The Future of Grant Funding: From Handouts to Equity-Like Stakes

Projects waste $100M+ annually on speculative airdrops to mercenary capital. This creates no sustainable alignment and often dumps on the very community it aims to build.

• Zero Accountability: Recipients have no obligation to contribute post-claim.
• Price Volatility: Immediate sell pressure destroys token utility and governance integrity.
• Misaligned Incentives: Rewards speculation, not genuine protocol usage or development.

Platforms like Sablier and Superfluid enable grants to be streamed based on verifiable, on-chain deliverables. This turns funding into a performance contract.

• Continuous Alignment: Capital flows only while contributors are active.
• Automated Compliance: Milestone completion triggers payment via Chainlink Oracles or DAO votes.
• Capital Efficiency: Recovers unearned funds instantly, unlike traditional cliff schedules.

DAOs like Uniswap and Compound hold $10B+ in stagnant treasuries earning near-zero yield. Grant programs are funded from depreciating assets, creating long-term sustainability risk.

• Non-Productive Capital: Idle USDC and native tokens don't fund future development.
• Voter Apathy: Complex grant proposals suffer from low participation and poor diligence.
• No ROI Tracking: Impossible to measure if grants generated protocol growth or revenue.

Structures like a16z's Crypto Startup School or Polygon's ecosystem fund model are moving on-chain. Grants convert to equity-like tokens or future revenue shares (e.g., Superstate).

• Direct Upside Capture: DAOs participate in ecosystem project success via tokens or fees.
• Professional Diligence: Delegates capital to specialized sub-DAOs or fund managers.
• Sustainable Flywheel: Returns from successful grants replenish the treasury.

Grant recipients file PDF reports. DAOs have no standardized on-chain metrics to evaluate impact on TVL, active users, or protocol revenue, making iterative funding decisions guesswork.

• Manual & Fraud-Prone: Self-reported metrics are unverifiable.
• No Comparative Analysis: Cannot benchmark grantee performance against ecosystem averages.
• Slow Iteration Cycles: Feedback loops for program improvement take quarters.

Protocols like Optimism's RetroPGF use Attestations (EAS) to build verifiable contributor graphs. KPI options (e.g., UMA) auto-reward grantees for hitting specific, on-chain targets.

• Trustless Meritocracy: Contributions are permanently attested and composable.
• Auto-Executing Rewards: Grants pay out automatically when Dune Analytics dashboards hit targets.
• Data-Driven Decisions: DAOs can analyze which grant attributes correlate with success.

Traditional grants are a capital efficiency black hole. Funds are disbursed with minimal accountability, leading to high failure rates and no upside capture for the treasury.

• ~80% of projects fail to deliver meaningful protocol value post-funding.
• Zero mechanism to recoup capital from successful outliers.
• Creates misaligned incentives, rewarding proposal-writing over execution.

Transform grants into vested, claimable future tokens based on verifiable, on-chain milestones. This mirrors venture capital's equity-for-capital model.

• Milestone-based vesting ensures continuous alignment.
• Treasury captures upside via token grants, creating a self-sustaining flywheel.
• Projects like Optimism's RetroPGF and Arbitrum's STIP are pioneering this shift.

Deploy smart contract-based grants that automatically disburse funds upon hitting predefined, on-chain Key Performance Indicators (KPIs).

• Fully transparent and automated execution removes grant committee bias.
• KPIs can be TVL growth, fee generation, or unique user targets.
• Enables scalable, data-driven funding at the protocol level.

Early experiments like Moloch DAO and MetaCartel demonstrated the power of small, aligned capital pools with skin in the game. Modern grant programs must adopt this ethos.

• Members stake personal capital, ensuring rigorous due diligence.
• Rage-quit mechanisms allow for rapid capital reallocation from failing projects.
• This model birthed foundational projects like dYdX and Nexus Mutual.

Grant programs issuing tokens with expectation of profit may inadvertently create unregistered securities offerings. This is the central tension in equity-like funding.

• Howey Test exposure increases with explicit profit-sharing terms.
• Requires careful legal structuring, potentially using SAFT-like agreements or non-transferable vesting tokens.
• A critical unsolved problem for DAO-native venture models.

The end-state is a decentralized marketplace where projects auction future token flow for upfront funding, and investors underwrite based on reputation and track record.

• Projects like Superfluid enable real-time, streaming grant payments.
• Prediction markets (e.g., Polymarket) could price project success probability.
• Creates a competitive, efficient capital allocation layer for the entire ecosystem.

Equity-like stakes require objective, on-chain success metrics. These are vulnerable to manipulation, creating a new oracle attack surface.

• Sybil grantees can inflate vanity metrics (e.g., transaction counts) to claim rewards.
• Malicious actors could short a grant's outcome token and then sabotage the project.
• Reliable oracles for "developer activity" or "protocol adoption" remain an unsolved problem, akin to challenges faced by Chainlink and Pyth.

Grant tokens that accrue value based on a project's efforts look functionally identical to investment contracts.

• The SEC and global regulators will scrutinize these as unregistered securities, mirroring actions against LBRY and Ripple.
• This creates legal liability for both grant issuers (as underwriters) and recipients, chilling innovation.
• The model could collapse overnight from a single enforcement action, unlike traditional, non-financial grants.

Financializing grants turns them into a yield source, inviting mercenary capital to optimize for token extraction, not ecosystem value.

• Teams will design projects to maximize grant token payouts, not long-term sustainability—a direct parallel to DeFi yield farming collapses.
• This leads to grant inflation, where the value of all outcome tokens is diluted by low-quality, high-output projects.
• The system could be gamed more efficiently than it can be governed, eroding trust faster than it builds.

The entity controlling the grant issuance and metric evaluation holds immense power, recreating the centralization the model aims to escape.

• DAO treasuries like Uniswap or Aave become de facto VCs, subject to political lobbying and voter apathy.
• Metric parameters can be changed retroactively, a form of governance risk exceeding that in MakerDAO or Compound.
• This creates a two-tier system where well-connected projects receive favorable terms, undermining meritocracy.

Traditional grants are a one-way transaction with zero financial alignment. They fail to capture the upside of successful projects, creating a misalignment between funders and builders.

• No Skin in the Game: Funders bear 100% of the risk with no direct return.
• Poor Accountability: Builders are incentivized to deliver reports, not products.

Replace grants with structured agreements that grant the funding entity a future claim on project tokens or revenue, similar to a SAFT or revenue share.

• Aligned Incentives: Funder success is tied to builder success.
• Capital Efficiency: Turns grants into a portfolio of high-potential, early-stage bets.
• Protocols Leading: Look at Optimism's RetroPGF and Arbitrum's STIP as models evolving in this direction.

Stop managing a static treasury. Operationalize funding through a transparent, on-chain DAO structure that makes investment decisions based on clear metrics.

• Transparent Governance: All proposals and votes are on-chain, reducing political overhead.
• Specialized VCs: Emergence of entities like The LAO and MetaCartel Ventures show the model works.
• Liquidity Provision: Capital can be deployed across grants, liquidity mining, and strategic partnerships.

The key performance indicator shifts from "dollars distributed" to "successful projects retained in the ecosystem." This requires post-funding support infrastructure.

• Track Real KPIs: Active users, TVL generated, protocol revenue.
• Provide Post-Grant Support: Access to devrel, auditing subsidies, and bizdev introductions.
• Ecosystem Lock-in: Successful projects become permanent liquidity and activity pillars.

De-risk funding by splitting it into tranches. An initial non-dilutive grant validates execution, followed by an equity-like stake upon hitting milestones.

• De-risked Deployment: Capital is committed but only fully deployed on proven traction.
• Builder-Friendly: Reduces pressure for early, dilutive fundraises.
• Clear Milestones: Creates a structured path from grant recipient to portfolio company.

Equity-like stakes in decentralized projects exist in a regulatory grey area. Howey Test implications for future token claims are non-trivial and require legal innovation.

• SAFT 2.0 Needed: New legal frameworks must be developed for this hybrid model.
• Jurisdiction Shopping: Funding entities may need to be structured in specific regions.
• Transparency vs. Liability: On-chain programmability conflicts with traditional securities opacity.