In the bull market, we had yield farming; in the bear market, we now have grant farming.
Why are grants significant?
Grants and grants programs have always had a place in crypto (or Web3, if that’s what you like to call it). Many of these programs and initiatives started focused on base layer network infrastructure, software development, and developer tooling.
Today, these programs have diversified into many focus areas, including content creation, curation, and community building. Over the past year, these programs have increased and gained significant popularity in the broader ecosystem. So let’s dive into why that is and the trajectory of these programs we see in the days ahead.
First, let’s start with some basics to ensure we’re all on the same page. A grant is “a sum of money given by a government or other organization for a particular purpose.” This sounds like free money to many, but the key phrase in this definition is “for a particular purpose.” Because we don’t have governments (yay!) doling out the vast majority of funding as we see with grants in the more traditional sense, we instead have interesting new kinds of organizational models that have evolved or developed to take on the role of grants management (among other things).
So, why do these different kinds of organizations dedicate many of their treasuries to giving away money to builders and projects?
To understand this better, there are two concepts we need to comprehend:
Fat Protocol Thesis
A seminal piece in the catalog of crypto knowledge, Joel Monegro’s Fat Protocols thesis states that unlike the walled gardens of Web2 where most of the value accrual happened at the application layer (Ex. Google, Facebook, Amazon) over the protocol layer (Ex. HTTPS, SMTP) the value accrual in Web3 will happen at the protocol layer over the application layer.
This will happen primarily due to two significant factors:
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Complete transparency of data
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The presence of a token to access the protocol that can accrue in value
The defensibility of Web2 projects lies in the data they possess and the tech IP. In Web3, when both the data and the code are open to the public, the only defensibility comes from network effects and the costs of switching to another product.
Network effects directly function the number of valuable products built upon a protocol. These beneficial products must also have a strong community with strong network effects to decrease user switching costs.
Now that it is well understood that protocols need practical applications built on top of them, how can a protocol incentivize valuable projects to be built on top of it? How can a value flywheel be created for an incentive program?
Enter Grants.
The Grants Value Flywheel
When we look at grants, the organization disbursing the grant has the underlying belief that the grantee will build something that will augment its value. Joel John explained the grants flywheel the best in an infographic from his piece “Grants & Web3” (another must-read from the catalog of crypto knowledge).
While the image above is self-explanatory, it is clear that the primary goal of a grants program is to maximize the number of individuals and teams building value across the broader ecosystem and using that value to attract the most users. Additionally, the treasuries that support these programs are very limited in what they can do with their funds. Therefore, they must place their bets wisely regarding operational costs and grant distribution, especially in the depths of a bear market like we are currently experiencing.
Another interesting aspect of grants in Web3 is that these programs manage some portion of the treasuries for the respective protocol tokens. This means that the grant programs are tasked with spending money to increase the value of the remaining tokens; this is a never seen dynamic in web2. For example, imagine if Apple had incentivized early app developers with Apple Stocks. In this mental model, if Apple accrues value because of the apps, the developers have unbound upside too.
Now that we have shared with you a bit of our perspective on the way, let’s take a look at the how as we dive deeper into how these programs function today.
Component Parts
To understand how grant programs work, we must first understand the different moving parts. There are currently four pillars we will touch on in this piece to describe how these programs are structured today:
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Organizational Structure
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Capital
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Participants
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Workflows and Tooling
Organizational Structure
Sov recently wrote a piece titled Organizational Models, describing the different kinds of organizations common across Web3, specifically for grants programs. These are:
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Foundations
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Ecosystem DAOs
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Protocol DAOs
At a high level, you see a spectrum where on one end, you have more centralized entities (Foundations) that are, at times stepping stones to traditional VC funding, either through their Ecosystem Funds or VC Networks. These organizations typically have strict regulatory requirements, like KYC/KYB, and oversight due to legal constraints of where they are headquartered and various other factors.
In the middle of this spectrum would sit Ecosystem DAOs. These are organizations that were created to help bolster support for a specific community or purpose. These organizations can be formed from a Foundation or Protocol DAO and exist in many respects to help the parent organization move closer to the middle in engaging with the community and broader ecosystem. For example, organizations like Aave Grants DAO were formed to manage and disburse grants. At the same time, others see grants as a primary function but also support other aspects of the community, like Polygon DAO.
On the far end of the spectrum, we have Protocol DAOs. These organizations espouse the core ethos of decentralization and make every effort to drive engagement and governance from their communities. Typically you see these organizations having prominent players that are active in governance functions. These stakeholders work to steer conversations and community sentiment towards goals and objectives that they feel would be best to help steward the sustainability and growth of the underlying organization. Prominent examples here would be MakerDAO and Compound.
Capital
Capital across the treasuries of organizations is managed in many different ways with varying levels of transparency in their flows and processes based on the type of organization they are.
On one end of the spectrum, you have more decentralized organizations like Protocol DAOs and some Ecosystem DAOs. Most of these are all on-chain and can be seen at sites like openorgs.info at a very high level. Others have further taken this commitment to transparency by developing their sites that provide dashboard-like views of how the funds are being used (like Polkadot’s Dotreasury or NounsDAO’s Governance).
Capital for these more decentralized organizations is allocated through open governance processes managed in forums like Discourse or Commonwealth or by dedicated teams that oversee the grants process and are responsible for budgeting, etc. Typically the entity would state core areas of focus based on the needs of the protocol or ecosystem, and it would be the responsibility of community teams to steward funds and resources for those goals. One of our favorite Twitter followers is DAO Research Collective, and they recently went into great detail regarding this topic in their piece, Treasury Management, if you want to learn more.
Other organizations on the more centralized end of the spectrum are typically more opaque in their processes. For example, they may have funds distributed across many on-chain wallets or in traditional bank accounts. Capital is sometimes allocated and managed by grants teams, but you would typically see Business Development or Foundation Leadership playing a heavy role in oversight.
