Evolving thinking on retro funding

https://www.loom.com/share/7c1cd5d2f196419b8e3b6573888d37ab?sid=458341f8-05ed-4829-bb4e-35a0709fb6bd

Exploring Retro Funding and Builder Incentives in Optimism's Ecosystem

In recent discussions around decentralized governance and builder incentives within the Optimism ecosystem, retro funding emerges as a key mechanism driving innovation. For those unfamiliar, retro funding is a novel approach designed to attract top builders to work on solving critical problems within the Optimism network. The idea is simple: reward past work that contributes to the growth and success of the ecosystem. But in practice, retro funding is multifaceted and continually evolving, presenting unique challenges and opportunities for builders and governance participants alike.

The Purpose of Retro Funding

At its core, retro funding is meant to incentivize the best developers and builders to contribute to Optimism’s long-term vision. This vision, articulated as the "optimistic vision," calls developers to create the infrastructure for a new internet—one that is decentralized, scalable, and inclusive.

For builders, the retro funding mechanism serves as a growth engine. It is designed to attract talent to the hardest problems on the network by offering a compelling reason to contribute: the potential for meaningful financial rewards after the fact. But for retro funding to function effectively, the message must resonate with builders, and Optimism must maintain a healthy funnel that captures and retains top talent.

The Builder Funnel: Awareness and Self-Selection

Understanding the builder funnel is crucial when evaluating the success of retro funding. The first challenge is awareness: Do builders know about retro funding and its potential? While awareness isn’t a major issue at present, it could become more pressing as competition for attention increases during bull markets. As the ecosystem grows, the challenge will be maintaining visibility and ensuring builders are informed about how they can contribute and benefit.

The next hurdle in the funnel is self-selection. Builders must determine whether their contributions will be eligible and whether the retro funding mechanism aligns with their goals. While some may opt-out after reviewing eligibility criteria, others might apply regardless, hoping for the best. Over time, increased self-selection may actually be beneficial, helping to filter out projects that aren’t well-aligned with the goals of retro funding, thereby improving the quality of submissions.

Fair Evaluation and Respect Among Peers

Once builders are aware of retro funding and have submitted their projects, the next critical question arises: Will their contributions be evaluated fairly? This is a significant concern for many builders. Ensuring that badge holders (those responsible for reviewing applications) assess projects based on relevant criteria is vital for maintaining trust in the system. If builders feel their work is not being considered in the best light, it can create frustration and disillusionment.

Equally important is the mix of projects that make it into a round. Builders want to feel that they are competing with other high-quality projects that respect the spirit of the competition. Over time, rounds with clearer eligibility criteria and better-scoped categories will foster a healthier competitive environment. In contrast, rounds that include “scammy” projects or those focused on farming rewards undermine trust in the process.

Financial Incentives and Business Models

Retro funding operates in a space where the financial incentives for builders can vary greatly. For some, retro funding might represent a core part of their business model, while for others, it may be a “nice-to-have” source of additional funding. This distinction is important because if retro funding becomes dominated by teams that are solely reliant on it, the diversity of projects may suffer.

The amount of funding a project receives relative to its perceived need can also impact how the builder community perceives retro funding’s effectiveness. The sensitivity of this issue is evident—especially for projects that depend heavily on retro funding to sustain operations. Understanding how projects utilize their rewards, whether they reinvest into their ecosystems or liquidate their tokens for immediate survival, offers valuable insight into the health of the ecosystem.

Governance and Badge Holders

Beyond its role in funding innovation, retro funding is also a governance experiment. The mechanism hinges on a simple axiom: impact should equal profit. This idea, inspired by Optimism’s vision, aims to create a governance system where the people—referred to as citizens or badge holders—are united by a common goal: rewarding impactful contributions.

Badge holders play a crucial role in maintaining the integrity of the system. However, their tasks must align with their strengths. High-value decisions, like determining project eligibility or evaluating the potential impact of a contribution, should take priority over lower-value tasks such as spam detection. If badge holders are consistently tasked with menial work, they may lose motivation and churn out of the system, undermining governance.

Optimism’s governance model also faces the challenge of attracting and retaining the right mix of citizens. Ideally, governance should attract individuals with diverse skills and experiences who are motivated by the opportunity to shape the network’s future. A positive feedback loop—where badge holders feel their contributions are meaningful and rewarded—will help maintain a strong, engaged community.

The Economic Model: Forking Capitalism

Finally, the economic model underpinning retro funding adds another layer of complexity. Drawing from Optimism’s vision to “fork capitalism,” retro funding seeks to combine the best aspects of traditional economic systems with the innovations of decentralized governance. However, this is the least developed aspect of the retro funding system and likely the one that requires the most attention moving forward.

A sound economic narrative is essential for maintaining the long-term viability of retro funding. This involves ensuring that the revenue generated from sequencer fees and the treasury is sufficient to support continued retro funding efforts. Additionally, the supply and liquidity of OP tokens, as well as the motivations of those holding them, will play a significant role in determining the sustainability of the retro funding model.

Conclusion

Retro funding is a bold experiment in decentralized governance and builder incentives. By aligning impact with profit, it aims to attract top talent to work on the hardest problems in the Optimism ecosystem. However, to ensure its success, the system must continually evolve. This includes refining the builder funnel, ensuring fair evaluation processes, aligning governance tasks with badge holder strengths, and developing a robust economic model that supports long-term growth.

Ultimately, retro funding has the potential to drive meaningful innovation, but it requires careful attention to the incentives and motivations of all participants—from builders to badge holders to the wider Optimism community.

opensource-observer / oso