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Leveraging Grants To Unlock Community-Driven Decision-Making

Arbitrum was founded in 2018 with the goal of scaling Ethereum. Arbitrum’s flagship product, Arbitrum Rollup, is an optimistic rollup protocol that inherits Ethereum-level security. It enables users to do anything they would regularly do on Ethereum with faster and cheaper transactions. Arbitrum offloads as much work and data storage as possible from Ethereum’s mainnet onto its own blockchain, effectively rendering it an Ethereum Layer 2 (L2).

Leveraging grants as a growth strategy in the L2 wars

While Arbitrum is a leading L2 with a $4B+ market cap, it faces steep competition from other Ethereum-scaling protocols. It became clear in the spring of 2023, with the launch of several new L2s, that growing the Arbitrum ecosystem was essential in order to establish the platform as the go-to scaling solution for Ethereum. The increasing competition placed added pressure on the Arbitrum ecosystem to develop a fierce competitive moat in a saturated L2 market. 

In addition to the increasing market competition, Arbitrum also underwent some major changes during this time period. In March of 2023, Arbitrum launched the ARB token. Tokens were immediately distributed to early users building on the network. This meant that control was effectively handed over from the foundation to community members (ARB holders). ARB holders help to govern the Arbitrum DAO, which makes decisions about topics including how to evolve the protocol or allocate treasury funds.  As the founder of the Arbitrum DAO,  Steven Goldfeder, proudly boasts, “The DAO has complete control over the treasury (...) no one other than the DAO can go ahead and implement things.” Not only did Arbitrum need to differentiate themselves amid ongoing L2 wars, they also needed ongoing community engagement in order to ensure the long-term survival of the DAO.

Running grants rounds was Arbitrum’s chosen way to do both of these things combined. They would both attract new builders into the ecosystem who were applying for grants and also include their community in one of the most important ecosystem decisions: capital allocation.

Increasing community involvement in governance efforts is no easy task. It requires painting a clear pathway explaining how to get involved, as well as clear incentives for why to get involved. grantSpecifically, they wanted their community to be involved in the decision-making process around which efforts to fund and to what degree. The Arbitrum team aligned on a grant program as the best method to leverage their community to 1) garner interest from the most talented builders in the web3 developer community, and 2) determine the most worthwhile initiatives to fund. The most attractive element of the grant program was their ability to lean on their community in the decision-making processes. The team believed investing in these types of collective decisions would serve to lay the foundation for continued governance involvement in the future.

Grants as a community-led initiative

The inspiration to run a program came about through a partnership with Plurality Labs, a team of grants management and operations servicers, several of which happened to be former Gitcoin employees. The team at Plurality Labs stumbled upon an Arbitrum governance proposal that had just passed a community vote. The proposal was dedicated to creating a grant framework for the Arbitrum DAO in order to fuel community growth and governance involvement.  The team at Plurality Labs immediately recognized the opportunity to use grants as a community involvement tool, specifically empowering the community to help review applications, make determinations around which projects to fund and for how much, and even to donate their own money in support of the respective projects. Gitcoin’s quadratic funding mechanism enables just that. Quadratic funding (QF) is an innovative way of distributing capital. With QF, the organization running the round puts their funding into a matching pool. They then allow community members to vote on and even donate to projects in the round that they want to support. At the end of the round, funds from the matching pool are distributed across the selected projects based on the number of votes received. When presented with the concept of QF, the Arbitrum team immediately recognized the potential of the innovative funding mechanism to incentivize their community and raise even more funding for their ecosystem. Additionally, they were keen to expand the aperture of ecosystem projects to invest in by leaning into the collective expertise of their community.

An easy SaaS solution to accelerate their path to market

As the only grant tool that offers quadratic funding natively within its SasS tool, Gitcoin’s Grants Stack was the obvious choice for Arbitrum’s grant managers given their goals around community activation. They also took notice of the frictionless setup. In a few minutes, the team could easily design, deploy and launch their round. While other grant tools would require the team to configure their own backend infrastructure, Grants Stack allowed them to run everything directly within one, easy-to-use platform. No additional steps required. Overall, the platform’s ease of use and minimal development sold the team on using Grants Stack to run their inaugural grant program.

