The Future of Funding: Why Grants Will Morph into Equity-Like Stakes

Uniswap's governance is moving beyond simple project grants to fund long-term, protocol-aligned work. This signals a maturation where funding is tied to sustained value creation rather than one-off deliverables.

• Key Benefit: Funds core protocol R&D and public goods, creating a flywheel for the Uniswap ecosystem.
• Key Benefit: Aligns developers with the long-term success of the UNI token, mimicking equity incentives.

Optimism's RetroPGF (Retroactive Public Goods Funding) is a canonical experiment in equity-like stakes. It rewards value after it's proven, solving the misalignment of upfront grants.

• Key Benefit: Creates a meritocratic market for impact, where the most useful contributions earn the most.
• Key Benefit: Builds a loyal, invested developer base for the OP Stack and Superchain vision.

Venture capital giant a16z runs a program offering convertible grants to early-stage crypto projects. This hybrid model provides non-dilutive runway that can convert to equity, blending traditional VC with web3 funding mechanics.

• Key Benefit: De-risks early building for founders without immediate dilution.
• Key Benefit: Gives a16z first look and alignment with the most promising teams building on Ethereum, Solana, and other L1s.

Polygon's ecosystem fund operates like a corporate venture arm, taking direct equity and token stakes in projects building on its chain. This is a pure equity-for-resources play.

• Key Benefit: Directly captures the upside of ecosystem growth, funding itself from treasury assets like MATIC.
• Key Benefit: Strategically directs development to fill gaps in the Polygon PoS, zkEVM, and AggLayer stack.

Stakes with profit-sharing rights are a regulator's dream. The SEC will classify them as securities, triggering onerous compliance costs and legal liability for founders and DAOs. This kills the permissionless innovation that defined DeFi's early days.

• Key Risk: Retroactive enforcement on past distributions.
• Key Risk: ~$1B+ in potential fines and legal fees industry-wide.
• Key Risk: Exclusion of US-based users and developers.

Equity stakes create permanent, concentrated ownership. VCs with large, locked positions will form de facto governance cartels, prioritizing extractive fees and rent-seeking over user experience. This mirrors the corporate capture seen in TradFi.

• Key Risk: Stagnant protocol development favoring incumbents.
• Key Risk: <10 entities controlling >51% of key governance votes.
• Key Risk: Suppression of competing forks or upgrades.

Locked, non-transferable stakes destroy the flywheel. Early team and backer tokens become illiquid, removing the sell pressure that creates market depth. This leads to phantom valuations and eventual catastrophic collapses when unlocks occur, as seen with FTX and Solana ecosystem tokens.

• Key Risk: Illiquidity premium masks true token value.
• Key Risk: 80-90% drawdowns post-unlock are predictable.
• Key Risk: Erodes trust in the entire staking model.

Open-source code with closed, vested ownership is a contradiction. Competitors will fork the protocol, strip the equity stake, and launch a community-owned version. The original "equity" protocol becomes a zombie, as value accrues to the fork. This happened to SushiSwap vs. Uniswap.

• Key Risk: Zero barrier to forking the core value proposition.
• Key Risk: Majority of devs & users migrate to the fork.
• Key Risk: Equity stake becomes a worthless claim on a ghost chain.

Equity stakes attract financial engineers, not protocol engineers. Talent flocks to design complex tokenomics for extraction, not to solve hard technical problems. This leads to a brain drain from core R&D to financial alchemy, stalling genuine innovation.

• Key Risk: 0 novel L1/L2 designs emerge from equity-stake ecosystems.
• Key Risk: Proliferation of "vampire fork" mercenaries.
• Key Risk: Long-term protocol security and scalability suffer.

Formal equity stakes make DAO governance a legal fiction. With clear, legally-enforceable shareholders, the DAO's decentralized decision-making becomes a theatrical performance. Real control rests with the equity holders, rendering community proposals irrelevant and killing grassroots engagement.

• Key Risk: <1% of governance proposals by community are enacted.
• Key Risk: DAO becomes a cost center for shareholder relations.
• Key Risk: Erosion of the credible neutrality ethos.

Foundations and DAOs deploy capital with zero accountability and no upside capture. This leads to:

• Misaligned incentives: Grantees optimize for grant completion, not protocol success.
• Capital inefficiency: ~70% of grant capital fails to generate sustainable value.
• No skin in the game: Builders face no penalty for abandoning a project post-funding.

Replace cash grants with vesting token allocations tied to KPIs and milestones. This mirrors startup equity vesting.

• Alignment: Teams earn their stake by delivering protocol usage and revenue.
• Accountability: Cliffs at 6-12 months ensure commitment; failure means forfeiture.
• Scalable Model: Enables funding 10x more early-stage teams with the same treasury by deferring dilution.

A hybrid instrument, inspired by SAFEs and token warrants, that starts as a grant and converts to tokens upon hitting triggers.

• Low initial dilution: No tokens issued until product-market fit is proven.
• Clear triggers: Conversion based on TVL, revenue, or user targets.
• Precedent: Models are being pioneered by Optimism's RetroPGF 3.0 and Arbitrum's STIP. This is the YC SAFE for web3.

Forward-thinking protocols like Aave, Uniswap, and Lido are becoming the most potent venture funds. Their edge:

• Native distribution: Can integrate and bootstrap usage instantly across a $50B+ ecosystem.
• Data advantage: Direct insight into on-chain traction and team execution.
• Exit to community: Successful projects naturally exit into the protocol's treasury and token, creating a virtuous cycle of value accrual.