Participants
Participants encompass both internal to the organization and that outside that participates across the grants lifecycle.
Internal participants include all the individuals and teams that work directly for the organization in some capacity. These roles can be full-time, part-time, on a contract basis, or as an appointment by the community (this usually occurs in protocol DAOs). Depending on the organization's size and level of focus, they may have dedicated grants teams, typically with roles like grants analysts, managers, and committees with specific focus areas. Other parts that are sometimes responsible include business development, developer relations, leadership, and protocol development. These teams may play supporting roles or, in the case of the organization not having a dedicated grants team, be directly responsible for managing the grants lifecycle.
These internal participants work on tasks across the grants lifecycle that include driving awareness review of applications, engaging with applicants, keeping current documentation, approving applications, and ensuring follow-up or follow-through once applications are accepted with things like funds disbursement, progress tracking, and ongoing support of projects and their stated goals and objectives.
External participants include those who have requested funding (applicants), those who have received funding (grantees) along with active community members (typically within the Protocol DAO structure that participates in some form of governance).
If we start by looking at both applicants and grantees, they typically fall into a few broad categories:
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Developers
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Marketers
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Researchers
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Curators
The lion’s share of programs today are looking for qualified developers to help build infrastructure, tooling, and interesting applications on top of their network. Recently Alchemy released a report detailing Web3 Development that offers some interesting insights into the current state of development across the broader ecosystem, and it’s apparent that even though we currently sit in the depths of a bear market in terms of price action, the amount of development happening is scaling at an incredible rate.
One point to consider is that even though this report shows a fast accelerating growth trajectory, it doesn’t show the scarcity of competent developers, a problem that many different ecosystems and their programs are dealing with.
In addition to developers being the main focal point for many of these programs, we are starting to see them open up to alternative skillsets, including content creation like marketing materials (blogs, newsletters, and social media) along with research that helps with building greater awareness, diving into complex topics that need further review or explanation, and even expanding into new frontiers like Decentralized Science (DeSci) like we have seen recently with Polygon DAO or the Ethereum Foundation. In addition to these types of content creation, we also see opportunities arise for curators that specialize in gathering and organizing information for wider consumption using tools like Notion or Obsidian.
One of the more significant challenges faced by many programs in the space today is finding qualified applicants that can fulfill the promise of building valuable projects that can help to grow the ecosystem. We joked a bit earlier in this piece about the phenomenon of “grant farming,” but its impacts can be seen in programs that are only disbursing to a tiny double-digit percentage (typically 10-15%) of the applications they receive. This low rate of application approval can be for various reasons, including the applicant’s lack of vision, doubts about its ability to execute, or the applicant doesn’t fit the areas of focus the program is looking at for growing its ecosystem.
Tooling and Workflows
Tooling and workflows refer to the process and supporting infrastructure these organizations use to grow and manage their grants program. While traditional non-profit organizations (what many people think of when they hear the word “grants”) often have a more established process for seeking and receiving funding along with a vast network of products and services, the Web3 space is just starting to develop mature tooling and workflows to address this emerging need.
Across Web3, there is a wide variation of tools and workflows that are being used today by teams, including traditional Web2-based tools like Google Sheets, Notion, Salesforce, and others with more and more Web3 native instruments, like Questbook, that are being developed specifically for the needs of these new kinds of organizations that crypto is enabling. The tooling type can be influenced by several factors, including the type of organization and its approach to building and managing its programs, the focus of its programs, the capabilities of its team, the complexity of its processes, and the specificity of its needs.
Many programs have a simple process for soliciting grant applications, especially for smaller grants (typically sub $30K). Usually, the steps will include submitting the proposal details on a form, in Github, or directly in the community governance forum. For more extensive proposals, the process can be much more involved with detailed explanations, including a project plan that explains the milestones for the submission.
Once applications have been received, the review process starts for the grantor. Depending on the kind of organization, the review process can involve internal team members that sit on a grants team or committee, typically with Foundations or Ecosystem DAOs. An excellent example of this kind of structure exists with Aave Grants DAO and their Grants Committee. Sov wrote more about their program in his Aave Grants Retrospective. Aave Grants DAO has multiple part-time members involved in the review process, all known and respected community stakeholders.
In the case of Protocol DAOs, the review process typically involves community discussions through governance forums, with community members providing their thoughts and opinions on submissions and using mechanisms like Snapshot to vote on the proposals. The goal is to ensure that there is a proper process to ensure the review process is fair and transparent and that those involved in making the decisions are qualified to make those decisions. The challenge with this model is that it can be cumbersome, not a good fit for more minor proposals seeking grants, and can often preclude smaller grants.
After a grant has been reviewed and approved, the monitoring and evaluation of the project's progress start. The grantor may monitor for grants that involve multiple milestones to ensure the work is progressing and provide feedback or resources where needed or escalate issues depending on their process and bandwidth. For more direct grants that involve a few specific tasks or objectives, the grantor may elect to payout upon completion or half down when work commences and the rest of the payment when the grant has been completed.
One area that many programs researched struggle with is measuring impact. The challenge is that different programs consider different areas of impact, and the tools they use, including custom-built tools, often aren’t built to capture various factors. As a result, many organizations are trying to learn more about impact after the fact. The hope is that new tools can be built to help organizations evaluate and get actionable insights on the effects and usage patterns for projects, developers, and organizations.
Closing
If it’s not apparent already, we believe grant programs and innovative new approaches to funding great ideas will continue to play a significant role in the Web3 ecosystem.
If you are building a Web3 grant program and are interested in how Questbook could help, we would love to hear from you. DM’s are open.
Peace!
- Sid Rao & Sov