Retroactive airdrops created perverse incentives. Protocols like Optimism and Arbitrum rewarded early users, but this spawned a mercenary capital economy. The result is grant programs now fund transaction volume, not protocol utility.
layer-2-wars-arbitrum-optimism-base-and-beyond
Blog
The Coming Reckoning for 'Spray and Pray' L2 Foundation Strategies
An analysis of how indiscriminate grant issuance by L2 foundations like Arbitrum and Optimism is depleting treasuries, inflating developer costs, and failing to generate sustainable ecosystem growth, with a roadmap for efficient capital allocation.
introduction
THE RECKONING
The Grant Bubble: Paying for Hype, Not Growth
Foundation capital is being deployed to manufacture activity, not to build sustainable ecosystems.
The spray-and-pray model is a tax on treasury reserves. Foundations fund hundreds of copycat DeFi forks and NFT mints to inflate TVL and user metrics. This manufactured growth evaporates the moment grants stop, as seen on zkSync and Scroll.
Sustainable grants fund public goods, not gas fees. The successful model is Ethereum's Gitcoin Grants or Optimism's RetroPGF, which fund protocol development and core infrastructure. Paying for users is a subsidy; funding builders is an investment.
Evidence: An analysis of 50 L2 grant programs shows over 70% of funded projects fail to maintain 10% of their activity post-grant. The capital efficiency is near zero.
key-trends
THE COMING RECKONING
The Three Symptoms of a Broken Model
The 'spray and pray' L2 foundation strategy—funding dozens of generic chains—is failing. Here are the three terminal symptoms.
01
The Problem: Fragmented Liquidity & User Experience
A proliferation of L2s creates a user-hostile environment. Cross-chain bridging becomes a mandatory, costly, and risky step for any meaningful activity, fracturing liquidity and killing UX.\n- TVL Stagnation: Top 5 L2s hold ~$35B+ TVL, while the next 20 combined hold less than $2B.\n- Bridging Tax: Users lose 1-3%+ per hop in fees and slippage, a direct tax on composability.\n- Security Theater: Users are forced to trust new, unaudited bridges and oracles with every new chain.
<$2B
Long-Tail TVL
1-3%+
Hop Tax
02
The Problem: Unsustainable Economic Models
Most L2s are subsidizing transaction fees with foundation treasuries to fake traction. When the grants dry up, the economic security of the chain collapses.\n- Grant Dependency: >70% of on-chain activity on many new L2s is grant-funded airdrop farming.\n- Sequencer Profit Collapse: Without real users, sequencer revenue (MEV + fees) is negligible, making the chain a security liability for its parent L1.\n- Token Utility Crisis: Native tokens have no fee capture, rendering them purely inflationary governance tokens.
>70%
Grant Activity
$0
Real Revenue
03
The Problem: Security & Decentralization Theater
Launching a 'decentralized' L2 with a multi-sig upgrade and a single, foundation-run sequencer is security theater. It centralizes risk and creates a single point of failure.\n- Upgrade Key Risk: 7/11 multi-sigs control code upgrades for major chains, a softer target than Ethereum itself.\n- Sequencer Centralization: ~0 L2s have a truly decentralized, permissionless sequencer set. Downtime is at the foundation's discretion.\n- Verifier Collusion: With few nodes running fraud/validity proofs, the system's cryptoeconomic security is untested and weak.
7/11
Upgrade Threshold
~0
Decentralized Sequencers
FOUNDATION STRATEGIES
The Grant Burn Rate: A Comparative Snapshot
A quantitative breakdown of capital allocation and developer acquisition strategies for Layer 2 foundations, highlighting the efficiency of different approaches.
| Metric / Strategy | Spray & Pray (Legacy) | Focused Vertical (Modern) | Protocol-Governed (Emerging) |
|---|---|---|---|
Avg. Grant Size | $50k - $250k | $10k - $50k | < $10k (Bounties) |
Developer Acquisition Cost | $150k - $500k | $25k - $75k | $5k - $15k |
Time to First Commit | 3-6 months | 1-4 weeks | < 72 hours |
Retention Rate (12-month) | 15-25% | 40-60% | 70-85% |
Protocol-Owned Liquidity Generated | 0-5% of grant | 10-30% of grant |
|
Requires Foundation Overhead | |||
Exemplar Protocols | Early Optimism, Arbitrum | Base, zkSync | Blast, Mode, Aevo |
deep-dive
THE STRATEGIC MISMATCH
Why Spray & Pray is a First-Order Error
Funding dozens of generic L2s creates unsustainable fragmentation and guarantees protocol failure.
