Author: Dara_VC
Compiled by: Jiahuan, ChainCatcher
The L1 Grant model has failed. Not the kind of "needs fine-tuning" failure, but a complete failure in structure, philosophy, and incentive alignment.
And the L1 teams running these programs are either "unable to see the forest for the trees" because they are too close to it, or too afraid of the negative impact of stopping to admit it.
Where Did the Money Actually Go?
NEAR once announced an $800 million ecosystem fund, with $250 million specifically earmarked for ecosystem grants over the next four years. Prior to this, NEAR had already distributed over $45 million in grants to more than 800 projects.
Avalanche committed over $250 million in grants, dedicated to driving its ecosystem development.
Aptos runs milestone-based ecosystem grants ranging from $5,000 to $50,000, with payment-focused grants going up to $150,000. BNB Chain provides up to $200,000 per project.
Overall, across all major L1s, the capital funneled into this "grant machine" over the past four years amounts to hundreds of millions of dollars, possibly even exceeding a billion. As of 2024, there are over 50 active Web3 grant programs globally supporting various projects, including public goods, DeFi, tools, AI, and infrastructure.
You might think, with such a massive influx of capital, we should see a plethora of breakthrough companies, unicorn protocols, and ecosystems that genuinely retain liquidity and users long-term.
But that's not the case. TVL (Total Value Locked) churns and drains away, developers chase the next incentive mechanism. The impressive data reported to the board last quarter looks embarrassing six months later. And the question no one wants to ask out loud is: Where did all that money actually go?
In Defense of the Original Intent of the Grant Model
To be fair, the grant model once made sense. In 2020 and 2021, when L1s were genuinely trying to cold-start ecosystems from scratch, grants were a reasonable spark. You need developers before you have users, protocols before you have liquidity. Grants could ignite the initial flywheel.
In the early stages of Web3 development, ecosystem grants played a crucial funding role. They supported open-source contributions, incentivized participation in new protocols, and allowed teams to build MVPs (Minimum Viable Products) without immediate monetization pressure. Grants were ideal for ideation and experimentation.
"Spark" is the key word here. No one designed grants to be a permanent fuel source. But that's precisely what they have become in many ecosystems—a long-term "drip feed" that keeps projects on life support, never forcing them to learn to breathe on their own.
The proliferation of grant-dependent projects exposes key limitations. Grants often encourage short-term thinking, with teams optimizing for funding rounds rather than sustainable operation. Projects can get stuck in a death spiral of writing proposals and chasing grants, with less focus on building a viable user base or revenue-generating product.
The Hamster Wheel Trap of Spinning in Place
A team targets a mid-tier L1—one with a well-funded foundation, an active grants committee, and, crucially, lower competition for grant funds. They develop a product that fits the current grant wishlist: DeFi tools, a DEX, an NFT marketplace, some kind of "AI integration" (whatever that means this cycle).
They submit a slick proposal, hit the KPIs outlined in the milestone structure, receive funds in tranches, and generate activity metrics the foundation team can screenshot for their quarterly reports.
A small group of established teams repeatedly win the money, the opportunities, and the attention. Even in systems like quadratic funding, these same teams often dominate, crowding out newcomers.
Over time, the smarter teams figure out this cartel dynamic and simply play within it. They build relationships with the grants committee, become "known faces" in the ecosystem Discord, and position themselves as reliable recipients of funds, cycle after cycle.
Then, when the ecosystem hits its ceiling, when TVL stops growing, when real liquidity remains on Solana and Ethereum (because that's where the real users are), these teams do the rational thing. They start scoping out the next active ecosystem, port their code, write new proposals, and move on.
Grant programs measure success by the number of grants given or funds distributed, but that doesn't tell the whole story. The TVL charts tell the truth, the developer retention data tells the truth, the dead Discord channels tell the truth.
The Unspoken "Hostage" Dilemma
The grant model creates a strange dynamic that is rarely discussed candidly: it creates a hostage situation, and both sides are hostages.
The foundation becomes a hostage to its own metrics. They promised deployed capital, must report ecosystem growth to the board, and the easiest way to show growth is to offer more grants, more projects, prettier numbers.
The Ethereum Foundation funded 105 projects before realizing it needed to pause open applications. The volume itself became the problem, overwhelming a lean team and making it impossible to assess real long-term impact.
Even the most mature, credible ecosystem in the space, Ethereum, eventually had to stop and reflect... are we actually creating value, or just manufacturing activity?
The grantee teams are the other hostage. Once you're in the grant cycle, your organization structures itself around it. Your roadmap becomes grant proposals, your KPIs become whatever the committee wants to see. You stop making product decisions based on user needs and start making them based on what gets funded.
Web3 founders and developers must recognize that success is measured not just by funding rounds or community hype; long-term impact comes from building infrastructure and applications that stand the test of time. Grants can be the spark, but they must not be the fuel.
The tragedy is that genuinely talented teams get trapped. They could be creating real value, but instead, they're optimizing grant applications and networking in Telegram groups.
The Real Role of Direct Equity Investment
Let's contrast this with L1 venture arms writing real checks—investing in companies they genuinely believe in, with equity plus tokens.
Solana Ventures, the strategic investment arm of Solana Labs, has a clear mission to accelerate the development of the Solana blockchain itself, using its capital as leverage for ecosystem growth. The firm often co-designs development partnerships with game studios.
