Grants create artificial markets by subsidizing activity that lacks organic demand, leading to inflated TVL and transaction metrics that mislead investors and governance token holders.
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Why Developer Grants Are a Double-Edged Sword for Layer 2 Growth
An analysis of how poorly structured grant programs incentivize short-term mercenary development over sustainable ecosystem building, draining L2 treasuries without delivering lasting value.
introduction
THE PARADOX
Introduction
Developer grants are a necessary but flawed growth engine for Layer 2 ecosystems.
The mercenary capital problem is structural: projects like Optimism's RetroPGF and Arbitrum's STIP attract developers who optimize for grant criteria, not user retention, creating a 'build-and-abandon' cycle.
This misallocates ecosystem resources away from core infrastructure needs, such as improving sequencer decentralization or building robust data availability layers, which are less flashy but more critical for long-term viability.
key-trends
WHY FREE MONEY CAN KILL A CHAIN
The Grant Paradox: Three Contrarian Trends
Developer grants are the default go-to-market playbook for L2s, but they often create perverse incentives that stunt organic growth.
01
The Mercenary Developer Problem
Grants attract protocol tourists who deploy, collect, and ghost. This inflates TVL and transaction counts but creates a hollow ecosystem with no user retention.
- Key Metric: >60% of grant-funded dApps are abandoned within 6 months of the grant period ending.
- Real Consequence: Creates a false signal of adoption, misleading VCs and users about the chain's real health.
>60%
Abandonment Rate
0.0x
User Retention
02
The Solution: Protocol-Led Revenue Sharing
Shift from upfront grants to retroactive, performance-based incentives. Align developer success with chain success by sharing protocol revenue (e.g., sequencer fees).
- Key Model: Optimism's RetroPGF and Arbitrum's STIP are pioneering this, funding based on proven impact.
- Real Consequence: Builders are incentivized to drive sustainable usage and fee generation, not just one-time deployment.
$100M+
OP RetropGF Rounds
Aligned
Incentives
03
The Infrastructure Moat Fallacy
Throwing grants at generic DeFi clones (another AMM, another lending market) is wasteful. The real moat is unique, chain-specific primitives.
- Key Insight: Starknet's account abstraction and zkSync's native account abstraction are defensible features that spawned novel app designs, not grant checks.
- Real Consequence: Fund the research and development of core infrastructure that enables use cases impossible elsewhere.
1
Unique Primitive
>10
Clones Funded
LAYER 2 ECOSYSTEM FUNDING
Grant Program ROI: A Sparse Harvest
Quantifying the tangible outcomes and hidden costs of major L2 developer grant programs.
| Metric / Feature | Arbitrum Foundation | Optimism Foundation | zkSync (Matter Labs) |
|---|---|---|---|
Total Grant Capital Deployed | $120M+ | $280M+ | $200M+ |
Projects Funded (Cumulative) |
|
|
|
Median Grant Size | $25k - $50k | $50k - $150k | $100k - $500k |
Protocol Revenue Generated by Grantees (Est.) | < 5% of total | ~15% of total | N/A (Data Opaque) |
TVL Retained from Grantees After 12 Months | < 20% | ~35% | < 15% |
Mandatory RetroPGF / Token Lock | |||
Primary Focus Area | General dApp Ecosystem | Public Goods & OP Stack | ZK Tech & Core Infra |
Notable Grantee Success (e.g., >$100M TVL) | GMX, Radiant | Synthetix, Velodrome | zkSync Era Native DEXs |
deep-dive
THE GRANT TRAP
The Mechanics of Mercenary Development
Protocols use grants to bootstrap ecosystems, but this often attracts short-term capital that leaves when funding dries up.
Grant capital is non-recurring revenue for developers. It creates a perverse incentive to build for the grantor, not the user. Projects like Arbitrum and Optimism have disbursed billions, but the resulting dApps often lack sustainable tokenomics.
Mercenary developers optimize for grant criteria, not product-market fit. This leads to protocol-specific forks of Uniswap or Aave that vanish post-funding. The ecosystem appears vibrant but is structurally hollow.
The counter-intuitive solution is smaller, milestone-based grants. Protocols like Polygon shifted to this model, funding only after proof of usage. This filters for builders, not bounty hunters.
Evidence: A 2023 analysis showed over 60% of grant-funded projects on major L2s were inactive within 12 months of final disbursement. Sustainable growth comes from fees, not subsidies.
counter-argument
THE INCENTIVE MISMATCH
Steelman: Aren't Grants Necessary for Bootstrapping?
Grant programs create a temporary, artificial economy that distorts developer incentives and delays sustainable growth.
Grants attract mercenaries, not builders. Protocol teams optimize for grant applications, not user needs. This creates a grant-driven development cycle that collapses when funding stops, as seen in the post-bull market exodus from many early L2 ecosystems.
They delay product-market fit discovery. Subsidized teams avoid the harsh feedback of real users and paying customers. Sustainable protocols like Uniswap and Aave emerged from organic usage, not grant competitions.
Capital efficiency plummets. Grant capital is a blunt instrument with poor ROI tracking. Contrast this with venture capital or protocol-owned revenue mechanisms, which enforce accountability through equity stakes or direct treasury alignment.
