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Kicking off this year's Premia Governance Series, we delve into the intricate role of governance in Web3 grants.

First, a quick update on the latest in governance news. Stay tuned for a deep dive into how governance shapes the Web3 grants landscape.

STRK Airdrop

Starknet has announced its airdrop through Starknet Provisions. Members of various groups who have helped advance Starknet, including Starknet users and builders, Ethereum contributors and stakers, and builders of select projects, may claim provisions. Apart from rewarding Starknet users and developers, the inclusion of Ethereum contributors at various will levels, will have implications on the governance of Starknet. 

Proposal to Refine and Expand Gitcoin Grants Program

Gitcoin proposes significant enhancements to its Grants Program focusing on Open Source Software with increased funding and biannual rounds. It also plans to transition the Web3 Community Round to a governance-led model, aiming for direct community involvement and expanded matching funds. 

Arbitrum's Strategic Push into Web3 Gaming

Arbitrum's proposal focuses on leveraging its ecosystem to advance Web3 gaming, highlighting initiatives like Arbitrum Orbit and Stylus for game development. It addresses the unique benefits of Web3 gaming, challenges developers face, and introduces the Gaming Catalyst Program to support developers and drive adoption within the ARB ecosystem.

Grants and Governance in Web3

Grants in Web3 have emerged as a pivotal force, facilitating access to capital that energizes the ecosystem and generates a significant impact on the economic layer of cryptocurrency. It is not uncommon to see projects that began at hackathons progress to secure funding through grants, enabling them to achieve market fit and widespread adoption. Although the influence of grants can be quantified by Total Value Locked (TVL), the number of unique users, and gas fees generated, the full scope of their impact extends beyond mere numbers, surpassing the value that can be assessed purely from a numerical perspective.

The collaborative essence of grant programs, coupled with governance participation through DAOs, represents a noteworthy social experiment towards an open internet. While the objectives and approaches of each Web3 grant program differ, they all share the common aim of nurturing a dynamic ecosystem. The diversity in grant allocation, in terms of value, types of grants, and the variety of projects supported, cultivates a multifaceted grants framework. This framework acts as a catalyst, propelling the creation of value within Web3.

Moreover, the funding of scientific research, traditionally a contentious area due to vested interests, is witnessing a shift towards more democratic funding models. DeSci grants DAOs are notably extending the scope of grants beyond on-chain activities to encompass fields such as women’s health, longevity, and genomic studies. This expansion of grant applications demonstrates a broadening horizon for Web3 initiatives, moving beyond the confines of blockchain technology to address global challenges and opportunities. 

Understanding Web3 Grants: Categories, Sizes, and Impact

The Web3 ecosystem spreads across several sectors such as DeFi, Web3 social, DePin, DeSci, and real-world assets, among others. Each of these segments possesses its own unique subdivisions, making a one-size-fits-all framework challenging to implement. However, a common classification can be outlined as follows:

Grant Categories: Protocols allocate funds across various categories based on their domain. These categories include grants for developers, security or bug bounties, community education, research, and initiatives to increase liquidity. The approach to disbursing grants varies, ranging from identifying potential projects and offering retrospective grants to issuing Requests for Proposals (RFPs).

Grants Size: Protocols typically categorize their grant programs based on the amount of funds disbursed. This classification allows smaller teams to make quicker decisions for small or micro grants, while larger grants require more extensive community participation and incorporate more rigorous checks and balances.

Impact Measurement: The effectiveness of grantees is often assessed using metrics such as increases in Total Value Locked and protocol usage. However, these quantitative measures can provide a one-dimensional view and may not fully capture the impact's efficacy. For instance, an increase in TVL does not necessarily indicate growth in a Layer 2 blockchain, and metrics like sequencer fees might offer a more accurate measure of success. Additionally, the total number of users can be misleading due to sybil accounts farming airdrops. 

Tooling: The tooling stack for grant programs comprises a comprehensive suite of products designed to facilitate the end-to-end management of grants. This includes the Allo protocol for running grant programs, Pairwise for a Tinder-like user experience in project discovery, Gitcoin Passport for identity verification, Questbook for domain allocation methods, and more. These tools collectively support the efficient operation of grant programs, from project discovery to impact assessment.

Role of Governance in Web3 Grants Programs

Governance within Web3 grants programs is a multifaceted aspect that directly influences their effectiveness, accountability, and impact. 

Enhancing Efficacy Through Community Decisions

Community-driven decision-making remains pivotal. By involving the broader ecosystem in governance, programs ensure that grants align with the community's needs and values. This democratic approach not only fosters transparency but also leverages collective wisdom, enhancing the program's relevance and impact.

