Grant programs attract mercenary capital. They subsidize yield farmers who exit after incentives end, creating artificial activity that vanishes. This is a capital-inefficient subsidy that fails to build lasting user habits or protocol loyalty.
layer-2-wars-arbitrum-optimism-base-and-beyond
Blog
Why Grant Programs Are Failing to Solve the L2 User Adoption Problem
An analysis of why funding developers on Arbitrum, Optimism, and Base fails to address the fundamental demand-side challenge of bringing mainstream users to Layer 2 networks.
introduction
THE MISALIGNED INCENTIVE
Introduction
Protocol grant programs are a capital-inefficient subsidy for mercenary users, not a sustainable growth engine for L2s.
Real adoption requires utility, not bribes. Users adopt Arbitrum or Optimism for lower fees, not for a one-time airdrop. Sustainable growth comes from native applications like GMX or Uniswap solving real problems, not from temporary liquidity mining.
Evidence: Post-incentive TVL drops of 40-60% are standard. Avalanche's Rush program and Arbitrum's initial STIP saw massive capital flight after rewards ended, proving grants are a leaky bucket for user acquisition.
key-trends
GRANT PROGRAM PITFALLS
Executive Summary
Layer 2 grant programs are misallocating capital, funding speculative infrastructure instead of solving the core user adoption bottleneck.
01
The Builders vs. Users Fallacy
Grants fund developer tooling and protocols, but users don't care about SDKs. Adoption is driven by applications that abstract away blockchain complexity.\n- Key Problem: Grants create a developer echo chamber while user-facing dApps remain underfunded.\n- Key Metric: <5% of major L2 grant budgets target end-user application UX.
<5%
UX Grants
95%+
Dev Tooling
02
The Liquidity Black Hole
Programs incentivize short-term mercenary capital, not sticky users. TVL is a vanity metric that evaporates when grants dry up.\n- Key Problem: $10B+ in liquidity incentives have failed to create sustainable usage flywheels.\n- Real Metric: Daily Active Addresses (DAA) remain flat post-grant, exposing the lack of product-market fit.
$10B+
Wasted Incentives
~0%
DAA Growth
03
The Abstraction Layer Gap
Users need intent-based, gasless experiences, not another wallet to fund. Grants ignore the critical middleware layer between the chain and the user.\n- Key Problem: No funding for account abstraction (AA) bundlers, intent solvers, or social recovery services.\n- Solution Path: Fund the infrastructure that makes L2s invisible, like UniswapX and ERC-4337 paymasters.
~500ms
Intent Latency
100%
Gasless Target
04
The Protocol-Centric Myopia
Grants are awarded to protocols that serve the L2's own ecosystem metrics, not to applications that attract external users.\n- Key Problem: Cross-chain interoperability and real-world asset (RWA) onboarding are systematically underfunded.\n- Missed Entities: Bridges like LayerZero and Across solve user problems but compete for grants against niche DeFi legos.
-90%
Cross-Chain Focus
10x
RWA Multiplier
thesis-statement
THE MISALLOCATION
The Core Thesis: The Supply-Side Fallacy
Grant programs fail because they fund supply-side infrastructure that users do not want, ignoring the demand-side liquidity problem.
Grant programs target builders, not users. They fund protocol development and infrastructure, assuming a 'Field of Dreams' effect where building it brings users. This ignores the demand-side liquidity problem where users need a reason to switch from established chains like Ethereum mainnet or Solana.
Capital is misallocated to redundant tooling. Grants fund another bridging frontend or NFT marketplace when the bottleneck is user liquidity, not technical options. The ecosystem already has Across, Stargate, and LayerZero for bridging and Blur and OpenSea for NFTs.
Evidence is in the TVL gap. An L2 can have hundreds of funded dApps but still hold less than 1% of its parent chain's TVL. The capital remains on the chain with the deepest liquidity pools and most established composability, not the one with the most grants.
