In this article, we explore the importance of funding open source development, existing funding mechanisms, and the trade-offs they bring. We apply the research results to Bitcoin and the broader cryptocurrency field. We analyzed how the past bitcoin development was funded and how it might develop in the future.
Modern digital infrastructure basically runs on open source software (OSS), but most people may not know it. Like physical infrastructure such as roads or bridges, this infrastructure needs to be maintained in the form of upgrades, bug fixes, and other improvements.
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In 2014, when Google researchers revealed an important vulnerability in OpenSSL, the world had some insight into the potential threats posed by poorly maintained digital infrastructure. OpenSSL is a popular password code library that securely transmits sensitive content such as passwords and credit card information. More than 66% of the world's servers use it. The "Heartbleed" vulnerability allows an attacker to steal information via OpenSSL. Soon after, the Shellshock vulnerability in the UNIX-based command-line tool Bash allowed an attacker to remotely access and execute arbitrary code on the victim's computer.
These loopholes, which have not been discovered for many years and are being used on many occasions, have sounded the alarm for the technology industry.
Funding for development
Billions of people rely on digital infrastructure, which means we must pay special attention to it. However, the reality is exactly the opposite. Open source software is very popular with users, but it often causes problems during maintenance. There are historically lacking funds for open source software for several reasons.
- First, it is difficult to build a sustainable business model around open source software development because the software itself is not proprietary.
- The form of donation of donations is plagued by the “tragedy of the commons”, in which developers pay for it, while others simply want to use the software for free.
- Prior to this, it was not possible to monetize at the protocol level without preserving access without permission. This situation may change with the emergence of native digital payments such as cryptocurrencies.
- Finally, the public lacks awareness of the risks posed by poor maintenance. This situation changed after the outbreak of Heartbleed and Shellshock.
All funding is unequal
One of the most important attributes of an infrastructure is reliability. To attract higher-level applications, users and businesses need to ensure that current core functionality is maintained. This can only be guaranteed if the development process itself is not affected by special interests and the interests of the users are put in the first place. Therefore, the fundraising mechanism itself must meet these goals. Risks resulting from poor governance and funding mechanisms include:
- Centralization of power: If development is funded by only 1-2 entities, they will gain tremendous power in the direction of development. They can fund the proposals they like, and they can also hold funds for proposals they don't like.
- Moral hazard: Similar problems arise when employees of companies with a profit-making purpose maintain open source software, especially if the company is an active user of the agreement. Developers put the interests of employers above the interests of other users, and let commercial interests drive the direction of development.
- Protocol hijacking: An attacker could introduce malicious code into the protocol.
- The malleability of the agreement: If the agreement is too malleable for change, this opens the door for lobbying and political activities that want to shape the direction of the agreement into a party that is good for itself.
The Bitcoin network is also a form of digital infrastructure that must be maintained and refined. In fact, Bitcoin may require more urgent continuous improvement because it is an attractive target. First, Bitcoin allows users to store wealth outside of the traditional financial system, thus attracting powerful enemies. In addition, attacking Bitcoin is easier to profit because stolen Bitcoin can be sold and attackers can also short bitcoin on the derivatives market.
Therefore, it is important that Bitcoin development have incentives that are consistent with the goals of the protocol and its users. In this article, we'll look at the support and funding models behind Bitcoin, how this funding evolved, and what will happen in the future. We will also study the best structure after minimizing negative results.
Exploration of funding mechanisms
Currently, volunteers are the most common contributors to open source agreements. They don't get direct monetary rewards for the contribution and maintenance of the software, but there may be other motivations, including the establishment of skills and reputation, ideology reasons, or just passion for contributions.
OpenSSL is an open source software maintained by unpaid volunteers. Due to the panic caused by Heartbleed, a group of technology companies recently launched a program to fund important open source projects. Another example is bitcoin, and Nakamoto is the first to bear the brunt. It was not until 2012 that Bitcoin developers began receiving external funding.
The volunteer model has many advantages. First, the lack of funds tends to attract missionary-like developers who are truly passionate about the project and maintain a long-term strategic vision for improving the software. Second, developers in this model are more inclined to collaborate and are more willing to work with others. The entry barrier is also lower – all developers can understand the software and submit a pull request.
