surprised if there was a trusted influencer who would risk their reputation on this weird financial scheme, unless there were at least several examples showing that it worked. I think what I'm doing is a prerequisite for this route.
[-]Viliam30

Either I am missing a point somewhere, or this probably doesn't work as well outside of textbook examples.

In the example, Frank was "blackmailed" into paying, because the builder knew that there were exactly 10 villagers, and knew that Frank needs the street paved. In real life, you often do not have this kind of knowledge. If instead the builder was unsure whether 9 or 10 villagers actually need the street paved, I assume he would have set up the rules so that it is enough for 9 villagers to pay, which means that Frank could have free-rided by claiming fa... (read more)

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2artifex
Yes, you need to solve two problems (according to Tabarrok) to solve public goods provision, one of which is the free-rider problem. Dominant assurance contracts only solve the free-rider problem, but you need to also solve what he calls the information problem to know how to set the parameters of the contract.
[-]Dweomite31

It's my impression that currently many "successful" Kickstarter projects already break their promises (most commonly by delivering very late, sometimes in more dramatic fashions) and rarely suffer any consequences for this.

I have some concerns that if the penalty for missing your funding goal (i.e. losing your collateral) is worse than the penalty for funding but then failing to deliver (i.e. probably just a reputation hit), that's a bad incentive for creators.  Some creators might try to meet their funding goal artificially (e.g. by secretly contribu... (read more)

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[-]Yair Halberstadt30

I think the biggest risk of DACs is that it incentivises people to fund contracts they don't actually want fulfilled to milk the proposer for cash.

My expectation is that if this becomes mature you'll get traders which try to predict which contracts won't be fully funded, and then push them up to say 50% (after which pushing them further risks them actually getting fully funded).

This not only discourages proposers from putting up contracts (to easy to lose money), but also makes it harder for users to easily see which contracts are worth funding and which a... (read more)

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1teageegeepea
Isn't whether a project is "worth funding" depend on whether you think it's proposed output is an actually valuable public good? If it is, then you shouldn't mind not getting a refund that much. If it isn't, there are other places to look for arbitrage.
[-]CronoDAS30

Paypal has transaction costs. How much of the refund bonus am I actually going to get?

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4moyamo
All of it. I'm going to cover the transaction costs.
[-]Yoav Ravid30

I think this is important and I'm happy someone is doing this, so I Pledged $25 :)

That said, I think for it to be successful the design needs to be improved a lot (though perhaps this could be provisioned later with another campaign), and the legal side has to be sorted out, and also it needs a better domain name. I'd be glad to help where I can, so I joined the discord.

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[-]Elizabeth20

It seems like the problem this actually solves is the transaction cost of evaluating a project. This doesn't seem like a problem right now. Maybe people would use kickstarter very differently if DACs were commonplace, but as it stands now people chip in very small amounts based mostly on vibes. 

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[-]AnthonyC20

Given the uncertainties on choosing pricing, I'm not sure there's any clear lesson we could draw from an absolute failure rate even in a world where dominant assurance contracts were commonplace. I like the idea of using prediction markets to choose the price, in a world where prediction markets are more mature as well.

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[-]Dreaded_Anomaly20

Is there a way to do this without needing to secure collateral for the refund, using some stable investment vehicle like a CD? "The earlier you pledge, the bigger refund you get if the contract isn't fully funded" might help avoid the "waiting until the last moment" issue, but maybe there's some perverse incentive or other blocker.

I'm also very curious about how this method could solve issues with funding of scientific research. The lack of market pricing for research is a major impediment to allocating public funds effectively. But what prediction market can accurately estimate the price of something that might not pay off for 100 years?

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[-]Ericf20

I don't think the assumption of equal transaction costs holds. If I want to fill in some potholes on my street, I can go door to door and ask for donations - which costs me time but has minimal and well understood costs to the other contributors. If I have to add "explain this new thing" and "keep track of escrow funds" and "cycling back and telling everyone how the project funding is going, and making them re-decide if/how much to contribute" that is a whole bunch of extra costs.

Also, of the public good is not quantum (eg, I could fix anywhere from 1-10 o... (read more)

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[-]Thomas Broadley22

since private goods are non-rival it is efficient to exclude consumers who aren't willing to pay

 

Should this be, "since private goods are rival it is efficient..."?

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2moyamo
Yes. Thanks. Fixed
[-]jmh20

Have you looked at Cowan's The Theory of Market Failure? If not you might find it of some interest.

Personally I would challenge the claim the claim of under provision due to a free-rider problem. The above collection of essays show a number of example of largely private provision of public goods where there are very clear potential for free-riding.

