From: Andrew Durham <yodrew@gmail.com>

Date: Sun, 26 Feb 2012 14:49:42 +0800

Message-ID: <CAP5m0mQvcHhxuJsboOTbsLbWodPTcictd0va+s2Z7EVfw1D2tg@mail.gmail.com>

To: public-webpayments@w3.org

Date: Sun, 26 Feb 2012 14:49:42 +0800

Message-ID: <CAP5m0mQvcHhxuJsboOTbsLbWodPTcictd0va+s2Z7EVfw1D2tg@mail.gmail.com>

To: public-webpayments@w3.org

Hi, My web search for web-based credit clearing systems (see "Alternative currency resources" thread) expanded to crowdfunding. I came across the Dominant Assurance Contract, proposed by Dr Alex Tabarrock, a mathematician, game theorist, and economist. It tweaks the Assurance Contract (aka, threshold pledge system) that Kickstarter is making famous. You are probaby familiar with the all-or-nothing nature of an Assurance Contract: if pledges fail to reach a financial goal in time, then pledgers keep all their money. With Dominant Assurance, "everyone who offered to contribute is given their money back *plus* a bonus. Thus contribution becomes the dominant strategy." See Dr Tabarrock's introduction here: http://marginalrevolution.com/marginalrevolution/2005/05/assurance_contr.html (contains link to PDF of his full presentation, which includes a formula to calculate the bonus.) While the math is way over my head, the narrative really got me thinking. What if strong supporters of a proposal could help fund the bonus pot? Dr Tabarrock liked this basic idea a lot when I sent him my proposal for it. Properly calibrated, its compexity (in comparison to its predecessors) could actually make crowdfunding more compelling than gambling. Here are the rules. Cooperative Dominant Assurance Contract 1. The proposer: - seeds the bonus pot with any amount of money - sets the maximum bonus rate between 100% and infinity in case of failure - sets the maximum profit rate in case of success. She can revise these rates upward until the campaign's deadline. 2. A contributor sets her bonus rate from 0% to infinity. Any contributor can revise her contribution upward and her rate downward until the proposal’s deadline. 3. A contributor with a bonus rate lower than 100% get the difference added to the bonus pot according to a bonus ratio, which she sets. This ratio determines how much of her contribution reimburses the proposer’s seed investment and how much increases the pot. 4. In case of failure, the pot is divided amongst contributors in proportion to their contributions and according to their final bonus rates. Depending on the variables, the proposer might retain some of the pot. 5. In case of success, contributors with average bonus rates of less than 100% are treated as investors who profit in inverse proportion to their average rate. 6. Contributors can make multiple contributions with different bonus rates. Thus someone with a really good idea but little seed money could still create an attractive assurance contract. Whole-hearted contributors (those with <100% rates) could profit from the risk of enticing the half-hearted (>100% rates ). The higher the maximum bonus rate, the wilder the game gets. It could be a spectacle of brinkmanship between the whole-hearts and half-hearts more compelling than a good craps game. Half-hearts would help attract attention to the proposal initially. Whole-hearts would help continue to attract half-hearts as the deadline approached. Of course, software would track variables, calculate totals, display graphs, and keep accounts in real time. Examples - Due to Rule 4, a sole contributor of $1 with an infinite bonus rate toward a failed proposal with an infinite maximum bonus rate would win the entire pot. - A second such contributor of $99 would take away 99% of the pot. - If the proposer set the maximum bonus rate to 110%, then the first would only get back $1.10 and the second $108.90, regardless of pot size. - Due to Rule 5, in a successful proposal with a 20% profit rate, a contributor whose rate was 60% for 10 days and 20% for 10 days would have an average rate of 40%, earning her 12% on her contribution (to be paid when the project actually profits). I’m pretty sure the rules are free of conflicts (though rule 6 might be redundant). I don't grasp the math. And I couldn't describe this with game theory or program it. But coming up with it was really fun. And it shows a variety of possibilities for future crowdfunding that creators of a new system might want it to be able to facilitate. Thanks for reading. Andrew -- independent researcher in philosophy, health, & design the darkness conjecture — http://andrewdurham.com 541.210.8470 vmReceived on Sunday, 26 February 2012 22:20:03 UTC

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