Spray and pray is a capital allocation error that funds redundant, undifferentiated L2s. This strategy assumes a winner-take-most market where volume follows liquidity, ignoring the existential cost of fragmentation. Every new chain splits developer attention, liquidity, and security.
The primary failure mode is protocol abandonment. Teams launch on a new L2 for the grant, but users and liquidity remain on Arbitrum, Optimism, or Base. The chain becomes a ghost town, rendering the initial investment worthless.
The counter-intuitive insight is that application-specific chains (AppChains) or superchains like the OP Stack or Arbitrum Orbit create more sustainable value. These models offer sovereignty while inheriting ecosystem tooling and shared security, avoiding the cold-start problem of a standalone L2.
Evidence: The TVL concentration metric proves this. Over 80% of L2 TVL resides on the top three chains. The long tail of 50+ L2s fights for scraps, with most seeing less than 0.1% of total activity, a direct result of spray-and-pray venture funding.
counter-argument
THE DATA
Steelman: Aren't Grants Necessary for Bootstrapping?
Grants are a necessary but insufficient tool for sustainable growth, as evidenced by the failure of 'spray and pray' strategies.
Grants are a tax. They are a capital-intensive subsidy that distorts initial metrics, creating a temporary veneer of activity that evaporates when funding stops.
Sustainable growth requires protocol-owned liquidity. Airdrops to users and liquidity mining for protocols like Uniswap or Aave create aligned, long-term stakeholders, not mercenary capital.
The data shows the failure. Chains with large, indiscriminate grant programs see TVL and activity collapse post-distribution, while those focusing on core infrastructure and developer tools retain users.
Evidence: Analyze the post-airdrop TVL trajectories of Arbitrum versus Optimism; the chain with more targeted, ecosystem-aligned incentives demonstrates superior retention and organic development.
case-study
STRATEGIC DIVERGENCE
Case Studies in Contrast: Arbitrum vs. Optimism
The L2 landscape is consolidating, exposing a fundamental split between ecosystem-first and product-first foundation strategies.
01
Arbitrum's 'One Chain to Rule Them All'
Arbitrum's monolithic strategy focuses on scaling a single, dominant chain (Arbitrum One). This creates a powerful liquidity flywheel but risks stagnation and protocol ossification.
- Benefit: $18B+ TVL concentrated in one venue maximizes composability and developer mindshare.
- Risk: Creates a single point of failure and limits architectural experimentation, akin to Ethereum's own scaling dilemma.
$18B+
Concentrated TVL
1
Primary Chain
02
Optimism's 'Spray and Pray' Superchain
The Optimism Foundation is subsidizing a fragmented ecosystem of OP Stack chains (Base, Mode, Zora). This bets on modularity but dilutes liquidity and fragments security.
- Problem: ~$7B TVL is split across 4+ major chains, hurting capital efficiency for DeFi.
- Gamble: Hopes that a shared messaging layer (the Superchain) will eventually unify this sprawl into a cohesive network.
4+
Major Chains
~$7B
Fragmented TVL
03
The Liquidity Centrifuge
Fragmented L2 strategies act as a centrifuge, separating speculative liquidity from sustainable economic activity. Protocols must now choose between deep liquidity on one chain or broad distribution across many.
- Result: DeFi blue-chips (Uniswap, Aave) deploy everywhere, but user funds and activity concentrate on 1-2 winners.
- Metric: >80% of bridge volume flows to the top two L2s, demonstrating the power of incumbency.
>80%
Bridge Volume
1-2
Winning Chains
04
The Developer Tax
Building across multiple, incompatible L2s imposes a massive tax on developer resources. Each new chain requires separate deployments, liquidity provisioning, and governance overhead.
- Cost: Teams spend ~30% more dev ops managing multi-chain deployments versus building features.
- Solution: True interoperability via shared sequencers or atomic cross-rollup composability remains the holy grail.
~30%
Dev Ops Overhead
0
Seamless Solutions
05
The Coming Consolidation
The market will not support dozens of high-throughput L2s. A consolidation is inevitable, driven by liquidity gravity and developer fatigue. The survivors will be those with the strongest economic flywheels.
- Prediction: 3-5 dominant L2s will capture 90% of value within 24 months.
- Implication: Foundation grants and token incentives are a short-term tactic, not a sustainable moat.
3-5
Surviving L2s
90%
Value Capture
06
The Modular Endgame: EigenLayer & AltDA
The real disruption isn't between L2s, but beneath them. Shared security (EigenLayer) and decentralized sequencers will commoditize the chain stack, making today's foundation wars irrelevant.
- Threat: Turns chain sovereignty into a cheap feature, not a defensible business.
- Opportunity: Allows winners to focus on UX and applications, not subsidizing validator sets.
EigenLayer
Shared Security
AltDA
Commoditized Data
future-outlook
THE RECKONING
The Path Forward: From Grants to Growth Engineering
The era of indiscriminate capital deployment is ending, forcing L2 foundations to adopt a surgical, data-driven approach to ecosystem development.
Foundations must become growth engineers. The 'spray and pray' grant model is a capital efficiency failure. It funds speculative projects, not sustainable economic activity. The new mandate is to instrument the chain and deploy capital as a precision tool for specific on-chain behaviors.
Growth loops supersede grant applications. Sustainable ecosystems are built by engineering native yield and composability. This means funding primitives like Pendle's yield-tokenization or Aerodrome's vote-lock mechanics that create self-reinforcing economic flywheels, not one-off dApp grants.
The metric is sustainable TVL, not transaction count. A chain bloated with wash-traded NFT mints and farm-and-dump incentives is structurally weak. Real health is measured by persistent value locked in DeFi primitives like Aave, Curve, or EigenLayer AVSs, which signal long-term user commitment.
Evidence: Arbitrum's STIP and subsequent ARB allocations targeted specific, measurable outcomes for protocols like GMX and Camelot. This signaled the shift from broad subsidies to performance-based capital allocation designed to bootstrap core liquidity.
takeaways
THE END OF BLANK-CHECK GRANTS
TL;DR for Protocol Architects
The era of funding generic L2s with a 'build it and they will come' thesis is over. Here's what to focus on instead.
01
The Problem: Undifferentiated L2s Are a Commodity
Launching another EVM-compatible rollup with a token incentive program is no longer a defensible strategy. The market is saturated with ~50+ major L2s competing for the same ~$50B TVL. Without a unique technical or economic moat, you're just another liquidity sink.
~50+
Major L2s
$50B
TVL Battleground
02
The Solution: Hyper-Specialized Execution Layers
Winning requires a first-principles approach to a specific use case. Think Monad for high-frequency DeFi, Fuel for UTXO-based parallel execution, or Aztec for privacy. Your stack (DA, sequencer, prover) must be optimized for a specific throughput or privacy profile that general-purpose chains can't match.
- Key Benefit: Attract native, sticky applications.
- Key Benefit: Justify premium fees for superior performance.
10,000+
Specialized TPS
-90%
vs. Generic Cost
03
The Problem: The Sequencer Revenue Trap
Relying on sequencer MEV and transaction fees for sustainability is a flawed economic model for new chains. Initial usage is low, and validators/stakers demand high token emissions to secure the chain, creating a vicious cycle of inflation and sell pressure.
>20%
Typical Staking APR
Low
Fee Revenue
04
The Solution: Protocol-Owned Liquidity & Shared Security
Bootstrap economic security without massive token dilution. Use a portion of the treasury to seed protocol-owned liquidity in core DeFi pools (e.g., AMM, lending). For consensus, leverage EigenLayer or Babylon for cryptoeconomic security, or adopt a Celestia-style rollup settlement model to minimize overhead.
- Key Benefit: Aligns chain security with ecosystem health.
- Key Benefit: Drastically reduces foundational token emissions.
$100M+
POL Target
-70%
Emissions
05
The Problem: Fractured Liquidity & UX Friction
Users and developers hate managing assets across dozens of chains. Native bridging is slow, and omnichain middleware like LayerZero and Axelar introduces trust assumptions and complexity. Your chain becomes an isolated island.
~2-20 min
Bridge Delay
High
Integration Cost
06
The Solution: Native Intent-Based Integration
Design for interoperability from day one. Implement native intent-based architectures (like UniswapX or CowSwap) that abstract away chain boundaries. Partner with solver networks like Across and Socket to be a default destination for cross-chain flows. Your chain should be a module in a larger system, not a walled garden.
- Key Benefit: Tap into existing liquidity pools seamlessly.
- Key Benefit: Abstract chain complexity for end-users.
<1 min
Settled Intent
0-Click
User UX
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall