This article explores the fundamental issues of grant systems and proposes strategic solutions inspired by successful models.

Tl;DR

• Grant programs suffer from centralization, administrative chaos, and misuse of funds, making them inefficient and ineffective.

• Web2 examples like AWS Activate show how strategic and specific funding can better support innovation and growth.

• Shift to funding critical needs like user support and infra, and implement matching investments with 'skin in the game'

• Audit grants, as recently used by Safe, show the potential for high ROI when grants are 'specific and strategic'

Growing Crypto Ecosystems

The core goal of a crypto ecosystem is to attract developers and builders to create new products and bring users to its protocol or infrastructure. While efforts in R&D, marketing, and developer relations can be measured, grants are obscure and difficult to quantify in terms of ecosystem contribution.

That being said, the success potential of crypto ecosystems is directly linked to the support it provides the protocols and startups building on top of it. Lack of support kills ecosystems. Just ask the EOS community which sued block one, and eventually forked away their tokens for not fulfilling their role. Or BlueDAO, which spoofed github commits to receive millions in grants, and later harassed builders from the ecosystem.

Crypto ecosystems have been iterating on this problem for a long time, with creative solutions that range from ecosystem funds and shared marketing efforts to grant initiatives like Retroactive Public Goods Funding (RPGF), Outcomes-based resource allocation (OBRA), and various other ‘long term incentive programs’ But how effective have these efforts been? The two largest ecosystems, Arbitrum and Optimism, have collectively given over $300 million in grants. Has this paid off?

To estimate potential impact of well-executed ecosystem support we can look to Web2 giants. AWS Activate program , for instance, provided over $6 billion in credits to more than 280,000 startups, including now-household names like Airbnb, Netflix, and Uber. This not only boosted AWS's reputation but also secured a loyal customer base.

The Reality of Grant Programs

In theory grants are great and having a grant program, even a broken one, is probably better than not having one at all. Grants help distribute wealth, increase the number of stakeholders and their diversity, and support varied and open contributions to the underlying protocol. However, today's grant programs face either of a few fundamental problems:

1. Centralization: Protocol leadership often controls the agenda and resources, opens up 'tasks,' hires teams, and pays them for the work... Wait isn't that freelancing? It is freelancing, just dressed as community support. While this is not inherently bad, this misses the core advantage of grants: permissionless innovation. Allowing any person or team to come up with novel ideas for the ecosystem.

2. Administrative Chaos: Current grant programs are overwhelming. Thousands of applications, unclear parameters, and loosely defined goals make it nearly impossible to understand what should or should not be funded. Delegates practically work full-time (mostly without compensation) to review applications which impacts their ability to judge properly. This can lead to delegates opting to favor projects that they know, or have been 'shilled' to them over researching into new proposals.

   

   Lefteris Karapetsas | Hiring for @rotkiapp

   @LefterisJP

   

   Hey guys who have open proposals for @OptimismGov mission intents
   
   Please stop emailing, DMing here, DMing in TG and discord asking to review your proposals
   
   I have already spent more than 8 hours in the last 3 days reviewing stuff. DMing me won't make me favor yours over others

   15

   4:13 PM • Jun 28, 2023

3. Misuse: When you give away 'free' money scammers will come to collect it. Grant programs constantly support 'grifters'—teams that excel at self-promotion but not at delivering well... anything. Optimism, for instance, has seen millions in Unused, lost or misappropriated funds, and that's just what was detected. Monitoring and accountability of these grant programs is an extremely difficult task, especially with pseudonymous identities that allow a lead dev at a protocol to request more tokens in a grant... to do his work.

We have to stop giving away free money, even if it's magical internet money, and move towards supporting builders and contributors of the ecosystem while minimizing administrative overhead, soviet bureaucracy, and opportunities for misuse.

Given these challenges, it's clear that the current approach to crypto grants needs reimagining. Let's explore how we can reduce uncertainty and increase the effectiveness of these programs.

Reducing Uncertainty

Heisenberg's Uncertainty principle says that one cannot measure exactly the position and momentum of a particle at same time.

The traditional approach to grants is pretty much giving blank checks to grantees hoping they'll use the funds effectively, but the combination of hope, the internet, and money rarely ends well. We need to shift how we think about grants, focusing on strategic and specific funding.

Instead of throwing money at grantees to 'support' or 'build' whatever they want, grant programs should focus on supporting the critical needs of projects building on top of their ecosystem. While 'salaries' are the lowest hanging fruit, we should avoid that, and instead fund specific needs such us:

• User funding and abstractions; fund project gas usage, giving its users better UX, incentivizing them to try the product at no cost. A great example of this is Base chain zero fee USDC transfers, an ecosystem utility used most applications and protocols built on Base chain.

• Infra funding and sponsoring: RPC provider funding, TheGraph / Subgraph network usage sponsorship, and on-ramp fee sponsorship. These type of practices worked great in web2, from cloud providers like AWS, GCP or Azure to free tier SaaS products.

• Matching with skin in the game: Assist projects to reach their definition of success KPIs, match every $ they put with your ecosystem token. This can be a growth campaigns, programmatic token incentives for protocol use, or security matching (more below)

Strategic and specific funding will transform grant programs from inefficient bureaucratic nightmares that incentivize obscurity into powerful tools for driving critical support, incentivize innovation and create growth within the ecosystem.

A wild use-case has emerged: Audit Grants

A few days weeks ago, a brilliant proposal passed on the Safe governance forum. Palmera, which built a Safe module for hierarchical structures within Safes, requested funding assistance for an open audit competition via Hats.Finance, a decentralized security (DeSec) protocol.

This is a brilliant example of a both strategic and specific grant. This targets a major pain point of a project as audits can cost anywhere from $20k to $400k (!!). The proposal is far easier to execute and monitor as the funds move directly to the Audit competition smart contract, and lastly, Palmera has skin in the game, they are covering a significant portion of the audit cost themselves and requesting additional participation from the Safe ecosystem.

Oliver, a co-founder at Hats, also adds:

"Security Grants have the best ROI out of any Grants. When an application is hacked, it's a terrible PR moment for the entire Ecosystem. By ring-fencing grants for security or specifically audits, the Ecosystem is doing itself a benefit and removing the biggest blocker for new projects to deploy."
- Oliver Hörr, Co-Founder of Hats.Finance

This Audit Grant also directly reflects the community's interest in the projects development.

“The proposal provides a clear indication of the community's confidence in the impact of the module. Components that are both high-impact and have significant security requirements present challenges in testing and gathering feedback. Proposals serve as the most effective method to measure and quantify these aspects.
- Andy Pavia, Co-Founder of Palmeradao.xyz

The Future of Ecosystem Support

As crypto ecosystems evolve, so must their support structures. By shifting from spray and pray to strategic and specific funding, we can drive innovation, support genuine builders, and create actual growth and traction. That being said, implementing strategic and specific funding is not always possible, especially in diverse ecosystems with varying levels of resources and governance structures.

Since I began writing and talking about this a few weeks ago, I received positive feedback from ecosystems who are looking to implement similar support structures. A few days ago Oasis launched a pool dedicated to secondary audits and bug bounties for projects within their ecosystem

Lefteris Karapetsas | Hiring for @rotkiapp

@LefterisJP

Are most of our current crypto funding mechanisms geared towards rewarding the talkers?

Those who tweet. Join podcasts. Join all the community calls. Write all the forum posts. Blog posts. Shill. Apply for all grant programs.

As opposed to those who just build the damn thing?

312

10:49 PM • Jan 17, 2024

What's Next

If you're involved in managing a crypto ecosystem or grant program, it's time wake up. Evaluate your current processes against the principles outlined above. Are you providing strategic, specific support? Are you solving real pain points for builders, or just giving away money? If you want to chat about this feel free to join the Ecosystem Builders telegram group, Message the Hats.Finance team if you're looking for an ecosystem audit structure, or DM me on Farcaster.

Disclosure:
I'm Eylon, a partner at Collider.vc, a Tel Aviv based web3 venture fund. Collider is an investor in Palemra, Hats.finance, and Safe.