However, there is also the risk of developer loss, and there are not enough developers willing to work without direct compensation. Whether it's exhaustion, lack of time, or loss of motivation, developers can't make contributions indefinitely, and as software evolves, it can be difficult to expand the developer community. In addition, most open source software does not rely on formal structures or entities to operate in a "marketplace" manner, with many different developers independently reviewing and submitting requests. Ethereum has been criticized for not having a direct, centralized development approach, and Fred Wilson believes that “the decentralized approach to development used in these projects is not suitable for setting deadlines and delivery dates.”
Sponsorship is another common form of support for open source software projects. In this model, companies and individuals can donate to non-profit organizations, and non-profit organizations allocate funds to developers or pay directly.
Companies like Microsoft and Google are major contributors to the Linux Foundation, a non-profit organization that hires developers to develop Linux kernels on a full-time basis. Stripe also has an open source project that provides grants and support for many open source software, from machine learning to databases to infrastructure.
Sometimes, such support and funding are unconditional, and sometimes there are some minor requirements for prioritizing which features. Nonetheless, all the sponsorship models have in common that donors benefit from the long-term health and sustainability of the software.
The biggest benefit of the sponsorship model is that they often align the interests of donors and developers. If the project creates a lot of value, the companies that build on it will be motivated to continue funding these projects. In addition, missionary developers now have the resources to make long-term contributions. Finally, the software itself has no commercial benefits and does not directly draw fees from the software itself.
If the number of sponsors is small, problems will arise. The more a project's continued development depends on an entity, the more they can influence the direction of the project (regardless of whether this power has been exercised).
Despite this, the sponsorship model is still a relatively mature funding model that has been successfully applied in many open source software. It can be a powerful fundraising tool that coordinates the interests of all stakeholders and ensures that it is maintained over time.
In this model, a for-profit company helps customers running open source software through installation, maintenance, and support. In addition, companies can profit from commercial applications built on top of this agreement (for example, Gmail built on SMTP).
For example, RedHat is a company that provides services, training, and support for Linux. It simplifies the interaction between the enterprise and the Linux kernel and speeds up the development and use of the software. In the bitcoin space, the profit-making company Blockstream focuses on realizing product realization using Bitcoin blockchain, including Liquid sidechains, mining, data access and more.
If these business applications are able to stand on the market, this will be a strong source of sustainable funding. The company is very interested in the long-term success of open source projects and will continue to provide support and dedicated resources.
However, there are also doubts about the feasibility of this business model. Compared with companies like Microsoft or Apple, RedHat gets much less value from its services, and its success can be replicated by other companies. In addition, there is a moral hazard if the business interests outweigh the common interests.
Protocol layer realization
In terms of the realization of the protocol layer, a new fundraising mechanism has been added to the field of cryptocurrency. The most outstanding example is the rise of ICO.
The ICO process is to issue scarce tokens to act as local units of the network. In the original ICO model, funds will be collected in the form of contracts, and the ownership of tokens will be distributed according to the proportion of capital contribution. The project roadmap will set the allocation time of the funds, and the token holder will vote on the published funding schedule. If the original project sponsor is unable to complete the work that satisfies the token holder, the contributor can hire another team to complete. This can be combined with a proposal system that allows token holders to measure project priorities based on token weights.
In fact, most ICO sponsors today receive most of the revenue, as well as a large portion of token funds. In general, most ICO checkpoints and schedule-based structures are less than the original plan, which makes the token project more likely to fall into short-term thinking.
On the plus side, ICO has raised billions of dollars. This provides developers with a wealth of resources to develop protocols compared to the liquidation efforts of previous open source technologies. In addition, this funding model typically gives a strong mandate to a single company or development team to form efficient decision making and iteration.
Although ICO has attracted a lot of people so far, there are still some serious problems with the current ICO.
- Once developers receive tokens immediately after the network is launched, they may lack the motivation to develop and maintain software. Some token projects, such as Zcash, hope to alleviate this problem by providing ongoing incentives to protocol-level developers. This kind of reward can be implemented in the form of inflation – this is usually part of the issuance plan, which can automatically reserve funds to cover development costs or charge for transactions. Providing rewards ensures long-term consistency of incentives, as the value of rewards will depend on whether the blockchain operates healthily.
- Financing through ICO tends to focus power on a few developers, making it difficult for outsiders to make meaningful contributions. In addition, volunteers have little incentive to work for a project free of charge when others are paid.