A multi-step approach to engage the Arbitrum community

In their quest towards progressive decentralization, Arbitrum decided to pursue a community-led approach. The team committed $100,000 in total towards the grant programs, which went into a QF matching pool (in quadratic funding, funds donated are matched to the projects in the rounds, meaning that every dollar donated will be matched by a dollar from the funder, in this case Arbitrum). As such, they decided to structure their program over two consecutive grants rounds. In the first round, the “Domain” round, the Arbitrum community was tasked with deciding how to allocate the funding pool between four shortlisted development areas: Gaming, Developer Tooling, New Protocol Ideas, and a catch-all pool for Education, Community Growth & Events. A fifth and final pool was later added by community request, as a handful of community members voiced the desire to support additional areas of growth outside the selected pools. In response to the community feedback, the core team ran an additional round for the fifth pool as a one-off after the completion of the Domain round. This structure allowed the foundation team to narrow the funding aperture based on their knowledge of the ecosystem while still taking advantage of the ecosystem insight of the DAO to determine the right prioritization.The core team leveraged the Domain round to get input from the community as to how to distribute the funding across the pools. 

Mitigation strategies to ensure successful outcomes

The next set of considerations revolved around how to promote the round. The program managers decided to focus on educational material first and foremost. Since the Domain round was the first grant program for Arbitrum, many community members were unfamiliar with the concept and specifically new to the idea of Quadratic Funding. Through a combination of Twitter spaces, partner co-marketing and governance forums, the program team worked to raise awareness about the program and to educate community members on how to get involved. This helped the team generate a great deal of interest in the round even before it went live.

Another key design principle for the Arbitrum round was to focus on engaging active, high quality community members. Specifically, the program managers wanted to minimize the involvement and upside for grant farmers: a term used to refer to individuals who only participate for the potential of receiving token airdrops and other benefits in the future. These behaviors often create adverse downstream consequences for communities, as grant farmers act purely out of self interest as opposed to a genuine alignment with the project. To keep incentives aligned, the program managers decided to implement a custom eligibility requirement: in order for donations to qualify for matching, users had to maintain a certain ARB threshold in their wallets. As a result, votes from users likely disguising themselves as invested community members would be excluded from the matching.

Aligning organizational goals with community priorities 

Over 800 people donated to the first round, totaling $5,000 in contributions. Community members donated directly to the pools they wanted to support. One half of these wallets were $ARB token holders, so their donations acted as a vote for the selected track. The Arbitrum DAO then distributed the earmarked $100,000 accordingly, prioritizing more funding to the most supported tracks. The greater the volume of donations, the higher the match. In this way, Gitcoin was able to distribute funding across the matching pools according to community preference.

The distribution was illustrative of the community’s priorities at that time. The $ARB token had just recently launched, so the community was in an experimental growth phase. The track for New Protocol Ideas was a clear community priority to help kickstart new development in the ecosystem.

Once the funding allotment for each category had been determined, the team moved on to the second round of the program, named the “Gitcoin Grants Funding Fest”. In the second round, the team focused on getting projects to apply for grants within the five pre-defined tracks. Builders submitted applications for consideration and were approved if they met certain eligibility requirements. Attracting high quality builders was an imperative, so the team specifically looked for a track record of relevant experience and a compelling plan for project execution. Over 140 projects applied to the round, and the team selected 51 that both met the eligibility requirements and aligned to their criteria for each track. These projects were then entered into the round to be voted on by the community at large.

