The Free Rider Problem (or, why I have a nice tree but still don't have a sidewalk)

Disclaimer: this is not an endorsement of any plan whatsoever. I do not endorse any current development funding plan. I am here to shine a light on an economic dilemma that we face. Lack of a good plan doesn't imply there isn't a problem that needs discussing.

A (mostly) true story:

Trees are great assets to property value. In my area, planting a $1000 tree can return a $10,000 - or more - increase in property value.

So back in 2001 after an old tree died, I planted a new tree in my front yard, where it looked best in my yard.

Little did I know, but my tree blocked by neighbor's view of the lake. Boy was she pissed!! She raised hell about the impact to her property value of losing her lake view, and not being a total dick, I agreed -- at significant cost to myself -- to have the tree moved.

But here's the thing. I live near a lake, and there's no shortage of trees where I live. It's practically a forest in places. What we lack, are sidewalks.

The neighborhood was built years ago as a lakeside cottage community, but has since heavily urbanized. Now, there is a tremendous amount of both automobile and pedestrian traffic sharing the same, narrow road. It's a disaster waiting to happen, and a lot of pedestrians walk through our yards, which nobody (the pedestrians included) likes. It's a clear problem, and everyone agrees: we need sidewalks. I'd happily have paid the $1000 I spent on a tree on a sidewalk instead.

The problem is getting everyone else to pay for their share of the sidewalk. Although everyone benefits equally, some people just don't want to pay their fair share.

So what to do?

Well, they argue, since I'm the one who wants a damn sidewalk so bad, I could just suck it up and pay for building a sidewalk down the whole street. But sidewalks are costly! If I were building a road, I could maybe charge a toll, but you can't charge a toll for a sidewalk because people can just walk around any barriers to entry I might set up. I'm a nice guy, but I'm not the neighborhood philanthropist.

So we hold a homeowner's association meeting, and it's suggested that we create a "neighborhood sidewalk tax" for the next fiscal year that will finance the sidewalk. Opponents cry "socialism" and "only a free market can provide quality sidewalks" and questioning who will be in charge of the shared funds. Even though everyone agrees that we'd all be better off with sidewalks, the plan fails.

So I end up with a tree in my front yard that benefits only me, and no sidewalk. It's been decades I've lived in this house, and there still isn't a sidewalk.

Bitcoin clients are like sidewalks

In this (mostly true) story, the sidewalk is an example of a shared public good that suffers from the "free rider" problem. It's an interesting example because it illustrates two different categories of free riders and the problems they cause:

1. the pedestrians who would benefit from a sidewalk, but have no incentive to pay, and who cannot be compelled

2. the homeowners whose properties would be made more valuable if they had a sidewalk, but who cannot achieve consensus on how to finance it

Pedestrians who use sidewalks are like end-users who want to use the investments in features and scaling but do not want to pay for the free open source software that they use. Homeowners are vested stakeholders in the value of the neighborhood, analogous to token-holders or invested miners.

Pedestrians get a better user experience if they have a sidewalk, just like cars get a better user experience if they have a paved road. With cars, however, it's possible to rent-seek by building a toll-road and making everyone who wants to use it pay a fee. This is like closed-source software that you have to pay to use. Sidewalks are like open-source software, in that it's basically impossible to rent-seek. And that's good, because nobody here wants "blockchain by Adobe." But, it creates the problem of free-riding users. In our space, as with sidewalks, we simply accept the fact that users are freeloaders and that's okay.

So this brings us to the category of stakeholders I want to focus on: the property owners themselves. Everyone invested wants the sidewalk (client software) to be of the best quality. We all depend on it, and furthermore, all of our businesses are better off the more robust this infrastructure is.

But consider a miner who invests his profits in client software development while his competitor invests profits in mining equipment. Sooner or later, the first miner will go broke, while the second miner will enjoy a nice, fully-featured client built by his now-defunct competitor. That's a pretty strong disincentive for any one miner to invest very much money in software development. This same dynamic can be applied to any stakeholder in the network. Anyone who invests significantly is made worse off, while at the same time making everyone else better off.

So instead of building sidewalks (shared infrastructure), which we need, we plant trees (neat features), which we didn't really need.

The free rider problem

Sidewalks and Bitcoin clients are textbook examples of the free rider problem.

In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or hospitals), or services of a communal nature do not pay for them or under-pay. Free riders are a problem because while not paying for the good (either directly through fees or tolls or indirectly through taxes), they may continue to access or use it. Thus, the good may be under-produced, overused or degraded.

It's been suggested that only a "free-market" solution can provide good results. If a company could come in and build a "toll sidewalk" then perhaps the problem can be avoided through privatization.

Here we have real-world experience to draw on.

We had a private, for-profit company invest in Bitcoin development once. They secured excellent funding, hired most of the best and brightest devs in the space, and put them to work developing the Bitcoin client.  They did exactly what any profit seeking company would do: they directed development in their own interests, in the way they saw fit: erecting barriers and seeking rents, just like any MBA student would tell you is the secret to profit maximization. That company was Blockstream.

Then, along came another for-profit company that also secured excellent funding, hired up many good devs, and put them to work on the Bitcoin (Cash) client. They also did exactly what any profit-seeking company would do: they erected barriers and sought rents. This company was nchain.

The problem with the "toll road" model of development is that it encourages a for-profit company to take a public good, and erect barriers and perform gate-keeping in order to maximize rent-seeking. What you end up with is a public-good-turned-private. You back yourself into "blockchain by Adobe" -- only in our case it's "blockchain by Blockstream" and "blockchain by nchain." That's not the outcome we want.

The classic solution to protecting the "public good" status of a public good is to support it through a "socialized" tax-and-spend program where everyone contributes equally to the public good that everyone uses. Another solution to the free-rider problem is the assurance contract. I hope to discuss these potential solutions in an upcoming article.

Thanks for reading, and please, remember: this is not an endorsement of any plan, merely a discussion of issues that we face.

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