Evidence: The 2021-22 L2 grant boom produced hundreds of forked DEXs and NFT platforms; less than 5% survived the subsequent bear market with meaningful traction, demonstrating the grant sustainability gap.
case-study
THE GRANT PARADOX
Case Studies: Grant Models That Work (And Don't)
Developer grants are essential for bootstrapping ecosystems, but misaligned incentives can create mercenary developers and technical debt.
01
The Optimism RetroPGF Flywheel
Funds public goods after proven impact, not before. This aligns incentives with long-term ecosystem value, not grant proposals.
- Key Benefit: Rewards real usage and infrastructure, not promises.
- Key Benefit: Creates a self-sustaining funding model via sequencer fees.
- Key Benefit: Attracts builders focused on sustainability over grants.
$40M+
Distributed
3 Rounds
Completed
02
The Arbitrum STIP Short-Termism Trap
Time-boxed, application-specific grants for protocols can inflate TVL metrics without building durable infrastructure.
- Key Problem: Incentivizes mercenary capital and farming, not developer retention.
- Key Problem: Creates protocol-specific tooling that doesn't generalize.
- Key Lesson: Grants must target composable primitives, not just TVL pumps.
$50M+
Program Size
Short-Term
Focus
03
Polygon's Builders Program: The Scalpel vs. The Checkbook
A tiered, milestone-based program that funds based on technical reviews and traction, not just ideas.
- Key Benefit: Filters for execution capability, reducing grant waste.
- Key Benefit: Provides technical mentorship alongside capital.
- Key Metric: Focuses on ZK research, infra tooling, and dApps with clear roadmaps.
Multi-Tier
Structure
Milestone
Based Payout
04
The "Spray and Pray" Grant: Why It Fails
Small, one-off grants for hackathon projects with no follow-on funding or support structure.
- Key Problem: ~90% attrition rate post-hackathon; projects die after prize money.
- Key Problem: No pathway to sustainability, creating a graveyard of abandoned repos.
- Key Lesson: Grants must be part of a funnel, not an isolated event.
High
Attrition
Low
Retention
05
Starknet's Devonomics: Aligning with Core Contributors
Directs a portion of sequencer fees to developers of top-used protocols and infrastructure, creating a perpetual revenue stream.
- Key Benefit: Incentivizes building high-quality, frequently used dApps and tools.
- Key Benefit: Shifts focus from grant applications to user acquisition and retention.
- Key Metric: Rewards are algorithmic and ongoing, not a one-time gift.
Ongoing
Revenue Stream
Usage-Based
Distribution
06
The Base Ecosystem Fund: Strategic Co-Investment
Coinbase Ventures and Base avoid pure grants, opting for equity/coin investments alongside other VCs. This demands market validation.
- Key Benefit: Forces product-market fit before major funding.
- Key Benefit: Leverages VC diligence and brings professional go-to-market support.
- Key Lesson: The most valuable capital isn't free; it's smart capital with skin in the game.
VC-Led
Model
For-Profit
Alignment
takeaways
GRANT STRATEGY
Takeaways for Protocol Architects
Developer grants are a primary growth lever for L2s, but misaligned incentives can create fragile ecosystems and unsustainable growth.
01
The Mercenary Developer Problem
Grants attract developers who optimize for the subsidy, not product-market fit. This leads to a high churn rate post-funding and a graveyard of abandoned projects that inflate ecosystem metrics.
- Key Risk: Up to 70-80% of grant-funded projects fail to launch or achieve meaningful traction.
- Key Insight: Grants should fund ongoing operations (like gas fees for users) not just one-time development, tying success to real usage.
70-80%
Attrition Rate
0
Sustainable TVL
02
Arbitrum's Retroactive Funding Model
The Arbitrum Odyssey and DAO grant programs shifted focus to rewarding proven value creation rather than speculative promises. This aligns incentives with actual ecosystem growth.
- Key Benefit: Funds flow to teams that have already demonstrated utility and user adoption.
- Key Metric: Programs like Arbitrum's STIP directed ~$50M+ in ARB to protocols that already secured >$1B in collective TVL.
$50M+
Retroactive Funding
>$1B
Proven TVL
03
Optimism's OP Stack Playbook
Grants are used strategically to bootstrap technical standardization. Funding developers to build on the OP Stack creates composability and defensible moats, not just isolated apps.
- Key Benefit: Creates a cohesive ecosystem where applications are natively interoperable, increasing the L2's overall value.
- Key Tactic: Grants are tied to technical integration milestones (e.g., deploying a cross-chain messenger module) rather than vague roadmap promises.
10+
Chains Built
1
Shared Standard
04
The Liquidity Mirage
Grants used to seed liquidity pools create incentivized TVL that evaporates when rewards end. This distorts fundamental metrics and delays discovery of genuine product demand.
- Key Risk: >90% of incentive-driven TVL can exit within 30 days of program conclusion.
- Solution: Structure grants as matching funds for organic user deposits or focus on bootstrapping non-financial utility (e.g., data availability, social graphs).
>90%
TVL Drop-off
30 days
After Rewards
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Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall