Ethereum Protocol Guild recaps the highlights of its one-year pilot

Ending May 23, the Guild’s pilot project sought to craft a new core protocol development funding mechanism that would serve as a counterbalance to Ethereum Foundation and corporate donors.

Ethereum coin locked in a transparent box, art generated by Midjourney.

The Protocol Guild, a collective of 130 Ethereum core protocol contributors, took the limelight during EDCON 2023, sharing its approach to tackling two core problems in public goods provision: funding and coordination.

Initially conceived as a way to “boost the incentives around stewarding the core protocol,” the Guild since moved to a more ambitious goal. The collective aims to become a one-stop-shop for funding the entire core protocol, balancing the influence of centralized donors like Ethereum Foundation and ConsenSys, and, in the worst case, acting as a funder of last resort.

To grasp the significance of the new initiative for Ethereum’s protocol development, let’s first explore the concept of public goods, which is intrinsically tied to public blockchains.

Blockchains as a public good

Although the concept of public goods has been around since the dawn of human civilization, the economic research into it did not start until the 1950s, when economist Paul Samuelson defined a public good as a good with two distinct aspects: non-rivalry and non-excludability.

Non-rivalry refers to the characteristic of a public good where one person’s use or consumption of the good does not deplete its supply or reduce its availability for others. For instance, a public park can be visited by many people at the same time, without one person's presence preventing others from enjoying it as well. Other examples of public goods include clean air, roads, or even the free flow of information on the Internet.

Non-excludability means that it’s impossible to prevent individuals from accessing or benefitting from the good, regardless of their contribution to its provision. For instance, public parks are open to everyone, even for those who don’t pay taxes or engage in community work to keep the place clean and enjoyable.

In that sense, public blockchains meet the economic definition of a public good: they are permissionless (accessible to everyone) and scalable (can handle the increasing number of users without impeding the network’s performance), which are also the core tenets of the crypto space.

Why is it so difficult to have nice things?

The combination of non-rivalry and non-excludability creates a unique challenge for the provision of public goods, known as the free-rider problem. Since everyone can benefit from a public good, regardless of their individual contribution, it is possible for some community members to keep using the good while refusing to pay for it. As long as individuals have an incentive to consume public goods, this will lead to under-provision and degradation of resources.

If left to the market alone, individuals will ultimately — to everyone’s detriment — deplete the public good due to incentive misalignment and coordination failure.

This issue is particularly challenging for the crypto industry, where the narrative is often about token speculation and maximizing individual profits. If everything is about short-term gains, how do we coordinate the collective action around protocol development that often spans months or even years ahead of implementation?

Since innovation is hardly encouraged when the innovators can’t capture the economic benefits of their efforts, the obvious answer is proper incentives for the protocol developers. But how should they be allocated, and who would oversee the process?

Quest for the Second Foundation

“And, Ebling, there’s another, greater purpose. Hari Seldon founded two Foundations three centuries ago; one at each end of the Galaxy. You must find that Second Foundation.” Foundation, Isaac Asimov

Samuelson believed that non-excludability of public goods required government intervention for proper resource allocation. Indeed, this is how the free-riders problem is solved in traditional hierarchical structures: either by taxation and subsequent distribution of subsidies, or by turning public goods private and charging a fee for usage.

The latter option is obviously non-negotiable for permissionless blockchains like Ethereum. The former, which allows keeping the goods public, is also at odds with the principles of trustlessness and decentralization since it requires a trusted centralized entity to collect and distribute funds.

Currently, a significant portion of core protocol development funding for the Ethereum blockchain is coming from centralized sources, namely the Ethereum Foundation, a Swiss non-profit dedicated to supporting the network’s ecosystem, and ConsenSys, the leading Ethereum software company. Some financial incentives for devs are also offered by numerous other entities involved in Ethereum’s core protocol work, including client teams and research orgs. These entities have various business models for funding their operations, from consulting services to offering a set of complementary products.

According to Cheeky Gorilla, the Protocol Guild contributor, the current Ethereum governance model is “incredibly decentralized” but would nevertheless benefit from more resilience brought by the collective.

“We want to help make Ethereum as resilient as possible. To that extent, it helps to have many different funding channels and mechanisms that support Ethereum’s core protocol development. The Protocol Guild’s funding mechanism was designed with simplicity and stability in mind, and aims to distribute funding in a way that’s sufficiently fair, remains accurate over time, and retains Ethereum’s credible neutrality,” Cheeky Gorilla said in an email to Coinpaper.

“While it would be amazing if members could rely on the Protocol Guild as their sole source of income, the reality is that a lot more funding will be needed for that to be possible. So, the Protocol Guild does not replace whatever salaries these core protocol contributors are currently receiving. The Protocol Guild also does not seek to restrict membership eligibility based on existing compensation. In this sense, today, the Protocol Guild’s financial incentives can be seen as a “bonus” for members. But, assuming a large number of Ethereum projects contribute to it, it’s reasonable to assume that there could eventually be members who rely on the Protocol Guild as their sole source of income, who don't need to focus on monetizing their work, and can stay 100% focused on the public good that is building and maintaining Ethereum’s core protocol.”

The Protocol Guild post-pilot

The one-year pilot that ended on May 23 was well received by the community, uniting 128 Ethereum developers across more than 20 ecosystem teams and projects. At the time of the program, Guild members worked on, among other things, the Merge, proto-danksharding, EVM object finality, and ETH withdrawals. With $12m raised and $11m already distributed among the contributors, the Guild hopes to capture a larger mind-share across the community as the initiative matures.

For the Guild’s post-pilot rollout, the collective plans to raise $100m over the next four years from projects that rely on Ethereum, with an aim to normalize setting aside a portion of ecosystem revenues to fund core protocol development. At the same time, it will continue to crowdfund its activity via Gitcoin Grants.

“At face value, $100M does indeed seem like a large amount, but it’s important to contextualize that relative to the number of members and the vesting period,” Cheeky Gorilla noted. “Assuming 150 Protocol Guild members, vested over 4 years, $100M would equal ~$170K per member per year. Most people in PG could earn far more than 170k/yr by going to work on, say, L2s or applications.”

“One of our central goals is to establish the norm that all projects built on Ethereum donate 1% of their tokens to the Protocol Guild. The extent to which we can get this norm adopted will dictate the scale PG can reach. However, given that we’re still in the early stages of building this norm, it is likely that proactive fundraising will still need to happen, which will take the form of governance grant requests from entities in Ethereum’s ecosystem.”

Funds will be allocated to members via time-weighting: the longer a member's contribution period, the higher their share. The post-pilot plans also include changes to the Guild’s architecture, removing its trusted elements in V2.

“In V2, the onchain membership registry will be controlled by a Moloch V3 DAO, meaning it cannot be updated unless a quorum of Guild members approve the change via an onchain vote. In practice, membership was already chosen with the Guild, and not multisig, coming to consensus, but V2 will remove the trust element of “porting” that decision on chain,” said Cheeky Gorilla.

“Beyond that, our focus will remain on building the norm that projects built on Ethereum donate 1% of their tokens to the Guild, in support of Ethereum’s core protocol development. Even though we’re not there yet, it’s been incredibly humbling to see the widespread support from the ecosystem for Protocol Guild! We’re excited about sharing our mission as broadly as possible.”