Today, we’re going to dive into how entrepreneurs can leverage the Web3 “Ecological Grant” (money to incentivize ecological projects) to create an MVP (Minimum Viable Product) before talking to a VC fund. Using data from multiple Grant projects, I analyze how Grant projects are designed and how founders derive value from them.
I’ve been thinking about how technology has grown from a niche user base to a wider user base. Of particular interest is how Grant-based capital can play a role in enabling application growth in Web3. Next, we’ll look at the importance of Grant capital and how to use it, and how to use it to create cool products.
In the 30 years before that, it was government-funded research that propelled the Internet. The Internet started as a defense research project. The government has created an environment that attracts enough researchers to participate in the construction of the Internet.
In the 1980s, Tim Berners-Lee wrote what would become the first proposal for a “global network” for a government-funded organization (CERN). Giants like Google and Facebook were also born under the background of major universities. It is clear that much of what eventually evolved into the Internet is fundamentally the product of capital being deployed without explicit grants, which is used to generate quick profits.
The Wheel of Web3 Adoption Rolls Forward
Web3 is not currently benefiting directly from government investment on a large scale, but the protocol that issues Grant funds is injecting money into Web3. It makes a lot of sense if you think of these networks or protocols as the future of nation-states. The proposition of the protocol providing Grant funding is very simple. The more applications deployed on a chain, the more users, and therefore the higher the usage rate of the underlying protocol itself. Users can log into an application’s on-chain, but once they have their assets linked, they can infiltrate different Dapps in the ecosystem. What’s the connection? Think of the Fat Protocol theory described by Joel mongro 6 years ago:
“The market cap of a protocol always grows faster than the total value of the applications built on it, as the success of the application layer drives further speculation at the protocol layer.”
So if you can get more developers to build applications on top of the protocol, it will eventually drive a proportional increase in the value of the underlying protocol. This script keeps repeating itself ecologically in the past.
Ethereum benefits greatly from Consensys actively helping developers find ways to build on Ethereum. Solana , Polygon , Harmony and FTM all have the same experience. Developer engagement metrics predict price appreciation so accurately that some investors actually track the number of developers building in the ecosystem and invest based on that.
Source: Electric Capital Developer Report
There are only about 18,000 monthly active developers in the Web3 system, with about 340,000 developers entering the system in 2021, the highest level on record. But for now it’s only scratching the surface. More developers are needed if Web3 is to become widespread around the world.
There are various reasons why developers don’t join Web3. MakerDAO ‘s Sustainable Ecosystem Expansion Core Unit recently released a report summarizing three reasons:
- The three views are the same – people in the same path will eventually come to the same goal, and the recognition of technology and value will eliminate many people.
- Technical Depth – A lot of skepticism around NFTs and transactions can hinder the technological innovation of Web3 as an ecosystem. These discussions involve a lot of “calling” because there are clear financial motives and interests in those talking about these things.
- Reputational Risk – Developers find it risky to fully transition to Web3 due to the abundance of scams, hacks, and Ponzi attacks in this space. As a result, those who solve Web3 problems in traditional markets cannot fully transform into this industry.
Many of the Web3 businesses I’ve backed in the early days were intentionally raising money from VCs like Accel and Sequoia so they could convince people from traditional markets that they were a legitimate business.
In fact, protocols like Polygon have crossed the chasm and entered the realm of public perception. In foreign countries, I have friends who write about their work at Polygon on dating apps like Bumble or Tinder. Indeed, the number of “right swipes” increased.
Large foundations focus on legality and hire compliance experts in-house to help startups in their portfolios recruit from traditional roles. The signal value of traditional venture funds came into play as companies scaled and struggled to recruit talent on short notice. One way to circumvent this is to allow the people in the system to build without worrying about funding.
Grant funding programs can be done in two ways:
1. They inspire talent who wish to enter the field with capital. This money is, in part, a reward for developers, creators, and marketers for working with Web3 projects.
