Why Grant Programs Are Bleeding Your DAO Dry

Grant programs are a prime target for Sybil attacks, where a single entity creates hundreds of fake identities to capture grant rounds. This dilutes funds meant for real builders and creates a false signal of ecosystem growth.

• Typical Sybil Capture Rate: 20-40% of grant pool
• Real Cost: Funding ghost towns instead of protocol utility
• Result: Treasury bleeds value to actors with zero long-term alignment

Grants are structured as upfront payments for promised future work, creating a massive principal-agent problem. Recipients face minimal consequences for non-delivery, leading to vaporware and abandoned repos.

• Delivery Failure Rate: Estimates exceed 50% for milestone-based grants
• Enforcement Cost: Legal pursuit is impossible, governance oversight is costly
• Systemic Flaw: Incentives are misaligned from Day 1, rewarding proposal writing over shipping

The rise of "retroactive funding" models like those popularized by Optimism's RPGF creates perverse incentives. Builders optimize for metrics that look good to committees (e.g., GitHub commits, Discord activity) instead of delivering real user value or protocol revenue.

• Distortion: Activity ≠ Impact. Teams game KPIs.
• Outcome: Funds flow to the best storytellers, not the best builders.
• See It In: Optimism RPGF rounds, where lobbying often outweighs utility.

The program funded hundreds of projects but struggled with measurable impact. The core issue was funding outputs (a new dApp) instead of outcomes (increased protocol revenue or TVL).

• Key Problem: Lack of post-grant KPIs and accountability led to capital dispersion, not concentration.
• Key Lesson: Grants must be tied to protocol-specific success metrics, not generic "ecosystem growth."

Early DAOs like Moloch pioneered ragequit mechanics to protect capital, but this created excessive friction for legitimate contributors.

• Key Problem: High coordination overhead and slow disbursement cycles (~weeks) starved high-velocity projects of operational runway.
• Key Lesson: Capital efficiency requires balancing sybil resistance with agile funding mechanisms like streaming via Superfluid or Sablier.

Aave's program initially suffered from low applicant quality and misalignment. Its evolution highlights the shift to outcome-based funding.

• Key Problem: Early rounds attracted proposals with weak Aave integration, diluting the treasury's strategic focus.
• Key Solution: Implementing RFPs (Request for Proposals) for specific protocol needs (e.g., new collateral types, risk dashboards) increased capital efficiency by 10x.

Retroactive Public Goods Funding (RetroPGF) inverts the model: fund what has already demonstrated impact, eliminating the risk of funding duds.

• Key Innovation: Shifts due diligence from predictive speculation to verifiable on-chain/data proof.
• Key Constraint: Requires robust attestation networks (e.g., EAS - Ethereum Attestation Service) and community curation to avoid popularity contests.

Sushi's high APY incentive programs and unstructured grants rapidly depleted its treasury, forcing a ~$50M emergency loan from the Frog Nation in 2023.

• Key Problem: Grants were used as a short-term growth hack, not a long-term investment, creating unsustainable financial obligations.
• Key Lesson: DAO treasuries must model grants as liabilities with a clear runway, not marketing expenses.

Professionalizing capital allocation by adopting venture-style diligence, milestone-based tranches, and equity/token warrants.

• Key Mechanism: Replace one-time grants with structured investment vehicles that align contributor success with DAO upside.
• Key Tools: Use Syndicate for legal wrappers and Llama for granular treasury management to enforce capital discipline.