Increasing participation through education and repetition 

Participation increased drastically in the second round, which attracted a whopping 2,482 unique donations from across the community - three times as many as the first round! Similarly, the donation amount increased, with over  $15,000 contributed in support of the eligible projects. A large part of that was due to a pivot in marketing tactics between the rounds (more on this below). See here on how funding was divided up:

The program managers attributed this notable increase to their ongoing education efforts, which significantly ramped up towards the start of the second round. (more on that below).

The community’s growing levels of engagement throughout the two rounds illustrates the power of continued educational and promotional efforts in fuelling community-based decision-making. Between the two rounds, the program managers created a Telegram group with over 200 individuals. The group served as a support channel for project participants, with members asking and answering questions, collectively strategizing around promotional efforts and encouraging participation in the round. The team directly credits the increased donation rate in the second round to this bridge-building with participants.

The power of marketing was particularly evident during the second round. The leaders of each funding pool were responsible for their own respective marketing outreach, so it’s easy to compare and contrast the efficacy of the various strategies. The gaming round, for instance, executed a thorough marketing strategy involving partnerships and promotional marketing on Twitter. Although the pool only received 12% of the votes in the initial round compared to the 20% allocated to developer tooling, the gaming pool pulled in more than double the contribution amount compared to developer tooling in the second round. This discrepancy underscores the importance of targeted community engagement and the potential of strategic marketing to influence project support within the round. 

Token-gated donations to level the playing field

Lastly, token-gating donations for the matching pool proved to be an effective strategy. This approach ensured that those who participated in the voting process were genuinely invested in the Arbitrum ecosystem. While financial incentives are not always the highest signal, economic alignment proved to be a good proxy for having a vested interest in the ecosystem’s governance decisions. Further, the grant program helped to even the playing field for all community members. Quadratic funding prioritizes matching based on volume of donations versus value of donations - the value of $ARB held or donated does not influence the size of the match. Therefore, ‘minnows’ with fewer tokens and ‘whales’ with significant holdings all had their votes counted equally. 

Program Impact 

Financial decisions are critical for any organization - where and how they choose to invest their capital or show restraint is often what makes or breaks them in the long-run. For Arbitrum, the decision to leverage grants as a method to empower their community was a deeply strategic one. By involving their community in such a significant decision-making process, they were able to galvanize engagement and spur higher participation in other governance decisions as a result. Investing in good governance practices early on paid dividends: the grants rounds created a standard for participation that made future governance efforts much easier to sustain. 

By collectively deciding to prioritize certain areas over others, the grants rounds put in place clear pathways for members to influence which initiatives and workstreams were supported go-forward. Today, Arbitrum consists of 500+ projects (more than any other Layer 2), 1,800+ monthly active developers (more than Solana), and $16 billion of assets bridged from other chains (more info here). Key to Arbitrum’s growth was their commitment to engaging their community from the get-go in a meaningful way.

Keeping up the grants momentum 

The Arbitrum DAO continues to employ grants as a strategy to grow and empower their ecosystem. The first program was not only a success by the participation standards, but it also served to inspire their community to get even more involved. While the core team spearheaded the creation of these first programs, their community is now running a total of four programs concurrently. For example, two new rounds titled the Short-Term and Long-Term Incentive Programs were initiated by a working group to help support active Arbitrum protocols.

The Arbitrum DAO is also in the process of designing a round that will be incorporated into the public Gitcoin Grants program. The goal is to leverage the expose of the communal rounds to access Gitcoin’s highly engaged community, which will increase awareness and exposure of Arbitrum. While initial grants rounds were intended to galvanize community support, the current rounds are now aimed at building on that momentum and increasing the engagement.

The team has even started innovating in the realm of decentralized funding themselves.  They recently designed and deployed a unique crossover program with the Uniswap team to encourage cross-pollination across the two ecosystems. Arbitrum’s grants journey showcases a common trajectory:  start small, and then iterate and customize for specific ecosystem needs. 

Arbitrum’s story illustrates that Grants Stack is not only an useful tool to allocate capital, but that it can also support experimentation to help program managers incentivize community participation, reach new builders and create long-lasting partnerships in the process.

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