2. For those who want to build Web3 projects, they reduce the cost of experimentation. In the past, if you wanted to make the transition to building a company, you had to convince a group of seed investors of your abilities.
Why does the protocol do this? In most cases, there is no explicit profit mandate in the agreement itself. Unlike venture funds, eco-funds usually have no external capital. Funding typically comes from protocol revenue or a portion of the protocol’s native tokens, which are reserved to fund new talent.
The above chart from DeepDAO shows the top 10 DAO treasuries they track. We would love to know where most of the capital is deployed and how it varies across ecosystems. The team at Questbook compiled this data and shared it with us. Below are the results of my analysis.
Ecological Grants at Different Stages
The chart above breaks down how Uniswap has deployed funds over the past year and a half. Uniswap was also launched with the help of the Ethereum Foundation Grant program. Uniswap has deployed nearly $5 million so far, about half of which has gone to the 6th wave of Grant grants.
It doesn’t make much sense to fund external projects until the Uniswap protocol grows to a scale where it can be adopted by a large number of users. Until the last two waves of Grants, the government hadn’t spent money on governance. Instead, most Grants are divided into Usability, Tools, and RFPs (Requests for Proposals/Challenges).
Grants will have knock-on effects for developers. In most cases, these developers are probably not building a product worth starting a business. On the other hand, they have specific skills to build the tools that the protocol can use. So instead of having them raise money from VCs and fret about making money, use the Grant program to incentivize them to build products that can’t be scaled with dollars.
Such tools are often able to solve very application-specific problems. For example, it can be used to display the historical APY (Annual Yield) of a pool on Uniswap, or track the lending rate of an asset on Aave . These tools are often great for niche communities, but don’t necessarily make money from them.
The running-in of protocol and ecology
Which direction would a founder with a venture-backed product take? In my understanding, the solution is to look at protocols that are at an inflection point. The ideal protocol should have enough technical advantages to support a large number of users, while facing a shortage of skilled developers who can build applications.
Most protocols face this problem at the development stage. Solana, Polygon, Avalanche , Near, and Harmony all had to launch large-scale developer-centric Grant projects in order to find developers who could build large-scale applications on these projects. When increasing initial grant funding, developers must consider which protocol is best for them, as each protocol has an active investor base.
At LedgerPrime, we saw a ton of DeFi applications from Solana. Avalanche has caught up because of its EVM compatibility. On the other hand, Polygon is certainly the first choice for developers to build B2C applications because of their relatively low transaction costs.
We evaluated the number of Grants in each ecosystem to see where developers are currently flowing. Solana and Polygon cannot be calculated because their Grants are provided through multiple smaller entities, and exact numbers cannot be derived. Polkadot ‘s Grants are ±300 times, the most Grants issued so far. The Ethereum Foundation itself has completed close to ±230 grants. (The official figure is closer to 300, but we exclude academic/research-related grants).
While Uniswap, Aave and Compound hold billions of dollars in funding, they have issued fewer grants. Raising Grant funding from L1 or L2 may still be the best option for founders looking to build an application and then scale it to venture capital-backed projects.
As the protocol evolves, it will be necessary for those organizations running Grant projects to adopt a monolithic stack-based approach to running Grant projects. Developers may rely on Grant to improve their skills, deploy their first application, and eventually scale the application. Capital is usually deployed in:
- User onboarding;
- developer education;
- Applications extend to later stages of protocol development.
Structurally, most ecological grant programs are optimized for transaction flow. In the case of Harmony, by deploying funds.
Harmony recently announced a $200 million grant that will deploy funds over three years. It is also one of the fastest growing L2s on Ethereum today. Harmony is like a “middle-aged protocol” in terms of maturity, as it’s been around long enough to start attracting users to its protocol, but hasn’t developed into a mainstream protocol like Solana.
About one-third of the Harmony Protocol’s grant claims will be awarded to DAOs, averaging $750,000 per DAO. In contrast, companies identified as “partners” will receive nearly $3 million each, yet only ±16% of the funds will actually be deployed in these companies. In this case, the partners either make acquisitions or accelerate development and reallocate funds to smaller businesses. For example, Filecoin has partnered with Tachyon, Techstars, Faber and Longhash during its growth cycle.