Balancing Centralized and Decentralized Management

The diversity of grant programs underscores the need for a nuanced governance approach. A hybrid model that incorporates both centralized efficiency and decentralized community engagement can address complexity, and place checks and balances on each of the systems.

Addressing Vested Interests and Collusion

With significant funding at stake, governance mechanisms must prioritize transparency and fairness. Implementing conflict-of-interest policies, anonymous voting, and transparent decision-making processes can mitigate risks of collusion and ensure equitable grant allocation.

Leveraging Collective Expertise vs Individual Expertise

Governance structures that facilitate knowledge sharing and collaboration can amplify the impact of grants, tapping into the community's diverse expertise to guide funding towards the most promising projects. While collective feedback can lead to blindspots, certain decisions are well suited for individual expertise. 

Impact Measurement and Accountability

Establishing clear metrics for success and regular reporting can help stakeholders understand the value generated by grant-funded projects, aligning with the goals of transparency and effectiveness. 

Community Engagement Strategies

Voter apathy being a problem in DAOs, keeping the community informed on all the proposals with regard to grants, can be a complex task, with stakeholders often missing out on crucial information. Creating effective communication channels, and facilitating free flow of information is a daunting task that is yet to be solved for large DAOs.

Notable Web3 Grants Programs

There are hundreds of grants programs in web3, funding billions of dollars in grants. We will explore three grants programs in particular: Arbitrum, for its high treasury value; Optimism, for its retrospective funding process; and Gitcoin, for its approach to public goods funding.

Arbitrum

Arbitrum, the largest DAO in terms of treasury values, is experiencing significant traction in governance activities.

The DAO has been proactively experimenting to enhance the effectiveness of its grants program. The primary objective of these grants is to attract new users and increase liquidity. The most notable aspect of their grants framework is the experimentation with various grants programs. The first significant initiative was the Short Term Incentive Program, allocating 50 million ARB, which concluded successfully. While the STIP led to the anticipated uptick, it fell short in funding many ecosystem projects and acknowledged STIP's limitations. To rectify this, the Long Term Incentive Program has been designed on a pilot basis, nearing its launch. Other significant experiments include Plurality Labs, Questbook’s Delegated Domain Allocation, Grants Ship’s game-based allocation, and other grants mechanisms.

Plurality Labs combines the best of both decentralized and centralized structures. Rather than having a single program manager with one method of distribution, Plurality Labs enables multiple program managers to design their own grants, whether in the form of direct grants, prospective grants, retrospective grants based on impact, quadratic funding through Gitcoin, domain expertise-based grants through Questbook, evolutionary game-based grants called Grants Ship, and more. Each design has its own distribution mechanism and manages the end-to-end grants process. Despite the variety of allocation methods, the program aims to establish a common framework capable of identifying, tracking, and refining metrics for each unique grant program, challenging the status quo in web3 grants programs.

Optimism’s RetroPGF

Optimism's bicameral governance model is a joint effort between the Optimism Foundation and the Optimism Collective. The Optimism Collective splits governance matters between the Token House and the Citizens’ House. Within the context of grants, the objective is to create a flywheel effect, with the Token House driving ecosystem growth, leading to more RetroPGF grants availability. The Citizens' House then distributes these grants as rewards to high-impact projects, further developing the network and sustaining the flywheel motion.

Optimism's Retroactive Public Goods Funding initiative rewards impactful contributions to its ecosystem, aiming to balance profit with public good. Beginning with a $1 million distribution across 58 projects, it has progressively increased its support and reach. The second round saw an increase in allocation to further support projects demonstrating significant public benefit. The most recent, third round, marked a significant step by distributing 30 million OP tokens, highlighting Optimism's dedication to creating a thriving environment where public goods are valued.

This program exemplifies how web3 funds its dependencies without conventional capital, such as VC funds, ensuring no project receives an insignificant allocation in the latest round. The third round had 643 applicants, with 146 badge holders and projects needing at least 17 votes to meet the quorum for funding eligibility. The burden on badge holders to review every project is significant, although community curation(lists) was introduced in round three. However, less networked projects risk missing the quorum of 17 votes. The badge holders' expertise varies, and they may lack the knowledge to review all types of projects. Easier said than done, Optimism could alleviate badge holder workload by grouping them for certain project segments, enhancing project review efficacy and discovery(for lesser known projects). OP’s sequencer fees are a crucial impact metric but received less than 20% of the allocation, raising questions about allocation sustainability. With applicant numbers expected to rise, identifying and funding high-impact projects will be an increasingly significant challenge.

