Based on the talk by Meg Lister, Product Lead, Gitcoin Grants Stack, at Funding the Commons, July 2023

Written by Rohit Malekar

This article delves into the integral role of grants in shaping the web3 ecosystem. It explores the mechanism for Direct Grants and Quadratic Funding, their strategic implementation at different stages of ecosystem growth, and their impact on fostering a dynamic and resilient community. The article also discusses the nuances of managing these programs amidst the constantly evolving web3 landscape, underscoring the need for agility and strategic thinking in grant program management. By outlining the successful application of these grant mechanisms across various stages of ecosystem growth, the article offers a blueprint for effectively funding public goods.

Unifying a web3 ecosystem with grants

Grants provide early support for web3 projects, driving the space forward while helping teams and communities retain their sovereignty. This helps ecosystem funders– from prominent protocols to tokenized communities– develop the technology and creative assets necessary to remain competitive. It also helps attract and retain talent within ecosystems by providing opportunities for developers and creatives to work on challenging projects. A recent example is the Arbitrum Foundation Grant Program designed to support DAO initiatives by offering milestone-based financial support for builders on Arbitrum.

Grants also help unite an ecosystem around shared priorities. Through providing monetary incentives tied to specific issue areas, a grants program can serve as an incentive mechanism to encourage projects that address a community’s shared needs and can serve as an essential signal for engaged builders within an ecosystem. Urbit is a personal OS designed from scratch to run peer-to-peer applications and uses a combination of proposals, bounties, and apprenticeships to enable builders to cultivate individual relationships and address ecosystem challenges more autonomously.

Grants can provide financial support in the early stages of development for projects that may not have other funding sources, giving builders leeway to take a risk on developing new technologies. Grants also fund development projects that might not fit conventional investment areas, such as seed funding from a venture capitalist. These tools can provide immense value for a niche community but may need to be more practical as an at-scale company. Aave Grants DAO (AGD) funds ideas submitted by the Aave protocol’s community, focusing on empowering a wider network of developers, DeFi projects, community builders, and anything that helps the broader Aave Ecosystem.

Navigating complexities in grant programs

In a web3 grants program, grantees and program managers encounter various challenges. Grantees often struggle with a disjointed experience as they must navigate various tools to complete their workflow. Additionally, when the grant's objectives are unclear, it leads to difficulties as the program progresses. The application process itself, often designed as a one-size-fits-all approach, can be burdensome and may not suit the diverse needs of applicants. The lack of established processes and best practices further complicates this scenario.

On the other hand, program managers face their own set of challenges. Ensuring a consistent flow of high-quality applications is a difficult task. They need strategies to effectively identify and highlight the most promising ideas with minimal overhead. The rapid and continuous changes within the web3 ecosystem require grant program managers to be flexible and adaptable. This includes making tough decisions about maintaining the original scope of a project, redefining it, or, in some cases, reconsidering and potentially withdrawing funding. Besides, choosing the most appropriate funding mechanisms can be challenging. These challenges underscore the need for agility and clear strategy in managing web3 grant programs.

How might we harness the potential of grants programs and create a blueprint that every ecosystem can use to fund public goods?

Types of Funding Mechanisms

Direct Grants and Quadratic Funding represent two prevalent methods of distributing funds in web3 grant programs. In addition, these mechanisms can be operated in a proactive or retroactive setup. It's important to note that no single funding mechanism is universally superior. Combining different grant mechanisms fosters a more diverse and dynamic ecosystem, strengthening the community's overall robustness and resilience.

Direct Grants

By using Direct Grants, ecosystems can support builders by directly funding things that are complementary to or needed by their projects. Direct Grants are straightforward funding mechanisms where a certain amount of money is awarded to projects or individuals to support specific endeavors. Recipients are often expected to meet certain milestones or deliverables​. Funding amounts are predetermined and awarded based on grantors' criteria.