Because the Harmony protocol can outsource the work of managing the transaction process, helping companies scale or handling investor relations through third-party firms that specialize in these tasks. In the same way, they allocated about 16% of their funds to hackathons, earning $1 million per hackathon.
The benefits of hosting a hackathon to the protocol are twofold. On the one hand, they found it easier to increase developer awareness through a global campaign that lasted for several weeks. They are building a spiritual commitment from stakeholders through huge incentive incentives.
On the other hand, they were able to curate a list of hundreds of applications that could be built. Every hackathon produces a “winner,” with multiple participants. If they can keep developers, they can create great products. While Harmony itself may only invest directly in very few deals, they have built a Grant program optimized to attract hundreds of developers.
Aggregation Theory and the Grant Program
In my previous article, I analyzed how blockchain can enable entirely new markets while reducing trust and verification costs. Grant is a product of this market. Things like venture capital and co-investment have been around for a long time, so when the startup financing social platform Angel.co came out in the early 2010s, it gave us a reference model.
On the one hand, Grants in Web3 are scattered across projects, and incentives to provide a single, unified interface are difficult to achieve. Grant-related data, on the other hand, can be more easily queried and verified than most traditional grant or crowdfunding projects. That’s why Gitcoin’s tokens are now worth around $700 million.
Questbook takes a different approach to this problem. They first gave developers some experience in Q2 2021. There are about 100 tutorials made for developers looking to transition from Web2 to Web3.
For the protocol, the challenge is finding distribution channels based on a vetted talent base that has been trained on how to use their technology to participate in the build. For developers, the problem is finding relevant pre-funding opportunities. Questbook is the intermediary between developers and financing. They claim to have distributed nearly $500,000 so far through their Grant funding tool.
There are also many challenges in this matter.
First, agreements often lack visibility into how and where funds are deployed. Even with capital deployed, it can be difficult to track where a business is going through its growth cycle. It may often be the case that more than one agreement provides a Grant to a business. These grant amounts may add up to something similar to your own VC funding. Today, network participants cannot clearly see who received how much money. Questbook addresses this challenge with its easy-to-filter interface. Over a long enough time frame, it will make it easier to track the net worth generated through these grant projects. Uniswap, for example, may have individually returned all funds deployed through Ethereum-related Grants to date.
I think in the next few years, processing grant applications will be a “verification” route. The number of grants earned by individuals and the DAOs they work with will be a better “credential” than a degree. Since the work of these developers can be easily verified on-chain, trust issues will be reduced.
The development direction of the ecological grant plan
It is likely that the ecological treasury has evolved from on-chain to a pivotal force in the financial system. Polygon’s $700 million-plus M&A is a reminder that the size of companies in the industry is no longer in the hands of hedge funds and VCs. The cooperating companies involved in the agreement are likely to step in and play a role that ICOs could not play in 2017. The view at the time was that users would invest directly in apps and see them grow at scale. Today, users vote on the protocol (through capital investment), and the protocol as a transaction deploys funds through ecological grants.
It’s a shift that most developers I’ve dealt with lately don’t realize. Venture capital funds by themselves may not be an ideal way to build and scale a business. Depending on the stage and nature of the application, approximately $12 billion can be invested through different grants. Most of this capital is non-diversified and targeted. So you can create something of value while still having a lot of ownership.
The ultimate goal of Eco Grant is to solve problems that cannot be solved by traditional financing methods. These are usually products that require time and a multi-year commitment. For this to happen, a single protocol must be worth trillions of dollars. At the time of writing, Bitcoin’s market cap is around $800 billion. Will we see great results like the Internet from the Eco Grant? It will be interesting to see if we can leverage ecological grants at some point in the future to solve really big problems like access to the internet, healthcare and education.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/one-article-to-understand-the-ecological-grant-angel-investment-of-web3/
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