It's not just an investor; it's an infrastructure and go-to-market partner, helping teams build Solana-native game economies and integrations.
This is a fundamentally different relationship than a grant. When you take equity and tokens, you're betting that this company will matter. It changes everything about how you interact with them. You're on the same side of the table now.
You want them to find product-market fit (PMF), you want them to raise a real Series A, you want them to reach a billion-dollar valuation, because that billion-dollar valuation does more for your ecosystem's credibility, your token price, and the long-term narrative than 50 grant recipients combined.
A16z Crypto invested $50 million in the core Solana protocol Jito, trading capital for tokens with the explicit goal of fostering long-term alignment between the two companies. This is the way. Not a $50,000 grant with a milestone report due in 90 days.
This is betting on a company that will actually move the needle, with real skin in the game.
In 2025, global blockchain VC funding reached $35 billion, with firms like a16z Crypto and Pantera Capital leading multiple significant rounds. This is the pool L1 venture arms need to be competing in.
Developers Are Loyal to Users and Liquidity, Period
Another strategic mistake the grant model makes is this: it assumes developer loyalty can be purchased with non-dilutive capital. It cannot.
L1 activity in 2025 is bifurcating into roles: Solana, BNB Chain, and Hyperliquid capture massive speculative flows, while Ethereum consolidates its position as a settlement and data availability layer. The base layer continues to subdivide into specialized chains covering privacy, performance, and app-chain coordination, making interoperability and cross-chain routing increasingly important.
The best builders have figured this out. They're not loyal to a chain; they're loyal to users and liquidity. They go where the users are, where the exit potential is, where there's real volume and money movement.
And right now, it's a multi-chain reality. The winners of the next cycle will be protocols and apps with meaningful integrations across multiple chains.
Layer-1 chains raised approximately $2.71 billion between 2023 and 2025, with nearly 48% of the funding flowing to early-stage projects. Investors still back new execution environments but increasingly expect faster ecosystem delivery.
The market is getting smarter, and it's punishing ecosystems that rely on grants to prop up fake activity. Real throughput, real users, and real revenue are being rewarded now.
So what should L1 venture arms do? Get into the best companies early with equity, with tokens, with real strategic participation in a multi-chain portfolio, making integration with your chain part of their roadmap, not an optional extra.
If you back a company that is going to matter, you work with them to make your chain the natural home for their activity. You earn that loyalty by being the best technical environment to build their product, not by renting it with a grant check.
One Billion-Dollar Company vs. 200 Zombie Projects
Scenario A: You deploy $10 million in grants to 200 projects over two years. Your quarterly board report has DAU numbers, some GitHub activity, and a bunch of quotes from teams active on Discord optimizing for grant KPIs.
Two years later, half of those projects are either dead or have migrated to where the real liquidity is. Your TVL is stagnant, your developer retention data is awful. You report "funded 200+ projects" and pray no one asks for their whereabouts.
Scenario B: You take the same $10 million and deploy it into 10 truly promising companies in your ecosystem via direct equity plus tokens, with an integration roadmap that ties their success to your chain.
You provide real strategic support—not milestone nagging, but intros to hires, tokenomics design, go-to-market strategy. Three years later, one company is worth $1 billion, two others are worth $200 million each.
That billion-dollar company is the proof point that changes everything. It changes what other builders think about building in your ecosystem, what VCs think about writing checks in your ecosystem, what exchanges think about projects on your chain, what LPs think about your token.
The narrative gravity of one真正的 breakthrough project is immense, and its compounding effects are something 200 grant-surviving "zombie" projects could never achieve.
In Q1 2025 alone, blockchain and crypto startups raised $4.8 billion, the strongest quarter since late 2022. Startups that can demonstrate utility, compliance, and scalability attract not only capital but also strategic partners and long-term support.
Smart capital is already flowing to real companies that create real outcomes. L1 venture arms need to get into that flow, not run parallel grant programs that isolate them from it.
Kill the vanity metrics. Stop reporting the number of projects funded, start reporting portfolio company valuations, the TVL of your invested companies, and developer retention that's tied to organic growth, not incentive programs.
Draw a hard line between infrastructure grants and company investments. Some things are worth granting—genuine open-source public goods, core infrastructure, security research. These are true public goods that benefit everyone in the ecosystem and don't require a business model. But a DeFi protocol or a gaming app? That's a company. Invest in it like one.
Those Still Splashing Cash Will Be Washed Out
The L1 landscape in 2026 is vastly different from 2021. The total market cap of the L1 sector stabilized above $2.96 trillion, and competition has shifted from theoretical to practical applications, stablecoin payments, gaming, perp DEXs, creator tools, and app-specific chains. Winners are pulling away on throughput, fees, decentralization, and developer appeal.
The grant era made sense in the cold-start era. That era is over. What's left is the real competition for the best builders, the best protocols, the most real economic activity. You don't win that competition by being the most generous grants committee.
You win because you have a cohort of truly great companies that choose your chain (often among many options) because it's the best place to build, and they stay because you are the right long-term partner.
The L1s that figure this out in the next 18 months will look like visionaries. And those still running grant programs as their primary ecosystem development strategy will be exposed for what they are: mistaking activity for value creation and paying hundreds of millions of dollars for the self-deception.