While the cases described in the book are not such that they could be said to be the last word on the question of public goods and under provision they do point to need to deal with the question in a more detaile... (read more)

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1moyamo
I haven't read the book, could you provide such examples? I think there are obvious cases of where public goods version of something is under-provided (lower-quality) compared to the club good version of that thing. e.g. Proprietary software being more polished than open source software, HBO higher quality than YouTube. Where I live the police are useless so neighborhood watches have sprung up in the wealthy areas. However, my impression is that the neighborhood watches appear much later and only in richer areas than you'd expect in an efficient market. Particular many people got private security years before neighborhood watches, and lower-income areas don't have neighborhood watches even though they would probably be willing to spend 1/1000 of their income (just pay 1 guy in the community of 1000 people) for more safety.
2jmh
It's been decades for me but the two best known examples are probably Coase's (IIRC) "The lighthouse in economics" and (forget the author) "The fable of the bees". The first covers the reality that lighthouses in Britain were getting built, largely via private funding and initiatives. These were very clearly of great value for the local community that relied on boats for many activities but it also served to provide protection/warning for all shipping that was merely passing through as it were. The second covered how bee hives were privately owned and negotiation with local farms or orchards that needed bee pollination services for harvest success -- or improved output -- even though the bees can and apparently do, service farms that are not paying for the service. Both studies argued that no only was government type forced production/cost support needed but that there did not seem to be any meaningfully measured under production from some optimal level.
1moyamo
I think these examples are consistent with my views: Sometimes public goods are provided because the demand for them is so great they people overcome the co-ordination problem or just allow people to free-ride (lighthouses) or sometimes public goods are not that public (bee pollination) and so private enterprises pay for them for very little free-riding. The problem is not the public-goods are never provided, but that the are under-provided: either they are not provided or are of low-quality relative to what is economically efficient.
2jmh
I find that bit something of a problematic claim.  If economic efficiency is the criteria one has to show that marginal costs and marginal values are misaligned. I'm not sure that is the general case. The claimed misalignment seems to be based on one of 2 general propositions: 1) that people will choose a persistently worse position over a better one or 2) Increasing the output of any good will be beneficial. In the first case I don't think such situations last very long.  In the latter, it seems based on some partial equilibrium analysis that is ignoring the opportunity costs of the resources shifted to increase the output of the public good. I do agree that coordination costs can be a factor in production of public goods but considering what institutional setting can best reduce the coordination costs -- thereby making the production possible/increased -- is the question. I think both mentioned articles, and others present in the book, point out that largely private settings have found ways to accomplish the coordination side.
[-]Matt Cashman10

I have had an academic interest in using assurance contracts in the social domain for a few years now. Like the author, I want them to be a reality but making that happen isn't my forté. My profession is research, not implementation.

I've written a few overviews of the idea for grants before. Here's one: https://cashman.science/wp-content/uploads/2023/09/Assurance_description_v11.pdf

 

The basic idea is this:

When we import this mechanism into the social domain, an assurance contract is an agreement something like an open letter—with the exception that th... (read more)

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[-]M. Y. Zuo10

But guess what: information is a public good! That means that it's currently underfunded.

There seems to be some unstated assumptions here, since it superficially appears like you've made a logical leap. 

 

Underfunded according to who? And for what types of information?

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[-]mbrooks10

What are the transaction costs if you need to do 3 transactions?
1. Get the refund bonuses from the producer
2. Get the pledges from funders
3. Return the pledges + bonus if it doesn't work out

Also, will PayPal allow this type of money sending?

Congrats on getting funded way above your threshold!

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1moyamo
I think it's about 10%, but I'll need more experience to see how much it actually works out on average. For comparison, I think normal crowdfunding has about 5-8% fees, but only if you succeed.
[-]kevinpostlewaite10

I like the idea of DAC and would like to see them available and used more widely but I'm not confident that this project is the way to move that forward. Mention is made of Kickstarter: is there any knowledge of Kickstarter or GoFundMe being approached and asked to implement this functionality? It's likely to be a more effective use of time than to implement this on a new unknown and untrusted platform. Ideally, Kickstarter and/or GoFundMe would add DACs as an option to the campaign creator and ideally donators would be able to opt out (some will dislike t... (read more)

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1moyamo
Alex Tabarrok said he tried in one of the videos linked. I haven't spoken to him about it, but I assume they weren't interested. I was hoping that proving the concept would cause more established players to adopt the system.
[-]igorkraw10

I applaud your intent, commitment and willingness to put in the effort of implementing pushing this, and I think it has a niche ("better kickstarter" isn't bad). However, I think the main problems in reality will be dealing with delivery failure/scams, transaction costs, market sizes (a lot of public goods aren't that public, minority concerns often don't  get serviced by firms because of simple non-profitability),  and threshold behaviour (when the value estimate for each person is washed out in the uncertainty noise and the refund is negligible... (read more)

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1moyamo
No, because of the loss of value due to unnecessary exclusion. So I think for the platform I'm creating, I'll only allow projects that are public goods (so if it's media/software it must have a permissive license). That means that anyone can take the public good with ads and just remove the ads. That's the main reason why open-source doesn't have ads, because everytime someone tries to add ads, people fork the project to remove the ads (on Linux usually the package maintainers will remove the ads).
[-]teageegeepea10

I would have contributed... if I hadn't been required to use Paypal. I closed my account a while back.

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[-]F.E. Guerra-Pujol10

Could we extend dominance assurance contracts to include retrodiction markets? See here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4323607

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[-]Mir10

Surely, there is a clever mechanism that can fix this issue? So I went to the Wikipedia page of the Free-rider Problem and scrolled to the bottom, and lo and behold it was just sitting there: Dominant Assurance Contracts.

I feel like every assurance-contract proponent went through a moment like this. It's like "Don't Look Up" except wrt a civilization-scale solution. I'm tempted to think some people 'just don't get it' because they're missing gears-level models re coordination problems in the first place, but that would be hasty.

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