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Common Goods Parachains in POLKADOT And The Free-Rider Problem

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Avatar for kevnag
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1 year ago

By way of introduction, the core of the POLKADOT system lies within its Relay Chain which is responsible for the interoperability of the network and the shared network security all while securing the parachains and parathreads within the protocol. This is accomplished by utilizing the hub and spoke model. The parachains exist as independent blockchains in the system which mint their own tokens and are customized to provide a specific individual use. Parathreads are even smaller than parachains which are models of blockchains operating on a pay as you go model. The beauty of this ecosystem lies with the bridges that allow the parachains and parathreads to connect with other blockchain networks such as Bitcoin and/or Ethereum. "Polkadot enables cross-blockchain transfers of any type of data or asset, not just tokens. Connecting to Polkadot gives you the ability to interoperate with a wide variety of blockchains in the Polkadot network." (https://polkadot.network)

Whereas the design space of blockchain systems is infinite, the Relay Chain within the POLKADOT system can only support a finite and limited number of parachains. Accordingly, to select which parachains can access the computing capacity of the Relay Chain, an on-chain auction is utilized where parachains bid and compete for the space through their willingness to lock up or bond DOT tokens for the duration of the lease. 

As such, the auction mechanism developed by POLKADOT does not work effectively for parachains that could be labeled as common goods. In economic terms, a common good is defined as: "goods that are rivalrous and non-excludable. ... whether the consumption of a good by one person precludes its consumption by another person (rivalrousness) whether it is possible to prevent people (consumers) who have not paid for it from having access to it (excludability)" [https://en.wikipedia.org/wiki/Common_good_(economics)]. How an ecosystem allocates such common goods creates a whole set of problems, one of which is the free-rider problem.

The free-rider problem is a type of market failure which happens when those who benefit from a resource do not pay for it. This is a problem to the system as those who are not paying for the common goods may continue to access or use it. As a relevant example every parachain team may believe that having a specific bridge in the system would benefit both their parachain and its users. If an individual parachain team makes a contribution to this bridge's auction there is an opportunity cost of losing funds that could have been utilized in their own auction. However, if this parachain team decides not to contribute, but enough other parachains do contribute, the non-contributing parachain may still employ the bridge in its operations. Because of the incentive to free-ride, the contributing parachains may end up with an insufficient amount of DOT to bond their auction bid. Therefore, the free-riders benefit from the bridge on the backs of the contributors.

This free-rider problem, although possible within the POLKADOT protocol, is easily avoidable. The governance process within POLKADOT's system can provision the common goods parachains and register the same outside the auction processes thereby bypassing the free-rider problem. Within POLKADOT, the Council and the Technical Committee are assigned the duty to direct discussions and on-chain motions within public referendums to accept or reject the registration of common goods parachains.

POLKADOT's governance system is evolving in this light to meet the needs of its parachains and stakeholders alike. Through the allocation and registration of common goods parachains, the entire POLKADOT ecosystem can experience the benefits of these useful common goods parachains that would otherwise be underfunded and likely absent due to the free-rider problem. So, beyond the auction process, the on-chain governance system of POLKADOT may additionally allocate parachain slots in perpetuity with no lock up or bonding of DOT tokens where the parachain benefits the system as a whole. 

I am merely an ordinary small investor who likes to share what I've learned and found interesting. Please take a few minutes and check out my other published articles. I am not in any way a financial advisor and as such, do your own research before investing. If you enjoyed this article please like it, comment and/or tip. Feedback is always welcome here.

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