Gitcoin

Gitcoin, a well-known entity in the public goods funding space, has distributed over $50 million towards public goods, with contributions from 4.3 million unique contributors. Gitcoin has made a name for itself in public goods funding using quadratic funding and has evolved into a comprehensive funding stack that other program managers can use to allocate funds in their own way. Owocki's post described the transition of Gitcoin 2.0 from a centralized product to a decentralized suite of products, exploring other funding strategies other than quadratic funding and enabling projects from the EVM ecosystem to access or build on Gitcoin’s funding platform.

Gitcoin has become a testament to progressive decentralization by first achieving product-market fit, then creating a DAO to build a grants stack and allo protocol, and now looks to double down on grants as the main focus. This includes spinning off Gitcoin Passport as an independent entity. Initially a Sybil resistance tool for Gitcoin, the Gitcoin Passport has become a go-to tool for Sybil resistance and identity verification in the EVM ecosystem, now poised to stand alone. Gitcoin will focus on developing technology and showcasing best practices to advance and codify grants programs that can be run by projects within the EVM ecosystem to create, manage, and run successful grants programs.

As it becomes increasingly clear that there is no one-size-fits-all approach to web3 grants programs, projects can take advantage of Gitcoin’s design to meet their own needs. Instead of spending time and effort designing their grants program, projects can now utilize Gitcoin’s allo protocol and grants stack, focusing more on capital allocation and reducing the governance burden involved in designing an end-to-end grants program.

Experimental Capital Allocation Methods

Let’s discuss some of the ongoing experimentations in the space.

Questbook’s Domain Allocation method

A community run grants program, started through Compound’s grants program uses delegated domain capital allocation model. This is a streamlined, efficient grants program that combines minimum governance with maximum community involvement. By dividing the grant program into specialized sectors led by individual allocators with full control over disbursement, it addresses inefficiencies seen in traditional DAO models. Community participation is redefined as the power to replace an allocator through a no-confidence motion, contingent on specific credentials. This model discerns by putting more weight on individual expertise over collective blindspot, and also increases accountability of the grants program. Questbook is used by Compound, Celo, Polygon and Arbitrum. 

Octant

Octant, developed by the Golem Foundation, is an innovative web3 grants program that utilizes staked ETH to create a funding pool for public goods, driven by community participation. By locking GLM tokens, users not only earn rewards based on their contribution but also gain voting power to influence how funds are allocated, directly tying community engagement to the platform's governance. This unique model is characterized by a non-custodial, token-locking mechanism, encouraging users to actively participate in the decision-making process. Octant stands out for its approach to incentivizing community-driven support for projects, with the potential to donate rewards to public goods projects, which are then amplified through matched rewards. Additionally, its design promotes a dynamic, interactive governance experience, where users can adjust their allocations based on community trends and discussions, thereby fostering a more engaged and responsive ecosystem for funding public goods.

Grants Ship

Grants Ship offers a meta-framework that applies evolutionary game theory to the allocation of grants, fostering competitive yet impactful disbursement of funds through transparent, on-chain processes. This protocol differentiates roles, such as ship operators, facilitators, grant recipients, and the community, to structure its operations. Capital is allocated to "Grant Ships," which then distribute funds based on their evaluation of grantees. Following each funding round, Ships report their distributions, and the community ranks them through a weighted token vote. Performance influences future funding allocations, with high-performing Ships receiving more capital, thus incentivizing effectiveness and alignment with community goals. This model introduces a dynamic, performance-based approach to funding allocation, encouraging continuous improvement and community engagement.

Closing Thoughts

Web3 grants programs are still in their infancy, working towards establishing frameworks resilient against manipulation in decentralized environments. It’s fascinating to watch protocols experiment with various methods for capital allocation, alongside the evolution of the tooling stack, which allows projects to focus on raising funds for specific causes instead of managing comprehensive grants programs. However, the operational challenges of running these programs remain a significant hurdle.

As protocols explore grant distribution in line with Web3 principles, an intersectional approach that leverages key learnings from each experiment could pave the way for a solid grants framework. Adopting localized governance, which balances the collective wisdom of the community with expert insights, will be crucial for enhancing the effectiveness and impact of Web3 grants programs.

After reviewing numerous proposals and documents, it's challenging to conclude in a generalized manner due to the inherent complexity of grants programs. Yet, observing how teams respond to community feedback and incrementally refine their programs is not only encouraging but also resonates with the core reason for our presence in Web3.

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