Fostering Developer Communities in Web3: Grant Programs

Over the past few years, protocol teams have invested time, capital, and effort into attracting developers to build on top of their networks.

The reason for this is simple: protocols need great developers to be successful.

As a blockchain protocol grows through developer and user activity, the value of its network increases, allowing the protocol to develop further. Protocol teams rely on their community to build out specific verticals (DeFi, Gaming, NFTs), tools, and cross chain infrastructure. Given the importance of developer activity, some of the most common engagement strategies adopted by blockchain teams include:

• Grants — Programs that distribute non-dilutive capital to teams building on top of or for a specific protocol
• Ecosystem funds — Managed funds that invest dilutive capital with the goal of growing a specific ecosystem or protocol
• Hackathons — Events hosted by a blockchain protocol where developers get together for a short period of time to build new decentralized applications on top of the protocol in exchange for cash prizes and other benefits

Protocols utilize any or all of these strategies, targeting project developers at various stages of “idea readiness”.

This article will focus on the advantages and disadvantages of grant programs, and if you’re an emerging protocol, key considerations and thought exercises for setting up a successful one.

Advantages of grant programs

1. Optimized for public goods: Ecosystem-issued grants do not involve equity stakes in any funded initiatives. No-strings-attached funding enables development of public goods (e.g., infrastructure, open-source tooling) and initiatives that benefit the ecosystem but aren’t profit or investment-return driven.
2. Versatile and flexible: Grant programs have the flexibility to define desired grant projects or keep the criteria open ended — they may fund anything from small value-add activities to larger scale projects, enabling nimble and targeted deployment of resources that benefit the protocol.
3. Increased adoption: A blockchain network with a wider variety of better and more useful applications, tools, and infrastructure ultimately attracts more user adoption — which in turn drives protocol growth.
4. For developers: Developers that receive grants from top protocols gain a ton of value through:

• Great APIs and tools that don’t break all the time
• Great onboarding, education, and code examples from the ecosystem tea
• Access to great events (e.g., hackathons) and a community of developers within the ecosystem
• Project exposure and awareness driven by the success of the protocol

Disadvantages of grant programs

1. Limited ability to fund large-scale efforts/mature projects - In contrast to funds where foundations may partner with external VCs to raise large amounts of capital for deployment within the ecosystem, grant programs are typically much smaller in size and optimized for public goods rather than mature protocols with a path to commercialization. However, grants can be a great bridge between project inception and venture funding for developer teams.
2. Grant programs can be centralized and opaque: In many cases, it is not clear how protocol teams are making decisions about grant programs, who to allocate to, and how to hold them accountable. While grant programs are great for incentivizing targeted development, a lack of transparency may raise questions around inherent biases or prejudices of the ecosystem team. However, many of these concerns can be addressed with thoughtfully designed grant programs like LEGO, Lidos’ grant program where the DAO can elect nominees to participate in the grant funding process.

Examples of crypto grant programs

Lido

• Focus: Lido is a liquid staking protocol with a grant program named LEGO (Lido Ecosystem Grants Organization) that rewards community members who contribute to the improvement of the Lido protocol and the staking ecosystem it supports - with verticals ranging from validation tech to DeFi integrations and more.
• Size: Max quarterly budget of 240k LDO, approximately $300k USD as of 26 July 2022.
• Structure: LEGO comprises a council of 6 founding core members who make large funding decisions as well as a number of DAO-nominated members who are able to award smaller sized grants based on community interests. Grants are categorized based on size and required effort, which determine the extent of involvement of the broader organization.
• Benefits: DAO-nominated members enable (albeit limited) representation of the community in the program’s funding efforts; defined funding verticals provide a loose scope for potential initiatives.

Gitcoin

• Focus: Gitcoin is a crowdfunding platform where developers can get paid to work on open-source software. Gitcoin Grants is governed by the DAO, and allows individuals to secure funding for public goods projects (e.g., open source software, journalism, public health, environmentalism).
• Size: Gitcoin has funded $43.98M to public goods to date through 2818 grants (not counting tips, ads, bounties), with individual crowdfunding supported by additional donations from philanthropists (see below for details on quadratic funding).
• Structure: Gitcoin provides limited structure to the grant and decision-making body as a crowdfunding platform where anyone can submit proposals/bounties. Interestingly, Gitcoin leverages a mechanism called quadratic funding that allocates extra funding to projects based on impact and number of contributors.
• Individual donations that are made to open source projects will be matched by additional philanthropic funding to increase the impact of votes for each project (e.g., a project that gets 100 individual donations would be matched with a higher amount than one with 10 donations, regardless of individual donation amount).
• Benefits: Probably the most decentralized of grant programs, Gitcoin employs quadratic funding to ensure adequate prioritization of projects with widespread interest.

Ethereum Foundation Ecosystem Support Program

• Focus: The Ethereum Foundation’s Ecosystem Support Program is an organization that provides funding and support to open source projects, with a focus on universal tools, infrastructure, and research for Ethereum developers. The ESP provides non-financial support in addition to funding in the form of office hours (e.g., feedback/guidance, networking).
• Size: The ESP funded ~136 projects in 2021 with $26.9M USD. Grants range from $250 - $200K+.
• Structure: All decisions are made internally, and the structure of ESP is opaque. Topics or areas of particular interest to the ESP are covered by targeted grant rounds.
• Benefits: While the decision-making of the ESP isn’t transparent, the ESP provides more than financial support, offering feedback and networking opportunities to foster the Ethereum development community.
  

What to consider when setting up a grant program

• Optimize your program structure for your foundation’s needs: Some protocols may need targeted support on a select number of initiatives, whereas more established protocols may desire a more open-ended platform to crowdsource a broader spectrum of development. Optimize your grant program for the needs and life stage of the protocol.
• Offer more than just financial support to recipients: Offering office hours, in-person events, and networking opportunities helps protocols capture value beyond the scope of the grant proposals. These value-add activities help foster a vibrant, collaborative developer community that is key to decentralized protocol growth.
• Be transparent as possible: Grant programs should reflect the decentralized nature of blockchain networks. As the protocol grows, ensuring transparency throughout the process and offering the opportunity for community input can empower developers by alleviating concerns around bias and lack of clarity on decision-making.

Stay tuned for more deep dives on developer engagement in Web3, with future spotlights on ecosystem funds and hackathons.

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