- Finally, a centralized company or foundation can easily become the focus of a dispute or the goal of legal review. ICO Tezos, launched in 2017, raised more than $200 million, and the controversy surrounding the control of funds lasted for a year. Telegram has made billions of dollars in financing in 2018 and is currently targeting the SEC by issuing unregistered securities to investors.
In summary, the realization of the agreement has been a common method of funding open source cryptocurrency projects, but its long-term feasibility is still unknown. It remains to be seen how many uses of issued assets and whether regulatory barriers will prevent future applications.
Bitcoin Developer Funding History
Since the creation of the Genesis block in 2009, the development and support of Bitcoin has made great progress. In the first few years, it was maintained by Nakamoto and a handful of other volunteers. When Bitcoin began to spread and formed market prices, it also began to attract external developers.
By 2012, investors and external contributors began to realize the need for more organized support, so they created the Bitcoin Foundation. Its mission is to standardize, protect and promote the use of Bitcoin cryptocurrencies for global users, including Gavin Andresen, Charlie Shrem, Mark Karpeles and Roger Ver. For a while, the foundation played an important role in the ecology and even paid for multiple core developers, such as Gavin Andreesen and Wladmir van der Laan. However, by 2015, the foundation’s funds had been exhausted.
In this case, the Massachusetts Institute of Technology Digital Money Program (DCI) began to support Bitcoin. DCI was founded in 2015 with the support of the MIT Media Lab and received support from Andresen, van der Laan and Cory Fields. In 2016, they announced the launch of a $900,000 Bitcoin development fund that attracted several large exchanges to make donations. Since April 2015, developers working with DCI support have taken up 14% of Bitcoin Core code.
Over time, other organizations that support Bitcoin have emerged. A group of developers, including Gregory Maxwell, Pieter Wuile, and Matt Corallo, created Blockstream, whose mission is to improve Bitcoin Core and build support services such as data services and sidechains. Blockstream has received a $90 million VC investment, and its employees have made significant contributions to Bitcoin, from a large number of improved protocols (BIP) and research on SegWit, to confidential transactions, password code libraries libsecp256k1, and lightning networks. .
In 2014, Alex Morcos and Suhas Daftuar created Chaincode Labs, another important non-profit organization dedicated to supporting Bitcoin. Chaincode focuses on the development, review, testing and maintenance of Bitcoin software and has trained many aspiring developers. Contributions contributed by developers supported by Chaincode include cost estimation algorithms, Fibre networks, and BetterHash.
An interesting development in funding Bitcoin development is that by actively supporting development, holders can get “reward” from the agreement itself. The continued health and maintenance of the agreement is beneficial to the long-term price development of Bitcoin and is economically beneficial to the owners of Bitcoin. In this way, the “donation” of support and development of Bitcoin can be seen as an investment to increase the value of Bitcoin held by itself. This dynamic is different from donating to a project like Wikipedia, which has much more to offer to donors.
In addition to the examples mentioned above, many other organizations directly or indirectly support the core development and maintenance of Bitcoin. Bitcoin companies such as Xapo, Bitcoin and Coinbase rely on the healthy development of Bitcoin and have supported developers in the past to focus on improving and maintaining agreements. Bitcoin Optech, a non-profit organization founded in 2018, has done a valuable job in driving the spread of Bitcoin expansion technology, including SegWit, volume trading, cost estimation, coin selection and lightning networks. Financial technology company Square recently announced Square Crypto, which now employs six developers focused on Bitcoin and Lightning Networks.
Overall, since its inception, efforts have been made to improve the size and quality of Bitcoin's resources. There are a variety of organizations, from non-profit organizations to colleges to large technology companies, whose clear mission is to contribute to Bitcoin. The diversity of contributors ensures that no organization has too much influence on the agreement, which is a sign of the maturity and maturity of Bitcoin from a niche open source software to an important digital infrastructure that millions of people can rely on.
Future Bitcoin Development Funding Road
If the Bitcoin ecosystem continues to expand, the number of companies and individuals interacting based on the important infrastructure of Bitcoin will increase further. Once this happens, we expect the attention and resources for bitcoin development to increase.
At the same time, we are currently witnessing the birth of a higher level of independent ecology based on Bitcoin, especially the Lightning Network. In the past few years, organizations such as Lightning Labs, Radar, and Acinq have invested and started to develop and work around the Lightning Network Protocol.
Finally, we expect that the funds will eventually be used by software engineers.