L2 GRANT PROGRAM ANALYSIS
The Grant-to-Adoption Disconnect: A Data Snapshot
A quantitative comparison of major L2 grant programs against key adoption metrics, revealing misaligned incentives.
| Key Adoption Metric | Arbitrum Foundation | Optimism Foundation | Base Ecosystem Fund |
|---|---|---|---|
Total Grant Capital Deployed | $200M+ | $850M+ | $200M+ |
Avg. Grant Size (Seed Stage) | $50K - $250K | $50K - $150K | $100K - $500K |
Primary Focus | General Ecosystem | Retroactive Public Goods | Onchain Consumer Apps |
TVI from Grantees (Est.) | < 5% of Total TVL | < 2% of Total TVL | ~10% of Total TVL |
Protocol Revenue from Grantees | < 1% | < 0.5% | ~3% |
Requires Native Token Emission | |||
Top Grantee Category | DeFi Infrastructure | Governance Tooling | Social / Gaming |
Time-to-Grant Decision | 3-6 months | 6-12 months | 1-3 months |
deep-dive
THE MISALIGNMENT
Deep Dive: The Three Fatal Flaws of Grant-First Strategies
Grant programs fail to drive sustainable user adoption because they optimize for the wrong metrics and incentives.
Flaw 1: Subsidizing Inefficiency. Grants fund speculative development, not user demand. Teams build for the grant committee, not the market, creating zombie dApps with zero organic traction. This is the moral hazard of free capital.
Flaw 2: Ignoring Composability. Isolated grants create walled gardens. A grant for a new DEX on Polygon zkEVM does nothing to solve the liquidity fragmentation that plagues users across Arbitrum, Base, and Scroll. The real problem is interoperability, not another AMM fork.
Flaw 3: Measuring Output, Not Outcomes. Programs track grant dollars deployed, not protocol revenue or user retention. A project like Optimism's RetroPGF rewards past contributions but struggles to prove it directly fuels future growth. Success becomes a vanity metric.
Evidence: The Liquidity Mirage. Analyze any major L2 grant recipient. You will find TVL spikes post-funding that evaporate within 90 days, while core infrastructure like Chainlink or The Graph sustains usage because it solves a fundamental need.
case-study
GRANT PROGRAM PITFALLS
Case Studies in Misdirected Funding
Layer 2 grant programs are pouring billions into developer incentives, but user adoption remains stagnant. Here's why the funding is misdirected.
01
The Protocol-Centric Grant Trap
Grants overwhelmingly fund core protocol development and liquidity mining, not the user-facing applications that drive adoption. This creates a supply-side glut with no demand.
- Result: $500M+ in grants for infra, <5% for UX tooling.
- Outcome: Users face fragmented wallets, complex bridging, and poor onboarding.
<5%
UX Funding
$500M+
Infra Grants
02
The Arbitrum Odyssey Fallacy
Massive airdrop campaigns like Arbitrum's attract mercenary capital, not sticky users. Post-drop, activity collapses as users rotate to the next incentive program.
- Result: ~50% TVL drop within 3 months of token distribution.
- Proof: The "Odyssey" model fails to build sustainable product-market fit.
~50%
TVL Drop
3 Months
Retention Window
03
Ignoring the Abstraction Layer
Grants fund individual L2s, forcing users to pick winners. The real adoption driver is chain abstraction (like Polygon AggLayer, Near) that hides complexity.
- Problem: Grants reinforce fragmentation.
- Solution: Fund SDKs and standards that make the underlying L2 irrelevant to the end-user.
0
Dominant Std
10+
Fragmented Chains
04
Optimism's RetroPGF: Funding Outputs, Not Outcomes
Retroactive Public Goods Funding (RetroPGF) rewards past work, but its metrics (like GitHub commits) are poor proxies for actual user growth. It's a builder subsidy, not a user acquisition engine.
- Flaw: Measures developer activity, not daily active users (DAU).
- Evidence: $100M+ distributed, yet L2 user bases remain niche.
$100M+
Distributed
Niche
DAU Growth
05
The Missing Bridge for Normies
Billions fund trust-minimized bridges (Across, LayerZero) for degens, but zero is allocated to seamless fiat-to-L2 ramps. The real bottleneck is getting net new users from traditional finance on-chain.
- Gap: No grants for compliant, low-fee fiat ramps with direct L2 settlement.
- Consequence: Adoption is limited to the existing crypto-native bubble.
$0
Fiat Ramp Grants
1B+
Potential Users
06
Grant Committees ≠Product Managers
Grant decisions are made by technical committees or DAOs, not by teams with P&L responsibility for user growth. This leads to funding interesting tech, not necessary products.
- Structural Flaw: No accountability for user adoption KPIs.
- Fix: Tie grant disbursements to measurable milestones like user retention and transaction growth.
0%
P&L Accountability
100%
Tech-Focus
counter-argument
THE MISALLOCATION
Counter-Argument: But Grants Build Essential Infrastructure
Grant programs systematically misallocate capital towards developer-facing tooling instead of user-facing applications.
