A Successful Business Model for Open Source Development
How the Web3, NFTs, and DAOs could bring economic solutions for sustaining Public Goods and Open Source Software projects
In the last three decades, the adoption of the Free Open Source principles for Software Development (FOSS) has played a crucial role in the astonishing progress in our quality of life, as more people were able to appropriate for the means of intellectual production, shaping the evolution of the Internet and the way of how we communicate ideas and share knowledge.
All that progress has been possible thanks to the tremendous efforts in R&D in the fields of computer science and information technology, that some individuals and organizations have just given away mostly motivated by philanthropic causes contributing to the greater good in our society.
Such efforts require large investments that talented individuals, businesses, and institutions have to wage, and at the same time they need to obtain profit from those investments in order to continue to support the production of knowledge and free software. However, they're still facing serious challenges in collecting revenue from that intellectual activity.
That's why we need to develop better ways for funding FOSS projects, beyond charitable efforts and surpassing the limitations of the crowdfunding model. A new business model is presented in this article that provides economic incentives to investors that contribute to a commons project, and also ensures the freedom of use to the open source software with unrestricted licenses, encouraging an open environment for spontaneous collaboration and communication of ideas.
The Tragedy of the Commons
Certainly, the Open Innovation methodology is the most effective way of coordination for organizations, allowing a heterogeneous group of volunteers to contribute with their effort and dedication for a common goal. People collaborate for free but are very concerned about getting the right solutions to problems and gathering accurate information on their investigations. They don't pursue profits when dedicating their effort to contributing to a knowledge field, but they're moved just for curiosity and passion for learning.
However, the open innovation method doesn't guarantee reliable results as the open source software suffers from the lack of quality assurance, since these tasks are done voluntarily by exceptional individuals that occasionally could dedicate their time and effort.
From a long-term perspective, every intellectual work that is shared across the Internet becomes a public good soon or later. This could be good for the community of users, helping to the improvement of those intellectual goods thanks to the collaborative efforts in an open innovation framework. But for creators, this could complicate the financial sustainability of their projects, when facing the impossibility of charging users a payment for accessing that content. This is mostly known as the Free-riding problem: Who would pay for something that others could get for free?
Despite the free access to digital content and the abundance of intellectual works in the current digital environment, there are very few talented individuals able to innovate and contribute to our digitized intellectual heritage.
Also, we have to consider that when someone creates something of great value and quality, usually won't like to share it for free, but would want a fair compensation in return. This shows that there is a huge disparity between the abundance of intellectual goods whose market value cannot be matched against the scarcity of talented individuals capable of making them, pointing out a serious market failure.
At the same time, big companies and important institutions use FOSS in mission-critical applications, putting at risk the security and reliability of basic services in diverse industries ranging from transportation, energy sector, public health, and banking. Moreover, the situation is even more troublesome concerning to the Blockchain industry, in most cases jeopardizing huge amounts of digital assets. This tells us that there is an urgent need for a consistent effort in quality assurance and maintenance for FOSS projects.
What happened with the Heartbleed bug and its derived vulnerabilities in the OpenSSL framework, is an exemplified cautionary tale that should aware people of the problems of not having enough financial resources for sustaining open source software initiatives, when the entire global digital economy is supported on a software infrastructure built entirely by volunteers, high skilled professionals who produce innovations randomly on rare occasions by unusual motivations.
If Open Source projects still depend entirely on charitable efforts for their sustainability, then it would be more difficult to achieve consistent quality assurance, as IT professionals would likely be more motivated to abandon those projects just for attending to their urgent economical needs. The donations model cannot be scaled enough to provide continuous revenue as required to maintain a group of professionals entirely dedicated to a free software project.
While Institutional grants are very limited and assigned only for the most renowned projects, other independent projects would require tremendous efforts in PR for raising funds in crowdfunding campaigns, often incurring in wasteful social media strategies just for obtaining followers. As these campaigns often require exaggerated promises in order to achieve popularity, developers would end up breaking the confidence of their investors when the final outcome of these projects failed to the public expectations.
As Aaron Stannard pointed out in this article, open source developers cannot perform the marketing roles often required for the donation campaigns, and at the same time working entirely on maintaining the software and solving its technical issues. This problem is getting worse as donations are becoming more scarce while requiring to hire more individuals for helping in the diverse tasks related to the project. He says:
"The size, importance, and visibility of your OSS project would need to be tremendous to bring in that many donors. The amount of effort you’d have to spend on just promoting your project to get that many donors is another full-time job in and of itself. Are you willing to put that much time in for an extra $3,365.38 per month? Probably not. This is why I ultimately think the donor model for OSS sustainability is doomed - the numbers don’t scale."
