Is Kickstarter an assurance contract?

Yes. Kickstarter is the best-known assurance contract: pledges are only collected if the campaign reaches its goal. Economists also call this a provision point mechanism.

What is the weakness of an assurance contract?

It solves wasted money but not wasted waiting. Since backing early earns you nothing extra, the rational move is to wait and see if a campaign will succeed before pledging. If everyone waits, campaigns fail that everyone wanted to succeed. This is the free-rider problem.

What is a dominant assurance contract?

A dominant assurance contract adds a refund bonus: if the goal is missed, backers are refunded plus a bonus. That makes backing the rational choice regardless of the outcome. Pieces is built on this mechanism.

What Is an Assurance Contract?

Q: What is an assurance contract?

An assurance contract is a funding mechanism where people pledge money toward a goal, and the money is only collected if the goal is met by the deadline. If it is not, everyone is refunded. It assures each contributor that their money is never spent on a project that falls short.

An assurance contract collects pledges toward a goal and only takes the money if the goal is met, so no one pays for a project that never happens; Kickstarter made the mechanism famous.

An assurance contract is a simple, powerful funding rule: people pledge money toward a goal, and the money only changes hands if the goal is met by the deadline. Fall short and everyone is refunded. Economists also call it a provision point mechanism, and Kickstarter turned it into a household idea.

What the mechanism assures

The name is literal. The contract assures every contributor of one thing: your money is never taken for a project that does not reach its threshold. That single guarantee is what made crowdfunding work at scale. Nobody wants to be the only person who paid for a bridge that never got built, and an assurance contract makes that outcome impossible.

Where it falls short

An assurance contract protects your money, but it gives you no reason to commit early. Backing on day one and backing in the final hour cost the same and pay the same, so the rational move is to wait and see. Let others pledge first, watch the progress bar, commit only when success looks likely.

The problem is that if everyone reasons this way, the progress bar never moves. Projects with enough willing supporters die of collective hesitation. This is the free-rider problem, and it is the quiet failure mode of ordinary crowdfunding.

The upgrade: pay people to be wrong

In 1998, economist Alex Tabarrok proposed a fix he called the dominant assurance contract. Keep the assurance contract exactly as it is, but add one rule: if the goal is missed, backers are refunded plus a bonus. That bonus is called a refund bonus.

Now backing early is rational no matter what you believe. If the project funds, you get the thing you wanted. If it fails, you are paid for having shown up. In game theory terms, backing becomes a dominant strategy, which is where the mechanism gets its name.

Where Pieces fits

Pieces is a dominant assurance contract platform for digital content. Creators lock their work behind a funding goal, bonders stake the money that funds the refund bonus, and backers either unlock the content or walk away with more than they put in. You can read the full mechanism in how Pieces works, or see it side by side with the classic assurance contract in Pieces vs Kickstarter.