Why Most Public Goods Funding is Just Marketing Spend

Retroactive funding is marketing spend. Protocols like Optimism and Arbitrum allocate grants to projects that already succeeded, buying narrative alignment and developer mindshare post-hoc.

The incentive is capture, not creation. Funding follows protocol-native tokens, not impact. This creates a closed-loop economy where grants signal loyalty to the L2's ecosystem over solving real problems.

Evidence: Over 90% of major L2 ecosystem funds are distributed to projects building exclusively on their chain, creating subsidized competition rather than foundational infrastructure.

Retroactive funding is performance theater. Protocols like Optimism and Arbitrum allocate millions to past contributors, but this creates a perverse incentive for developers to chase narrative over utility. The funding is a PR tool, not a sustainable growth engine.

Grants are brand-building exercises. A DAO treasury funding a new DEX aggregator or NFT marketplace is buying a marketing case study. The real goal is to signal ecosystem vitality to VCs and users, not to solve a core technical deficiency.

The evidence is in the outcomes. The Ethereum Foundation has funded thousands of projects, yet core scaling bottlenecks persist. The funding creates a consultancy class of grant writers, not a pipeline of production-ready infrastructure.

Retroactive funding is marketing. Protocols like Optimism and Arbitrum allocate retroactive grants to projects that already succeeded. This rewards past success but fails to fund the risky, early-stage R&D that creates breakthroughs. It's a signaling mechanism to attract developers, not a capital allocation engine.

Treasury governance is broken. DAO treasuries, like Uniswap's $2B+ pool, are managed by token holders who prioritize token price appreciation. This creates a structural incentive mismatch where funding decisions favor projects that boost short-term metrics over long-term infrastructure.

Protocols outsource R&D costs. By funding public goods after they're built, Ethereum L2s and Cosmos app-chains avoid the capital risk of foundational work. They let the ecosystem bear the cost of failure, then capture the value of success through retroactive airdrops and integrations.

Evidence: Gitcoin's decline. The shift from quadratic funding to large, centralized matching pools from Optimism and Polygon turned Gitcoin Grants into a protocol marketing channel. Developer grants became dependent on the marketing budgets of L2s, not sustainable community value.

Funding is misallocated marketing. Grants from L2s like Optimism and Arbitrum are primarily designed to attract users and developers to their chain, not to solve fundamental problems. This creates a vendor-locked ecosystem where projects build for a single chain's grant cycle, not for the broader network.

Sustainability is an illusion. The retroactive funding model popularized by Optimism creates perverse incentives. Teams optimize for narrative and visibility to win future rounds, not for shipping durable code. This is a speculative grant economy detached from real user value.

Compare Gitcoin to direct grants. Gitcoin's quadratic funding surfaces community preference but is gamed by sybil farmers. Direct grants from entities like the Ethereum Foundation or Polygon select for established teams, creating an insider allocation problem. Both models fail to fund novel, high-risk R&D.

Evidence: L2 grant distribution. Analyze any major L2's grant recipients. You will find a preponderance of wallets, bridges (like Across), and frontends—projects that drive immediate TVL and volume. Core protocol research, client diversity, or cryptographic primitives are chronically underfunded.

Retroactive funding models like Optimism's RPGF are glorified marketing budgets. They reward past contributions but fail to create a self-sustaining economic flywheel. The funding is a one-time grant, not a recurring revenue stream tied to protocol usage.

Protocols must internalize value capture. Projects like Uniswap and Lido generate real fees, which can be directed to public goods via mechanisms like fee-switch governance. This creates a direct link between protocol success and ecosystem funding.

Retroactive vs. Proactive funding is the core tension. RPGF rewards what was built; a proactive model like Ethereum's PBS/MEV-Boost funds what is needed. The latter aligns incentives for future development, not just past work.

Evidence: Gitcoin Grants distributes ~$50M annually, but this is dwarfed by the billions in protocol fees generated by top DeFi applications. The capital exists; the plumbing to redirect it does not.