Grants fund developer tools that solve problems for builders, not users. Programs prioritize wallets, indexers, and SDKs like The Graph or viem, which are essential plumbing but do not drive end-user adoption.
This creates a supply-side bubble where infrastructure outpaces demand. The ecosystem resembles a city with perfect sewers and no houses, a direct result of misaligned grant incentives that reward technical novelty over user growth.
Evidence: Analyze any major L2 grant dashboard. You will find dozens of indexing services and bridging abstractions for every single grant awarded to a consumer-facing dApp with a clear growth loop.
FREQUENTLY ASKED QUESTIONS
FAQ: The Builder's Dilemma
Common questions about why grant programs are failing to solve the L2 user adoption problem.
Grant programs primarily attract mercenary capital and developers, not end-users. They fund infrastructure like bridges and DEXs, but fail to create compelling applications that solve real-world problems. Users migrate for utility, not grants.
future-outlook
THE INCENTIVE MISMATCH
Future Outlook: From Grants to Growth Loops
Protocol grants fail because they subsidize supply without creating sustainable user demand.
Grants fund builders, not users. Protocol treasuries like Arbitrum's DAO Treasury pay developers to deploy, but this creates ghost chains with high TVL and zero daily active users. The incentive structure is misaligned with long-term adoption.
Growth requires embedded economic loops. Successful adoption, like early Uniswap liquidity mining, ties incentives directly to user actions. Future systems must use intent-based architectures (e.g., UniswapX, CowSwap) that program rewards into the transaction flow itself.
Proof-of-Use beats proof-of-deployment. Metrics shift from grant proposals to retention and frequency. Protocols like Optimism's RetroPGF 3 are experimenting with rewarding real usage, but this requires on-chain attribution layers like Hypercerts or EigenLayer.
Evidence: Less than 10% of projects funded in major L2 grant rounds maintain user activity after the grant period expires, per a 2023 Celestia ecosystem report.
takeaways
WHY GRANTS ARE MISSING THE MARK
Key Takeaways
Despite billions allocated, L2 grant programs are failing to drive sustainable user adoption due to fundamental misalignment with market realities.
01
The Builder-Consumer Mismatch
Grants fund infrastructure for other builders, not applications for end-users. This creates a developer echo chamber where funded projects (e.g., new DEXs, lending protocols) compete for the same tiny existing user base.
- Result: Market saturation of similar DeFi primitives.
- Missed Opportunity: No funding for onboarding tools, fiat ramps, or consumer apps.
>80%
DeFi-Focused
<5%
Consumer Apps
02
The Liquidity Mirage
Programs prioritize TVL over active users, creating a mercenary capital problem. Projects like early Optimism Quests attracted farmers who left after incentives dried up.
- Key Metric: Daily Active Addresses (DAA) is ignored for vanity TVL.
- Real Cost: Pays for temporary liquidity, not permanent user habits.
-90%+
TVL Drop Post-Grant
~7 days
Farmer Retention
03
The Integration Gap
Grants fund isolated projects, not the composable stack needed for seamless UX. A user needs a wallet, bridge, gas abstraction, and app—grants only solve one piece.
- Critical Failure: No coordination between grant recipients (e.g., a bridge grant and a wallet grant).
- Solution Needed: Programmatic grants for integrated stacks, like Safe{Wallet} + Biconomy + Socket.
5+
Apps to Use
0
Grants for Stacks
04
The Speed-to-Market Failure
Grant committees move at DAO speed, missing market windows. By the time a grant is approved, the competitive landscape or user trend (e.g., SocialFi, Restaking) has shifted.
- Process Bloat: Multi-month approval vs. weeks for a VC check.
- Consequence: Funds cutting-edge tech that's already obsolete.
3-6 months
Avg. Grant Timeline
4-8 weeks
Market Cycle
05
The Airdrop Distortion
The promise of a future airdrop corrupts builder incentives. Teams optimize for grant committee checkboxes and sybil-resistant metrics, not product-market fit.
- Perverse Incentive: Building for airdrop hunters, not real users.
- Data Pollution: Inflates all adoption metrics, making real growth impossible to measure.
90%+
Sybil Activity
$0
Real Revenue
06
The Solution: Outcome-Based Vesting
Replace upfront grants with milestone-based vesting tied to real adoption metrics. Follow the model of Optimism's RetroPGF but applied proactively.
- Payout Triggers: Monthly Active Users, retention rate, or protocol revenue.
- Alignment: Pays for results, not promises. Attracts builders who believe in their product.
100%
At-Risk Capital
10x
Better ROI
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