The Cost of Misaligned Incentives in dApp Grant Milestones

Teams optimize for vanity metrics like wallet addresses and transaction counts, not sustainable usage. This creates a phantom economy where grant capital is recycled into gas fees to hit milestones, with zero real user retention.

• Key Metric: >80% of grant-funded wallets are inactive post-milestone payout.
• Result: $100M+ in grant capital annually fuels empty on-chain activity instead of product-market fit.

Grant deliverables are structured as one-time technical checkboxes (e.g., "deploy on X chain"), not ongoing value creation. This leads to abandoned integrations and zombie contracts that drain ecosystem resources.

• Key Metric: ~60% of grant-funded smart contracts see <10 transactions after deployment.
• Result: Network bloat and security liabilities from unmaintained code, as seen in early Arbitrum and Optimism grant cycles.

Sophisticated actors use grant proceeds to fund Sybil farms, creating a self-sustaining loop. Capital from Uniswap DAO or Aave Grants is used to bootstrap fake engagement, which is then used to qualify for more grants from other ecosystems like Polygon or Base.

• Key Metric: Identified Sybil clusters can recirculate ~30% of grant funds into new grant applications.
• Result: Grant programs inadvertently fund professional grant gamers, not builders, distorting allocation signals for VCs and DAOs.

Retroactive Public Goods Funding aims to reward past contributions, but its opaque, multi-round voting process has devolved into a marketing contest. Teams spend more resources on retroactive narrative-building than on building usable software, creating a grant-seeking feedback loop that misallocates capital.

• Impact: $100M+ distributed across 3 rounds with questionable value capture.
• Result: High-profile projects like Gitcoin and Uniswap receive funds, while smaller, critical infrastructure is overlooked.

The $120M DAO grants program in 2023 explicitly tied funding to Total Value Locked (TVL) milestones. This created a massive, temporary incentive for mercenary capital, not users.

• Tactic: Protocols like GMX and Camelot launched high-APR farms, attracting $2B+ in short-term TVL.
• Aftermath: >60% TVL evaporated post-grant distribution, revealing the program funded liquidity bribes, not sustainable growth.

A $180M liquidity mining program that paid protocols like Aave and Curve to deploy on Avalanche. Incentives were purely emission-based, attracting professional yield farmers who optimized for maximum extractable value (MEV) and immediate exit.

• Outcome: TVL spiked to ~$10B, then collapsed as emissions slowed.
• Lesson: Paying for liquidity without designing for user retention or protocol fee sustainability is a capital-efficient way to rent a userbase that doesn't care about your chain.

Polygon's zkEVM grant program required developer activity and transaction milestones. This led to a surge in low-value, grant-farming contracts that inflated metrics without creating real utility. The chain's activity graphs became a signal of grant compliance, not organic adoption.

• Symptom: >50% of early transactions were from grant-qualifying dummy contracts.
• Systemic Risk: Distorted on-chain data makes it impossible to gauge genuine product-market fit, poisoning the well for legitimate builders.

Teams optimize for grant committee checkboxes, not user adoption. This leads to feature-complete ghost dApps with <100 active users and zero sustainable revenue. The grant becomes the primary business model.

• Wasted Capital: ~$2B+ in ecosystem funds misallocated annually.
• Distorted Roadmaps: Building for grants, not for users.
• No Skin in the Game: Success decoupled from financial outcome.

Fund what is proven useful, not what is promised. Inspired by Optimism's RetroPGF, this model rewards impact after it's demonstrated, aligning incentives with real-world value.

• Impact-Driven: Rewards protocols like Uniswap, Ethereum Client Teams, and Gitcoin based on measurable usage.
• Eliminates Speculation: No more funding vaporware roadmaps.
• Community Judgement: Uses badgerDAO-style community curation to assess value.

Structure grants as zero-interest loans that convert to equity/tokens upon hitting genuine traction metrics (e.g., $1M+ TVL, 10k+ MAU). This creates founder-aligned, patient capital.

• Alignment: Founders only dilute if they succeed.
• Patient Capital: Removes premature liquidation pressure.
• VC-Compatible: Mirrors SAFE notes from traditional tech, familiar to investors like a16z crypto and Paradigm.

Grants often mandate integration with a specific L1/L2 or partner dApp (e.g., "Must deploy on Chain X"). This forces suboptimal technical decisions and fragments liquidity, harming the very ecosystem it aims to help.

• Artificial Fragmentation: Creates 10+ identical dApps across chains to collect grants.
• Technical Debt: Forces use of inferior stacks for funding.
• Liquidity Dilution: ~$500M+ in bridged liquidity stuck in grant-mandated silos.

Replace "Complete Smart Contract X" with "Achieve $500k in protocol revenue" or "Secure 5,000 organic users." Pay out grants based on verifiable on-chain and product metrics.

• Outcome-Oriented: Funds success, not activity.
• On-Chain Verifiable: Uses The Graph for transparent metric tracking.
• Anti-Fluff: Impossible to fake genuine user adoption and revenue.

A hybrid model that got it partially right. Arbitrum's Short-Term Incentive Program (STIP) funded protocols like GMX, Uniswap, and Camelot based on a proposal for future incentives, with some clawbacks for underperformance.

• Merit-Based: Funded established protocols with clear plans.
• Partial Accountability: Included clawback mechanisms.
• Lesson: Still forward-looking; a retroactive layer would strengthen it.