Grant programs are inefficient capital sinks. They fund speculative projects with low accountability, creating a grant farming economy that extracts value without building sustainable protocol usage. The $7B+ in L2 treasuries is a strategic weapon, not a charity fund.
layer-2-wars-arbitrum-optimism-base-and-beyond
Blog
The Future of L2 Treasuries: From Grant Dispensers to Strategic Investors
L2 DAO treasuries, like Arbitrum's $3B+ hoard, are squandering capital on low-impact grants. Survival demands a shift to venture-style investing: rigorous due diligence, portfolio theory, and strategic equity stakes.
introduction
THE MISALLOCATION
The $7 Billion Blunder
Layer 2 treasuries are squandering billions on ineffective grants while ignoring their most powerful asset: strategic on-chain capital deployment.
Treasuries must become strategic investors. Protocols like Arbitrum and Optimism should deploy capital directly into their own DeFi primitives, seeding liquidity for Uniswap V3 pools or acting as the backstop for Aave lending markets. This creates reflexive value capture.
The model is MakerDAO's Endgame. Maker's shift from passive DAI holder to active allocator in US Treasury bonds and real-world assets demonstrates the yield and stability imperative. An L2's native asset is its balance sheet.
Evidence: Arbitrum's $3.3B treasury earns minimal yield, while its top DEX, Camelot, operates with fragmented liquidity. A directed 5% allocation would bootstrap entire new markets.
key-trends
THE FUTURE OF L2 TREASURIES
Why Grant-Only Models Are Failing
Treasuries are moving beyond simple grant distribution to become strategic investors, leveraging their capital to drive sustainable ecosystem growth.
01
The Problem: The Grant Churn Cycle
One-time grants create mercenary builders who leave after funding dries up, failing to build sustainable businesses. This leads to high project failure rates and low protocol fee retention.
- ~90% of projects fail to generate meaningful protocol revenue post-grant.
- Capital is spent on short-term incentives, not long-term infrastructure.
- Creates no compounding value for the treasury itself.
~90%
Failure Rate
0%
Equity Stake
02
The Solution: The Strategic Investment Arm
Treat the treasury like a venture fund. Invest for equity, tokens, or revenue share in core infrastructure projects like oracles (Chainlink, Pyth), bridges (LayerZero, Across), and data indexers.
- Generates direct returns that refill the treasury.
- Aligns incentives for long-term development and integration.
- Transforms the L2 from a landlord into a co-owner of its stack.
10-100x
Potential ROI
Permanent
Alignment
03
The Problem: Misaligned Incentive Design
Grants often fund competitors to existing ecosystem projects, creating internal conflict and fragmentation. They fail to solve the cold-start problem for critical, non-speculative primitives like decentralized sequencers or trust-minimized bridges.
- Funds duplicate efforts instead of filling strategic gaps.
- No mechanism to de-risk building complex, capital-intensive public goods.
High
Fragmentation
$0
De-risking
04
The Solution: The Protocol-As-a-Customer Model
The treasury becomes the first and most important customer. Issue RFPs and milestone-based contracts to build specific, needed infrastructure, pre-committing to usage fees or purchase agreements.
- Guarantees a market for high-value, risky builds (e.g., a new DA layer).
- Uses procurement, not charity, to direct development.
- Model pioneered by Optimism's Retro Funding and Ethereum's Protocol Guild.
100%
Usage Guarantee
Milestone
Based Pay
05
The Problem: Treasury Value Leakage
Pure grant models are extractive; value flows out and never returns. The treasury's native token appreciates only from speculative demand, not from capturing value created within its ecosystem. This is a fundamental misallocation of a ~$10B+ aggregate asset.
- Fails the basic test of capital efficiency.
- Leaves the protocol vulnerable in bear markets.
$10B+
Idle Capital
Leaking
Value
06
The Solution: The Ecosystem Index Fund
Deploy treasury capital into a diversified portfolio of the ecosystem's own top projects via token purchases, liquidity provision, and staking. This creates a virtuous cycle where ecosystem success directly boosts the treasury.
- Automatically captures upside from successful applications.
- Provides deeper liquidity for native projects.
- Turns the L2 into the largest, most aligned LP and stakeholder.
Diversified
Exposure
Virtuous
Cycle
STRATEGIC ANALYSIS
L2 Treasury War Chests: Assets vs. Strategy Mismatch
Comparison of treasury management strategies for leading L2s, highlighting the misalignment between asset composition and strategic goals.
| Metric / Strategy | Optimism (Grant-First) | Arbitrum (Ecosystem DAO) | Starknet (Protocol-Owned Liquidity) | Base (Corporate Treasury) |
|---|---|---|---|---|
Treasury Size (USD) | $7.2B | $4.5B | $1.8B | $400M |
Native Token % of Holdings | 100% | 100% | 100% | 0% |
Stablecoin / Diversified Assets % | 0% | 0% | 0% | 100% (USDC) |
Primary Mandate | Retroactive Public Goods Funding | Ecosystem Grants (STIP) | Protocol-Owned DEX Liquidity | Corporate Profit & Ecosystem Growth |
Annual Runway at Current Burn |
|
|
| N/A (Revenue Positive) |
Direct Strategic Investment Capability | ||||
On-Chain Revenue (30d avg) | $1.2M | $2.8M | $180k | $12.5M |
Key Risk | Token Volatility Erodes Grant Power | DAO Governance Bottleneck on Deployment | Capital Efficiency of Locked Liquidity | Centralized Control of Funds |
deep-dive
THE STRATEGIC PIVOT
The Venture DAO Playbook: Diligence, Equity, Alignment
Layer 2 treasuries are evolving from passive grant machines into active, equity-seeking venture arms.
The grant model is broken. It creates mercenary builders and misaligned incentives. Strategic investment, using treasury capital to take equity or token warrants, creates durable alignment and captures protocol value.
Diligence requires new tooling. DAOs must adopt venture-grade frameworks like Syndicate's deal rooms and OpenLaw for term sheets. This moves beyond social consensus to structured financial analysis.
Equity is the ultimate alignment. A token grant is a one-time payment. An equity stake ties a builder's financial success directly to the L2's long-term adoption and revenue, mirroring a16z's model in web2.
Evidence: Optimism's RetroPGF funds past work, but its venture arm, OP Labs, makes equity investments in core infrastructure, directly shaping its ecosystem's future.
case-study
THE FUTURE OF L2 TREASURIES
Case Studies in Strategic Capital
Leading L2s are moving beyond simple grant programs to become strategic investors, deploying capital to secure core infrastructure and drive ecosystem growth.
01
Arbitrum's $200M Catalyst Program
The Problem: Passive grants fail to attract and retain top-tier DeFi protocols, leading to mercenary capital and fragmented liquidity.\nThe Solution: A structured, milestone-based investment fund that co-invests alongside VCs.\n- Strategic Alignment: Funds are deployed for specific growth targets (e.g., TVL, user acquisition), not just development.\n- Protocol Ownership: Takes equity or token warrants, aligning the L2's treasury returns with the protocol's success.
$200M
Fund Size
Equity+
Investment Model
02
Optimism's Retroactive Public Goods Funding
The Problem: Proactive grantmaking is inefficient and prone to misallocation, funding ideas over proven impact.\nThe Solution: A results-based capital allocation mechanism that rewards already-delivered value.\n- Impact Verification: Capital flows to projects (like Chainlink, Uniswap, Gitcoin) that have demonstrably benefited the OP Stack ecosystem.\n- Flywheel Effect: Creates a powerful incentive for builders to contribute public goods without upfront funding, knowing retroactive rewards are possible.
$40M+
Distributed
Results-Based
Allocation
03
The StarkNet Ecosystem Investment Arm
The Problem: Scaling tech alone doesn't guarantee a vibrant app layer; you need strategic capital to bootstrap critical primitives.\nThe Solution: Direct treasury investments into foundational infrastructure like oracles, bridges, and DeFi cores.\n- Infrastructure Moats: Targets investments in services like Pragma (oracles) and layers like zkLend (money market) that become essential ecosystem plumbing.\n- Non-Dilutive for Builders: Often structured as strategic partnerships or simple agreements for future tokens (SAFTs), avoiding excessive dilution for early teams.
Strategic
Deployment
Core Primitives
Focus
04
Base's Onchain Summer & Ecosystem Fund
The Problem: A new L2 needs to rapidly catalyze a cultural and economic movement, not just onboard developers.\nThe Solution: Blend large-scale community engagement with a dedicated fund co-managed with Coinbase Ventures.\n- Cultural Capital: Events like Onchain Summer drive mainstream attention and user acquisition, creating a fertile ground for investments.\n- Venture-Style Sourcing: Leverages Coinbase's deal flow and due diligence to identify and fund high-potential onchain consumer apps, focusing on the next wave of adoption.
Coinbase+
Deal Flow
Consumer Apps
Focus
counter-argument
THE MISCONCEPTION
Objection: "But DAOs Aren't VCs"
The core function of capital allocation is identical for DAOs and VCs, demanding the same strategic rigor.
Capital allocation is capital allocation. A DAO treasury's purpose is to maximize the value of its native token. This is identical to a venture fund's mandate to maximize returns for its LPs. The governance wrapper is irrelevant to the core financial function.
VCs have a structural advantage. Professional VCs operate with specialized deal flow, diligence frameworks, and portfolio management tools like Carta. DAOs relying on forum posts and snapshot votes lack this institutional machinery, leading to inefficient, reactive capital deployment.
Strategic investment creates network effects. Grants fund builders; investments align stakeholders. An Arbitrum DAO equity investment in a promising dApp creates a deeper, more valuable partnership than a one-time grant. This transforms the treasury from a cost center into a strategic balance sheet asset.
Evidence: Look at Uniswap's $165M venture fund. The Uniswap DAO did not create it; the core team did. This demonstrates the existing capability gap and the immense value of professional, proactive treasury management that DAOs must now internalize.
takeaways
FROM GRANT DISPENSERS TO STRATEGIC INVESTORS
TL;DR: The New Treasury Mandate
L2 treasuries, now holding billions in native tokens and sequencer fees, must evolve beyond simple grant programs to become the primary growth engine for their ecosystems.
01
The Problem: Idle Capital & Grant Inefficiency
Treasuries are yield-bearing assets sitting idle while grant programs suffer from misaligned incentives and poor ROI tracking. This is a massive opportunity cost for ecosystem growth.
- $5B+ in sequencer fees annually across major L2s, largely unproductive
- Grant programs often fund features, not flywheels, with no clear path to sustainability
- Zero leverage applied to the treasury's core asset: the network's own economic security
$5B+
Annual Fees
<10%
Grant ROI Tracked
02
The Solution: Protocol-Controlled Value (PCV) & Strategic M&A
Deploy treasury assets as strategic, yield-generating capital to acquire and bootstrap critical ecosystem primitives, mirroring OlympusDAO's model but for infrastructure.
- Use native tokens as acquisition currency for core DeFi apps (DEXs, lending) to capture fees and direct traffic
- Allocate to on-chain venture funds (e.g., a16z Crypto's model) for targeted ecosystem bets
- Create protocol-owned liquidity pools to reduce mercenary capital and stabilize core trading pairs
50-100x
Leverage Multiplier
Fee Capture
New Revenue Stream
03
The Problem: Fragmented Liquidity & User Onboarding
Every new L2 fragments liquidity and creates a cold-start problem. Bridging is still a UX nightmare, stifling composability and adoption.
- $30B+ in bridged value trapped in isolated liquidity silos
- Users face 7+ steps and multiple fees to move assets between chains
- No native liquidity for new ecosystem tokens, killing early-stage projects
$30B+
Siloed TVL
7+ Steps
Bridge UX
04
The Solution: Treasury-Backed Intents & Unified Liquidity
Treasuries should fund and guarantee intent-based bridging systems (like UniswapX, CowSwap, Across) and provide seed liquidity for canonical bridges.
- Subsidize solver networks to offer gasless, optimal-rate cross-chain swaps
- Act as the liquidity provider of last resort for new native assets, de-risking early-stage launches
- Co-invest with other L2s in shared liquidity layers (e.g., Chainlink CCIP, LayerZero) to reduce collective fragmentation
1-Click
Target UX
-90%
Slippage Target
05
The Problem: Centralized Sequencer Risk
The multi-billion dollar security of an L2 rests on a single, often centralized, sequencer. This is a systemic risk and a wasted trust asset.
- Sequencer failure or censorship can halt the entire chain
- MEV extraction is opaque and not shared with the protocol treasury
- No credible path to decentralization without economic redesign
Single Point
Of Failure
$100M+
Daily MEV
06
The Solution: Treasury-Staked Decentralized Sequencing
Use the treasury as the stake in a Proof-of-Stake sequencing network, decentralizing control and creating a new yield stream from MEV.
- Treasury stakes native token to bootstrap a permissionless set of sequencers
- Implement MEV smoothing and redistribution (via SUAVE, Flashbots) back to the treasury and stakers
- Transform sequencer risk from a liability into the protocol's core revenue-generating asset
10-20%
Potential APY
Decentralized
Security Model
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