Why Ecosystem Funds Often Fund the Wrong Projects

Funds chase the last cycle's winners, leading to a glut of low-differentiation DEXs and lending protocols. This saturates liquidity, fragments TVL, and starves novel infrastructure.\n- Result: 10+ forks of Uniswap v3 on a single L2, none reaching $50M TVL.\n- Opportunity Cost: Core primitives like decentralized sequencers or intent-based solvers remain underfunded.

Foundation teams, lacking technical depth, rely on venture capital deal flow to identify projects. This biases funding towards narrative-driven, founder-friendly ventures over technically rigorous ones.\n- Symptom: Flashy DeFi 2.0 ponzinomics funded over boring ZK-proof aggregation services.\n- Outcome: Ecosystem remains dependent on external, often extractive, capital for core R&D.

Treasury grants are approved via tokenholder votes, which favor retroactive, visible rewards over speculative, long-term bets. Builders optimize for proposal theater, not technical merit.\n- Evidence: Millions for yet another NFT marketplace, pennies for MEV mitigation research.\n- Systemic Failure: Optimism's RetroPGF struggles to value public goods, while Arbitrum's STIP funds obvious revenue-generating apps.

Funds prioritize end-user applications but neglect the developer experience (DX) stack. Without robust tooling, testing frameworks, and local devnets, innovation stalls.\n- Consequence: Teams spend months on RPC reliability and indexer setup instead of product logic.\n- Contrast: Solana's aggressive funding for client diversity and Ethereum's EF grants for core protocol work.

Programs measure success by Total Value Locked, creating perverse incentives for mercenary capital and unsustainable yield farming. This burns through treasury assets without building lasting utility.\n- Pattern: $100M+ incentive programs that evaporate within 90 days of concluding.\n- Real Cost: No permanent user retention, damaged tokenomics, and a cynical community.

Ecosystems must issue Requests for Technical Improvement (RTIs) that specify precise, measurable infrastructure gaps. Fund based on working prototypes, not whitepapers.\n- Model: Polygon's zkEVM grant program requiring milestone-based delivery.\n- Mechanism: Staged grants with expert technical committees for evaluation, bypassing popular vote.

Funds chase narrative-driven dApps with high TVL but low technical novelty, ignoring the underlying infrastructure that enables them. This creates a fragile ecosystem dependent on a few centralized services like Infura and Alchemy.

• Problem: Funding the 100th DEX fork instead of the novel sequencer.
• Solution: Mandate a minimum 30% allocation to core protocol R&D and client diversity.

Massive grants are used to bribe mercenary capital into providing TVL, which evaporates after incentives end. This mislabels liquidity depth as product-market fit.

• Problem: Paying for fake growth via emission bribes.
• Solution: Fund projects solving real liquidity fragmentation (e.g., UniswapX, CowSwap) and intent-based architectures that reduce extractable value.

Funds overlook the boring, critical middleware: local development nets, advanced indexers, and formal verification tools. This increases time-to-market and security risks for all builders.

• Problem: Every team rebuilds their own dev stack from scratch.
• Solution: Systematically fund public goods like Foundry forks, The Graph competitors, and zk-proof circuit libraries.

Capital floods into isolated L1/L2 ecosystems, creating walled gardens. True composability requires funding secure, minimal-trust bridges and shared security models, not just another LayerZero config.

• Problem: Funding chain-specific apps that can't communicate.
• Solution: Prioritize projects leveraging IBC, ZK light clients, and shared sequencer sets for Across-like interoperability.

Treasury decisions are gamed by well-connected insiders and VC syndicates, leading to recursive funding of the same founder networks. This stifles genuine innovation from unknown builders.

• Problem: DAO votes are predictable and centralized.
• Solution: Implement quadratic funding rounds, anonymous grant committees, and milestone-based vesting to break cartels.

Funds are judged on quarterly user growth, forcing them to back quick-hitting consumer apps instead of long-term protocol infrastructure. This sacrifices sustainable tech debt for vanity metrics.

• Problem: Optimizing for daily active wallets over protocol security.
• Solution: Tie fund performance to 5-year technical milestones, client diversity scores, and reduction in centralization vectors.