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January 5, 2023

The Case for Grant Programs: How to Incentivise Ecosystem Growth by Funding Innovation

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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.

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.

This article discusses the significance of grants for ecosystem development and considerations in setting up a grants program.

Grants as a catalyst for ecosystem growth

Grants can 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 encouraging projects that address a community’s shared needs and can serve as an essential signal for engaged builders within an ecosystem.

Grants can provide financial support in the early stages of development for projects that may not have other sources of funding, 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 still provide immense value for a niche community but may need to be more practical as an at-scale company. However, developing technologies that don’t fit this model, such as open-source infrastructure used by the entire developer community or improvements to an existing stack, is often necessary for a healthy ecosystem.

Additionally, the ecosystem dynamics made possible by blockchain provide avenues for monetization that more effectively capture the value of niche projects. Grants can help catalyze growth, allowing project stakeholders to take advantage of this.

Establishing a grants program

Though every grants program should be tailored to an ecosystem’s unique community dynamic and goals, following some best practices can increase the chance of success.

  1. Establish clear goals. The first step to establishing a grants program is determining which ecosystem or community priorities it will focus on. This requires a clear definition among ecosystem leadership of the project’s mission, vision, and growth goals and may require prerequisite roadmapping and goal-setting sessions through Miro or another collaboration tool. For example, the Ethereum Foundation’s Ecosystem Support Program supports builders rather than end-users and highlights commitments to developer tools, research, community building, infrastructure, and open standards.
  2. Determine which types of grants will be offered. For grant programs with a broader scope, segmented grant categories that provide different funding levels for other goals are necessary. Different grant categories, such as infrastructure, education, or gaming, help summarize the vision from the previous step in a way that is easy for the community to understand and help galvanize new projects. It also affects the governance of the grants program; for example, grants with higher funding amounts may require a stricter approval process involving a community vote, while grants below a certain threshold can be unilaterally approved by grants program staff. For example, the Protocol Labs Research Grant Program defines three types of grants– topic-specific requests for proposals (RFPs), wildcard RFPs, and open research grants– that have distinct qualifying criteria and support a broad range of researchers. Gitcoin Grants uses sub-rounds such as climate and Ethereum Infrastructure to provide specific experiences for builders and funders interested in specific issue areas.
  3. Define the application process and approval criteria. This could include a clear request for proposals (RFP) that outlines the goals and objectives of the program, the selection criteria, and the timeline for submitting applications and voting, if relevant. Having a clearly defined process for approving applications among program staff is essential. This can be done manually through a database tool such as Airtable or Typeform or an on-chain alternative such as Gitcoin’s Grants Hub (currently in testing).
  4. The approval and due diligence process could include a thorough review of the project roadmap, past milestones, and budget and a comprehensive assessment of the proposed team. Depending on available staff, some grant programs also have a technical interview for development projects. Determining who is responsible for approval is also a vital part of this process. Options to consider include using a centralized committee or putting it up for a community vote.
  5. Determine the funding allocation and distribution process. How grant funding is allocated may be determined with varying degrees of community input. Using a more community-oriented mechanism such as quadratic funding could be a way to tap into the wisdom of the crowd to gain context on what priorities are present in a community and ensure that resources are distributed in alignment with community desires. The information gained through this process can also be integrated into broader growth strategies. For programs where speed and efficiency are necessary or for early iterations, these decisions can also be made through a committee. Aave Grants DAO uses a selection committee with plans to further decentralize the decision-making process by involving more community members in evaluating grants. Gitcoin deploys a pluralistic, bottom-up process through quadratic funding, and initiatives like the Uniswap Grants Program use this to highlight which projects have the most appeal in the ecosystem. Stand Together, an American philanthropic organization, is evaluating using web3 to run similar experiments in incorporating community input into the fund distribution.
  6. Administration cost: The administration cost should be included in the budget for the grant, alongside any potential partnerships that could help with the distribution. Protocols often need more visibility into how and where capital has been deployed. It is crucial to track milestones reached by projects sustained by the program. Anyone can use the upcoming Gitcoin Grants Suite (currently in testing) to connect resources, contributors, and ecosystems to democratic funding mechanisms in the most optimal way possible.
  7. Engaging potential funders and builders: It is important to promote the program to developers and organizations at conferences and meetups, online through blogs and social media posts, and offline through newsletters and emails. Additionally, it would be best to consider whether organizations could serve as sponsors or partners in distributing the funds.
  8. Reporting Requirements: Grantees should be able to track the progress of their projects, so we suggest establishing reporting requirements ahead of time. This will help ensure that grantees are accountable for their activities and that the funds are used correctly.
Putting it all together: measuring success

Ken Ng from the Uniswap Grants program offers an interesting qualitative measure of grant success by citing the example of grants used for Plasma, a previously attempted scaling solution for Ethereum that did not succeed. He contends that failure can, in itself, be a success, as Plasma ultimately led to the development of Optimistic Rollups.

Assessing the success of a grants program is usually a matter of degree. For most projects that have already undergone a proper examination process and ongoing reporting, achieving objectives within a reasonable time frame can be seen as an accomplishment. While there may be ways to measure the effect of grants on metrics like revenue, the volume of transactions, and user retention, grant programs should be both directly tied to strategic business goals and growth metrics but more open to experimentation if the program is early in its life-cycle.

When Hayden Adams recalled his experience of creating a Proof of Concept for Uniswap, he stated that it "didn't even feel like work." As researchers and developers continuously stretch the limits of what can be accomplished in the web3 ecosystem, a well-structured grants program can reward those innovators.

Our experience at Gitcoin shows us that when successful grantees pay it forward by becoming funders, it sets up an iterative cycle of nourishment and growth for future web3 builders.

To keep up to date with what we’re improving in our own grants program, follow us on Twitter or catch up on our blog.

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