Direct Grants are more suitable for projects with clearly defined goals. They provide a straightforward funding method to kick-start development or to achieve specific milestones. They operate with a centralized decision-making process, where a single entity or a small group decides on funding allocation. This is preferable for projects that require a more controlled or directed development environment. Direct Grants can be directed towards structured innovation with clearer short-term goals, where builders can be funded by the organization more quickly than with Quadratic Funding. Thus, Direct Grant programs can offer high short-term value to fill gaps or needs within the ecosystem. ENS Small Grants, dYdX grants, Uniswap Foundation Grants are a few examples of direct grants programs.

Quadratic Funding

Quadratic Funding (QF) is a crowd-funding mechanism that amplifies available resources by inviting community members to make donations (big or small) that act as votes on where to allocate funds. It encourages a broader spectrum of experimentation by tapping into collective decision-making and funding, which might lead to discovering and supporting unconventional or niche projects. Quadratic Funding enables a community-driven approach that calculates funding allocation based on the number of contributors and the amount of funds raised, thus promoting a more democratized and transparent funding mechanism. It uses a unique mathematical formula that rewards based on the number of people who have donated, not only donation size. Quadratic Funding is often beneficial for ongoing or community-centric projects where a broader support base and engagement are crucial for success. Incredible projects like Uniswap, Bankless, Coin Center, and POAP were funded via Gitcoin in their early days and have grown to be pillars of the growing web3 community.

Retroactive Grants

The discussion on funding public goods is incomplete without considering retroactive funding mechanisms. Retroactive public goods funding, based on the principle that it's easier to evaluate past usefulness than to predict future utility, complements Direct Grants and Quadratic Funding (QF). While proactive Quadratic Funding often faces uncertainty in project funding amounts, leading to unpredictable outcomes, the retroactive application allows for assessment and reward based on actual achievements. Similarly, retroactive direct grants enable funding for ideas nearing realization, encouraging more risk-averse organizations to invest in innovative projects.

Different projects have varied funding needs, necessitating a mix of proactive and retroactive grant methods for optimal alignment with project requirements and grant structures. Over-reliance on retroactive grants in an ecosystem can limit initial funding for innovative ideas, potentially affecting visionary projects and a diverse range of builders. However, when used in balance with proactive grants, retroactive grants can highlight potential opportunities, foster networks among projects, and encourage risk-averse organizations to support public goods they might not have considered otherwise.

Optimism Collective’s Retroactive Public Goods Funding (RetroPGF) and Gitcoin Citizens Round are two prominent examples of retroactive grant programs.

Map to types and stages of ecosystem

Grant programs must evolve as each growth stage unfolds for a web3 ecosystem. The choice of funding mechanism depends on available funding, community size, and the level of decentralization. The following depicts a recommended blend in the context of ecosystem growth.

Early Stage: A blend of direct grants and quadratic funding is ideal, with a heavier emphasis on direct grants supporting concrete outcomes in the nascent ecosystem. The critical oversight at this stage is often the failure to implement quadratic funding, which is essential for attracting external donors and engaging communities in a shared vision.

Growth Stage: During this phase, the focus is on growth and sustainability for an ecosystem. An equal mix of direct grants and quadratic funding, along with the introduction of retroactive grants, is effective. The retroactive grant acknowledges the contributions of early builders, keeping them engaged and feeling rewarded as the ecosystem expands.

Mature Stage: Here, the emphasis shifts to decentralization in addition to growth and innovative ideas. The proportion of direct grants and quadratic funding reverses compared to the early stage. The community leans more towards quadratic funding to reflect its priorities. At this mature stage, about half of the grants are retroactive, as projects are less dependent on initial capital.

Grants Stack is a decentralized, protocol-enabled solution that enables any community to easily create, manage and grow a grants program. Interested in running your round? Schedule a demo with our team. If you’re a round operator looking to learn more about Grants Stack, please check out our Manager Toolkit.