Assurance Contracts

An assurance contract is a type of agreement where individuals pledge to contribute resources (usually money) toward a collective goal, but only if a predefined threshold of contributions is met. If the threshold isn't reached, no one is obligated to contribute, and any pledged money is returned. It's a mechanism to solve coordination problems where people are hesitant to contribute unless they’re assured that enough others will also contribute to make the effort worthwhile.

Why it's powerful:

1. Coordination Problem Solved: It ensures that no one is left contributing alone to an underfunded project. It aligns incentives by guaranteeing contributors that their funds will only be used if enough support is gathered.

2. Risk Reduction: Contributors face lower risk because if the project doesn't reach its target, they don't lose their money.

3. Incentive to Participate: People are more likely to pledge because they know their contribution will have a meaningful impact only if enough others join in.

4. Efficient Public Goods Funding: Assurance contracts are particularly useful in funding public goods (which are typically underfunded due to free-rider problems). By guaranteeing that projects only go forward if there is enough collective support, they encourage wider participation.

Who is using it?

1. Crowdfunding Platforms: Platforms like Kickstarter or GoFundMe use a similar model (often called "all-or-nothing" funding). A project only receives funding if it meets its fundraising goal, which is a form of assurance contract.

2. Blockchain & DAOs: Cryptoeconomic systems use assurance contracts to fund public goods. Optimism's Retroactive Public Goods Funding uses a variation where people can vote to fund projects that have already demonstrated value. Other blockchain initiatives may use assurance contracts for decentralized fundraising efforts, like Gitcoin's quadratic funding rounds or DAO-based treasury management.

3. Public Goods Projects: Assurance contracts can be used to fund initiatives in open-source software, journalism, and environmental efforts, where individual contributions toward a collective goal are needed but won’t occur unless a sufficient group participates.

4. Local Government Projects: Some municipalities experiment with assurance contracts to fund local projects where a certain number of people in the community need to commit before the project proceeds.

It’s a powerful tool for addressing the classic coordination challenges that arise when trying to fund or create public goods, and it is gaining traction in decentralized communities and blockchain ecosystems where collective decision-making and funding are critical.