Proposed Mechanism : Secure Quadratic Assurance (SQA)
by Aryan
The Secure Quadratic Assurance (SQA) mechanism I’m proposing is a hybrid approach that leverages both Quadratic Funding (QF) and Dominant Assurance Contracts (DACs) to create a more proactive and secure capital allocation system. Here’s a deeper explanation of each stage and how the process works:
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Participation-driven Matching (Quadratic Funding Core)
- What happens? Projects that need funding invite community members to contribute. Each contributor’s donation acts as a “vote” for that project.
Quadratic Formula: The more contributors a project has, the more funds it receives from the matching pool. However, the total amount a project gets is not just proportional to the size of the contributions but based on the number of contributors (i.e., the broader the participation, the better).
Example: If Project A receives $100 from one large donor and Project B receives $100 from 10 smaller donors, Project B will receive more matching funds. - Purpose: This amplifies the influence of smaller donors and creates a funding process that reflects community support, not just large capital injections.
- What happens? Projects that need funding invite community members to contribute. Each contributor’s donation acts as a “vote” for that project.
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Assurance Layer for Security (Dominant Assurance Contracts)
- What happens? Before any funds are allocated, the system sets a participation threshold that a project must meet in order to be fully funded.
- Assurance Contract Mechanism:
- Contributors pledge their funds with the understanding that they will only be deducted if the project meets the set threshold (e.g., a certain number of contributions or a specific funding amount).
If the project fails to meet the threshold, all contributors are refunded**—but with a small **bonus (e.g., 5%) on their original contribution. This bonus could come from the project itself or the matching pool as an incentive to participate.
Purpose: The assurance layer ensures that contributors are more willing to fund projects because they are not risking their money on something that may not be viable. It increases trust and reduces the fear of failure.
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Encouraging Early Engagement
- What happens? To make the system more proactive, the SQA mechanism rewards early contributors.
- Early contributions get a multiplier effect, meaning they either:
- Receive greater matching pool bonuses (i.e., their funds get an extra boost in matching, making early support more valuable), or
- Enjoy higher assurance bonuses if the project fails to meet its threshold (i.e., early contributors get refunded with a bigger bonus if the project doesn’t take off).
- Why this is important?:
- It incentivizes people to act early rather than waiting until a project becomes popular. In many funding scenarios, projects can struggle to gather momentum, and early backers often wait to see how others act. By offering better rewards, SQA reverses that hesitation and encourages people to be the first to contribute.
- The multiplier encourages broader support earlier in the process, increasing the chances of meeting the funding threshold.
Example of the SQA Process:
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Project Announcement: A project (e.g., building a community park) is proposed, and a matching pool of $50,000 is made available through quadratic funding.
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Assurance Contract Set: The project requires at least 100 contributors, with a total funding goal of $10,000 to succeed. If this is not met, contributors get their money back with a 5% bonus.
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Community Contributions:
- Early contributors (first 50 participants) are encouraged to contribute because their contributions will:
- Receive more matching funds (multiplier effect), increasing the project’s funding.
- If the project doesn’t meet its threshold, they will get a 10% refund bonus, while later contributors would only get a 5% bonus.
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Matching Pool Distributed:
- If the project gets enough contributors (e.g., 120 contributors and $15,000 total raised), the matching pool is allocated based on quadratic funding rules. Projects with broader participation get more from the pool.
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Outcome if Threshold Fails:
- If the project only gets 80 contributors and raises $8,000, the project fails to meet the threshold. All contributors receive their original contribution back plus a 5% bonus, with early contributors potentially getting a 10% bonus.
Key Benefits of SQA:
- Security: Contributors know that if a project doesn’t reach critical mass, they won’t lose their money. The bonus provides further motivation to participate.
- Proactivity: The system is designed to encourage early contributions, which is crucial in getting momentum for funding projects. The multiplier effect incentivizes people to take action sooner.
- Democratic Funding: Quadratic funding ensures that projects with widespread community support, not just large donors, receive more backing.
All the mechanism flow and specific use case Dapp for this mechanism is shown here : https://excalidraw.com/#json=vP6S3-A0PO42Ego2yJKd8,uuU0Qw2DVdHi_gyMk_aHbA
Conclusion
The Secure Quadratic Assurance (SQA) mechanism creates a secure, democratic, and proactive capital allocation system. It’s particularly well-suited for funding public goods or projects in decentralized ecosystems where broad community support is needed and contributors need assurances against project failure.