And even if the crowdfunding campaigns achieve success, the amount collected wouldn't last long for maintaining the software project in the long term, as more cases of former open source projects that ended in adopting a proprietary model become more frequent. Recently, the developers of LiveCode announced that will abandon the open source model for their product and will start selling their software with a proprietary licensing, despite having achieved their financial goals in a successful Kickstarter campaign. In this article, Kevin Miller expressed "It wasn't anywhere near our annual revenue even in that one Kickstarter campaign,"
Also, we've seen FOSS projects reducing the quality of their software and incorporating intrusive functionality as desperate attempts for extracting value from users. In the year 2012, Canonical Ltd caused great controversy within the Linux community when introduced Amazon-affiliated advertisements in the main menu from their Ubuntu Linux Distribution, causing privacy vulnerabilities and leaking personal data. In the same fashion, the Audacity software featured private data collection in its last release from 2021, outraging longtime users and causing alternative forks of the software development by removing the "Telemetry" feature.
Those attempts of extracting value from users, and the lack of interest from companies on maintaining the principles of Free Software, raise concerns for the viability of the Open Source practices in the future of the IT industry. If this trend continues, it could endanger the freedoms of the Internet users as more institutions encourage governments for passing legislation in defense of the copyright legal protection, just for retaining the value of their Intellectual Property and protecting their economic interests.
The question is, why do companies insist on enforcing a copyright system that causes more harm than good? It just doesn't offer better incentives for authors for increasing the quality of their works; instead, causes more friction with users by hindering collaboration and the sharing of ideas. And as it couldn't become worst, authoritarian initiatives like Article 13 from the EU Parlament endangers all the technological progress achieved from the last decades threatening to destroy the fundamentals of the Internet.
The Paradox of Value
The lack of interest in contributing to Open Source Software is due that companies already see innovation as a double edge sword: As they recognize the need for R & D for improving their production processes and being competitive in the market, also such knowledge could help their competitors for free at expense of the already waged pioneering efforts, thus threatening their own business opportunities. That's why capital investors are always looking for an unfair advantage when providing funding to new tech-based start-ups, such as legal protection of their original inventions and unique knowledge via patents and copyright. In short, the message from VCs to entrepreneurs is clear: No IP = No Funding = No jobs.
This struggle that companies face when cultivating innovation and at the same time willing to protect their investments in intellectual property, results in a conflict of interests with their talented employees, as they become less motivated to contribute with their own ingenuity and expertise on improving the knowledge base for the company. This poor management of the knowledge production and the lack of recognition to their engineers could be one of the decisive factors in the recent shortage of professionals in the IT job market.
This economical situation also frustrates any entrepreneurship initiative from engineers when they try to offer their innovative solutions to the market, despite the increasing demand. Their raising fears on failing to protect their work against big corporations is well expressed in this article from Ben Thompson about the economic realities of Open Source. To summarize: if you give your secret sauce away for free, and it gets popular enough, cloud providers will inevitably spin up competitive services using your very own code against you.
For all the reasons mentioned above, it’s urgent to find a solution to the economical problems in Open Source development. This solution must offer incentives to investors and at the same time guarantee the freedom of use and collaboration for its users and motivated developers. The big question is: How to align both interests, the economic and the ethical, that apparently are in contradiction?
This is a kind of paradox comparable to the "Diamonds Vs Water" problem in the classical theory of Economics, of why diamonds are more valuable in the market despite that people need water for living. In our modern era, this paradox could be translated to the problem of knowledge production in the digital world, where the rapid diffusion of intellectual content could improve the quality of living for people and the competitiveness of companies. But when becoming abundant by its accessibility, its price reduces to zero and erases the future returns for the company that initially invested in developing that content.
That could be interpreted as a voluntarily self-imposed sacrifice, as these companies tend to cannibalize their own benefits when investing in science and technology. In competitive terms, it just means losing for helping others to win the race.
Understanding this paradox is key for developing a proper solution to the economical problem of funding Open Source projects, and any kind of digital creation in general. This solution shouldn't rely on any kind of scarcity imposed on the access to digital content; instead, it should increase the revenue to developers as more users get benefited from that software.
Also, it should offer value returns to the investors that contribute with funds to the FOSS project. These returns couldn't come from the consumption of the digital media, but instead, it would rely on the partnership to the project. Hopefully, with the tools of the blockchain technology and smart contracts, now it's possible to develop a clever solution that solves that paradox of value: For example, by tokenizing a digital representation of memberships to a Decentralized Autonomous Organization (DAO).
