The Future of Protocol Sustainability: Built-In Retroactive Funding Pools

Protocols generate billions in fees but lack a native mechanism to recapture value for their own development. This creates a free-rider problem where core contributors are underfunded, forcing reliance on volatile token treasuries or VC funding rounds.

• Leakage: Value accrues to extractors (MEV searchers, LPs) not builders.
• Dependency: Development roadmaps are tied to token price, not protocol utility.
• Inefficiency: Manual grant committees like Optimism's RPGF are slow and politically fraught.

Embed a perpetual funding pool directly into the protocol's fee switch or inflation schedule. Smart contracts autonomously collect and distribute funds based on verifiable, on-chain contribution metrics, removing human discretion.

• Automation: Fees are routed to a pool like EIP-6968's Block-Builders RPGF model.
• Objectivity: Distribution uses attestations or retroactive oracle data (e.g., Hypercerts).
• Sustainability: Creates a positive feedback loop where protocol success directly funds its own innovation.

Maximal Extractable Value and user transaction order flow represent the largest, most liquid source of recapturable value. Protocols like CowSwap (via CowDAO) and Uniswap (via UniswapX) are already using this to fund public goods.

• Liquidity: MEV markets represent $500M+ in annual extractable value.
• Design: Order flow auctions and intent-based systems (e.g., Anoma, Flashbots SUAVE) can natively allocate a cut to an RPGF pool.
• Alignment: Redirects value from adversarial searchers back to the ecosystem that created it.

The most mature experiment, distributing over $100M+ to date. It's a blueprint for how a protocol can systematically fund its own infrastructure.

• Key Benefit: Creates a direct, on-chain feedback loop where protocol revenue (sequencer fees) funds its own development.
• Key Benefit: Decentralizes grant-making via a badgeholder system, moving beyond foundation control.

MEV searchers capture billions in value that could otherwise fund protocol development. This is a direct sustainability drain.

• Key Benefit: Built-in funding pools can internalize this value. Imagine a % of all MEV being routed to a retroactive pool.
• Key Benefit: Aligns block builders and validators with long-term protocol health, not just short-term extraction.

A smart contract vault that automatically accrues a % of all protocol fees (swap fees, gas, commissions). Governance decides distribution via retroactive rounds.

• Key Benefit: Sustainable & Predictable Funding. Removes reliance on volatile token treasuries or VC grants.
• Key Benefit: Incentivizes Positive-Sum Contributions. Builders work for the protocol's future revenue share, not just a one-time grant.

The failed but seminal ATOM 2.0 proposal aimed to create a Liquid Staking and Interchain Scheduler to generate fees for a community pool.

• Key Benefit: Showed a clear vision: protocol security (staking) and core services (scheduling) should fund the ecosystem.
• Key Benefit: Highlights the political hurdle of re-architecting a chain's native token economics for sustainability.

Foundation grants are slow, political, and miss emergent needs. They fund proposals, not proven outcomes, leading to misallocated capital.

• Key Benefit: Retroactive funding pays for proven impact, not promises. It's a market signal for what the ecosystem actually values.
• Key Benefit: Dramatically reduces administrative overhead by crowdsourcing discovery and evaluation.

While not fully retroactive, Arbitrum's DAO has direct control over sequencer fee revenue. This sets the stage for a native, on-chain funding pool.

• Key Benefit: Proves the mechanism works. The protocol generates real, spendable revenue from its core operation.
• Key Benefit: The next logical step is to automate a portion of this flow into a continuous retroactive funding pool, following Optimism's model.

On-chain identity is cheap. RPGF pools become honeypots for sophisticated Sybil attackers who can game quadratic funding or reputation-based voting to drain funds. This isn't a theoretical risk; it's a daily reality for protocols like Gitcoin Grants and Optimism's RPGF rounds, which spend significant resources on fraud detection.

• Key Risk: Sybil farms can capture >30% of allocated funds without detection.
• Key Risk: The cost of defense (e.g., BrightID, Proof of Humanity) often outweighs the value of small grants.
• Key Risk: Creates perverse incentives where building reputation bots is more profitable than building protocol utility.

A built-in RPGF pool creates a permanent, automated expenditure line from the protocol treasury. During bear markets or periods of low revenue, this mandatory spending can accelerate a death spiral, directly conflicting with the protocol's financial sustainability.

• Key Risk: Fixed percentage allocations (e.g., 10% of fees) become unsustainable during -80% TVL drawdowns.
• Key Risk: Competitors like Lido or Aave without this obligation have greater treasury resilience.
• Key Risk: Forces a trade-off between funding public goods and funding core protocol development and security.

RPGF decision-making power is a high-value governance right. Whales or coordinated groups (e.g., VC syndicates, delegated validators) can capture the process to fund their own ecosystem projects, turning public goods funding into a subsidized business development arm.

• Key Risk: Centralizes influence, mirroring the flaws of MakerDAO's early governance.
• Key Risk: Diverts funds from critical, non-commercial infrastructure (e.g., client diversity) to venture-backed dApps.
• Key Risk: Erodes community trust, as seen in backlash against Uniswap Grants and Compound Grants.

Retroactive funding rewards past work, but protocol sustainability depends on future value. This creates a fundamental misalignment: builders are incentivized to work on what was valuable, not on what will be valuable for the protocol's next phase.

• Key Risk: Funds legacy infrastructure (e.g., EVM tooling) while emerging critical needs (e.g., ZK prover research) go underfunded.
• Key Risk: Mimics the failure mode of corporate R&D budgets that only fund incremental improvements.
• Key Risk: Contrast with Celestia's modular ecosystem fund, which is explicitly forward-looking.

Managing a grants program is a full-time operational burden requiring legal, accounting, and community management. Protocols like Optimism have spawned entire foundations to handle this. For a lean protocol, this creates significant overhead and opens up regulatory scrutiny.

• Key Risk: >50% of grant funds can be consumed by operational overhead (review, compliance, distribution).
• Key Risk: Creates a clear SEC-targetable "investment contract" nexus by actively funding specific projects.
• Key Risk: Distracts core devs from protocol mechanics, as seen in the Ethereum Foundation's evolving role.

A siloed, protocol-specific RPGF pool fragments funding for cross-chain or ecosystem-agnostic public goods. Why should a wallet builder or a security researcher choose one protocol's grants over another's? This leads to duplicated efforts and underfunds universal infrastructure.

• Key Risk: Undermines network effects for foundational tech like Nomic or Tenderly.
• Key Risk: Forces projects to pick tribal allegiances, reducing overall ecosystem resilience.
• Key Risk: Highlights the superior model of Gitcoin's matching pools, which aggregate demand across ecosystems.