NFTs and the Collectors Mindset
In the year 2021, the market of Non Fungible Tokens (NFTs) exploded, raising more than $10 billion traded in the last quarter of this year. This situation has been recognized as a successful application of blockchain technology as it allows registering and transferring digital assets, those that could represent digital designs, music, articles, essays, memes, and gaming-related items.
The remarkable killer application of this kind of technology has been debuted in the visual arts market, as NFTs allowed the exchange of digital images and short animations with artistic value, where supposedly each piece has a subjective valuation for the collectors that are willing to pay any price just because they manifest a sentimental appreciation of the art. On this matter, the collectors don't expect to own the digital content represented in the acquired NFT (as this only contains metadata related to the digital art) but instead, they pay for a digital certificate of ownership emitted by the artist.
This kind of market is prone to favoring speculative behavior for investors, as they estimate the potential future valuation of NFTs depending on the uniqueness and rarity for each piece, expecting that there would be someone willing to pay more for that piece in auctions. The successive resale of NFT pieces stimulates a dynamic economical activity, where speculators obtain profit from the practice of "flipping" (a term referring to the activity of resale an art piece by a greater price to the next collector).
Given that economical success, many see the NFT marketplace as a promising solution for funding intellectual works, learning materials, and open source software. However, some fundamental aspects in the NFT market make it difficult for applying its principles to non-artistic intellectual works that instead possess intrinsic utility value. These are:
The lack of price signals in the art market, since it's not possible to determine the true value of an art piece as its demand depends on the sentimental appeal to the interested collector. In contrast, the demand for FOSS products could be measured as to how their functionality provides utility to their users. NFT marketplaces cannot reflect that discrimination, as it treats all artistic creations as the same no matter how much work was required to produce them.
With artistic NFTs, it's possible assigning exclusive ownership of a particular art piece to a particular collector. With FOSS, the ownership status is unclear as many users demand the services that the same product provides. Whoever acquires a license to the right to use the software, won't like to exchange that right to others as demand increases.
The market success of an NFT art piece is linked to the popularity and the celebrity status of the artist, that in most cases perform the role of influencers in social media. FOSS projects simply respond to technical criteria and objective results, so cannot manifest sensational appeal in order to attract users with provocative content. Also, as FOSS projects are usually maintained by the collaborative efforts from multiple authors, it's not ethical to link their market value to the popularity of their highlighted members and diminish the merit for the rest of the contributors.
Artistic creations come to existence once, and will be preserved unaltered in their lifetime. In contrast, FOSS products have to be adapted and maintained continuously over time, as they evolve with their users' experience while improving their functionality and fixing their failures. Software products require constant funding for hiring specialists in their maintenance.
FOSS products quality is variable and can be measured constantly over time as users' experience determine the level of satisfaction that the software provides to them. So their utility can be evaluated and their demand is affected in consequence. That's why a subscription model is more well suited with software products as they provide a service to their users. NFTs just cannot capture value continuously for preserving that relationship between the software project and its users along time.
At last, the subjective market appreciation of NFT artistic pieces relies on their Authenticity and the expectation for future valuation as owners expect to sell them to future collectors at a higher price. With FOSS projects, their valuation depends on the Prestige, as developers struggle for maintaining a reputation oriented towards the excellence of their performance, always looking to offer the best solution to a problem, and the best way to satisfy the needs of their users.
For the reasons mentioned above, a proper solution for FOSS projects would consist of structuring an organization around the development of the software, which facilitates the exchange of ideas and encourages collaboration for the community members committed to the betterment of the software.
Also, those who invest in the FOSS project should obtain an economical benefit that doesn't depend on the expectation of future valuation of their investment, but by providing another kind of intrinsic value instead: F.E. special perks that only the partners would receive from their investment in the project.
That kind of organization is what DAOVOTION features with the Egregore concept. The principle of the Egregore as a business organization consists of manifesting the value of communal ownership around the maintenance of Open Source software, or any Intellectual Work in general.
The Honorable Bonding of an Egregore
An Egregore is Decentralized Autonomous Organization (DAO), focused on collecting funds for sustaining the development of a particular Intellectual Goods Project, which can be an Open Source Software project. The most fundamental aspect of an Egregore is that it represents the consolidated will of a group of individuals towards a common goal. Members of an Egregore look after the project’s well-being and manifest a sense of belonging for the commonly shared patrimony, as the Egregore offers support and welfare to its members in compensation.
A carefully designed Tokenomics is key for granting a FOSS project the ability to offer value to its investors. DAOVOTION establishes a set of rules to incentivize an accountable behavior for both investors and developers by their association to an Egregore created for supporting a FOSS project.
Investors of an Egregore adopt the role of Devotees; those can be considered sponsors with honorable behavior. They look after Egregores that represent FOSS projects with a good track of quality and utility offered to its users. The good performance of the project and the honorability of its members is what provides a good Prestige Score to an Egregore.
From that score that represents the reputation of the Egregore, Devotees obtain the intrinsic value from their investments. This Prestige Score grants a derived reputation value to a Devotee Token, which is considered a collateral asset that can be staked in services that require insurance. For example in DeFi applications, a Devotee Token can be staked as collateral for lending. Another use case could be securing Oracles that provide accurate reporting in Prediction Markets applications, which means that Devotees could earn money by staking their tokens for information assurance services.
Also by possessing a Devotee Token, investors are entitled to sell new Devotee Tokens to interested clients that want to become members of the Egregore. In that way, Devotees act as brand ambassadors and sales agents for the Egregore, while providing funds for supporting the labor of developers in a FOSS project. From this activity, as Devotees recruit new members into the organization they'll earn commissions from each token sale.
For testing the truth about the health of the projects, DAOVOTION establishes a system for evaluating the efforts in maintaining a good quality track in FOSS and Intellectual projects. With Arbitration Trials, Devotees from other projects could act as Jurors and deliberate against a particular Egregore. Its Prestige Score is affected when Jurors evaluate how good or bad are its developers maintaining the quality of the project, and how they're responding to the demands of its users.
From these trials, developers feel the pressure for providing good quality content and pursuing excellence in their efforts, and Devotees become aware of the value appreciation from their investments in the project. Arbitration Trials motivates Authors (developers) and Devotees (investors) in working consistently on improving the quality of their productions. Also, they’d be willing to invest more money and effort in correcting issues that affect the user’s experience.
Because the historical performance of the Egregore's Prestige Score is tracked in the blockchain, any interested party could analyze how Authors (developers) are committed to the fulfillment of the community expectations about their Intellectual Goods development, but also shows the degree of shared responsibility that Devotees perform when honoring their contractual obligations from DeFi applications.
In that way, DAOVOTION Tokenomics stimulates a healthy competence between Egregores, nurturing a dynamic market where Authors and Devotees join forces in maintaining a good reputation for their Egregores and pursuing excellence in their quality efforts, just for offering the best possible value to its users. Egregore members are encouraged to think ahead and make the right decisions for their projects, as they're aware that those Egregores with higher Prestige Score are more attractive to potential investors that are just looking for good quality collateral.
Closing Thoughts
With the introduction of the Egregore as a new concept for business organizations in the digital world, DAOVOTION solves the market failure problem that affects FOSS projects. This economic model bestows value to Intellectual Goods, both social and economic, while allowing them to become freely accessible by the community of users.
By designing clever incentives for all actors involved in the creation of a digital ecosystem, DAOVOTION helps to develop a balanced market economy where creators, consumers, and investors get all the advantages for their entrepreneurship growth. Also, it encourages the pursuit of excellence in digital arts, software development, educational material, science, and knowledge building. Fostering a healthy competence between innovative projects.
The implementation of the DAOVOTION system will demonstrate the real potential of the Web3 and decentralized blockchain technologies in the Software Industry, leading to a drastic transformation in the way that IT business and knowledge-oriented organizations generate wealth.
In the near future, as more software companies move in the direction of the Web3 ecosystem, they will abandon the copyright model and adopt free open source software practices for integrating their products in decentralized computing networks. Companies will no longer be afraid of innovation, and will encourage the free sharing of knowledge as the Egregore model allows them to capture economical value from their investments in science and engineering research projects.
Sooner than later, those companies will discover that empowering users and granting them ownership of the system via digital assets markets, yield better economic benefits for them rather than trying to enforce control over their platforms, making the old paradigm of the Web2 and centralized cloud computing obsolete.
The idea of empowering users and fostering innovation is the essence of the upcoming Metaverse, and we all were wishing to make it a reality. I personally believe that, if a company like Epic Games takes a leap of faith towards the Web3 by giving away its most valuable technological asset, more big companies will follow that trend towards decentralization.
I'm talking about releasing the Unreal Engine under a Free Open Source license, so it could serve as the technological basis for constructing the Metaverse based on free protocols just like the World Wide Web was founded. That was the motivation why I started a campaign in Change for convincing Epic Games to take part in that adventure. (I would appreciate your support by signing the petition).
At last, I recommend checking the site NebaiRevelations for getting more information about how you could get involved in the construction of the DAOVOTION platform. Also feel free to discuss these ideas in our Discord channel.
Best regards,
Nebai Leon, CEO of the Nebai Revelations project.
Website : https://nebairevelations.com/
Twitter: @NebaiRevelatio1