Author: Dara_VC
Compiled by: Jia Huan, ChainCatcher
The L1 grant (ecological grant) model has become ineffective. It's not the kind of failure that "needs fine-tuning," but a complete failure in terms of structure, concept, and consistency of motivation.
The L1 teams running these projects are either too close to the situation to see clearly, or they are too afraid to admit it because they are too worried about the negative impact of stopping them.
Where did the money go?
NEAR previously 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 disbursed over $45 million in grants to more than 800 projects.
Avalanche has committed over $250 million in funding to drive the development of its ecosystem.
Aptos operates a milestone-based ecosystem grant program, with amounts ranging from $5,000 to $50,000, and payment grants up to $150,000. BNB Chain provides up to $200,000 in funding for each project.
Overall, across all major L1 funding bodies, hundreds of millions, and possibly even billions, of dollars have been poured into this "funding machine" over the past four years. As of 2024, there were over 50 active Web3 funding projects globally supporting a wide range of projects, including public goods, DeFi, tools, AI, and infrastructure.
You might think that with such a massive influx of funds, we should see a lot of groundbreaking companies, unicorn protocols, and ecosystems that can truly retain liquidity and users in the long run.
However, this is not the case. TVL (Total Value Locked) is circulating and disappearing, with developers chasing the next incentive. The impressive figures reported to the board last quarter now look embarrassing six months later. And the question no one wants to ask publicly is: Where did all that money go?
To justify the original design intent of the ecological funding model
To be fair, the ecosystem grant model once made sense. In 2020 and 2021, when L1 was truly trying to cold-start its ecosystem from scratch, grants were a reasonable spark. You need developers before you have users, and you need protocols before you have liquidity. Grants could ignite the initial flywheel.
In the early stages of Web3 development, ecosystem grants played a crucial financial role. They supported open-source contributions, incentivized participation in new protocols, and allowed teams to build MVPs (Minimum Viable Product) without immediate monetization pressure. Grants were ideal for brainstorming and experimentation.
"Spark" is the key word here. No one designed funding to be a permanent fuel source. But this is precisely the reality of many ecosystems—a long-term "infusion" of nourishment that allows projects to survive on life support systems without ever forcing them to truly learn to breathe on their own.
The proliferation of projects reliant on funding exposes key limitations. Funding often encourages short-sighted thinking, with teams optimizing for funding rounds rather than sustainable operations. Projects may get caught in a vicious cycle of writing proposals and soliciting sponsorships, with less focus on building a viable user base or a revenue-generating product.
Hamster wheel trap that spins in place
One team set their sights on a mid-tier L1 network—one with well-funded foundations, active grant committees, and, crucially, less competition for funding. They developed products that fit the current grant wish list: DeFi tools, DEXs, NFT marketplaces, and some kind of "AI integration" (regardless of what that means in this cycle).
They submitted a brilliant proposal, achieved the KPIs stipulated in the milestone structure, received funding in installments, and produced activity data that the foundation team could screenshot and display in their quarterly reports.
A small group of established teams repeatedly wins funding, opportunities, and attention. Even in systems like Quadratic Funding, these same teams often dominate, excluding newcomers.
Over time, smarter teams figured out the dynamics of this cartel and became adept at navigating it. They cultivated relationships with funding committees, became "insiders" within the ecosystem's Discord, and positioned themselves as reliable recipients of funding in cyclical fashion.
Then, when the ecosystem hits its ceiling, when TVL stops growing, and when real liquidity remains on Solana and Ethereum (because that's where the real users are), these teams will make a rational move. They'll start evaluating the next active ecosystem, porting their code, writing new proposals, and then walk away.
Funding projects are measured by the amount of funding disbursed or the funds allocated, but this doesn't tell the whole story. TVL charts tell the truth, developer retention data tells the truth, and lifeless Discord channels tell the truth.
The unmentioned "hostage" dilemma
Eco-funding models have created a strange dynamic that is rarely discussed openly: they create a hostage relationship in which both sides are hostages.
Foundations have become hostages to their own metrics. They are committed to deploying capital and must report the ecosystem’s growth to the board, and the easiest way to demonstrate growth is to provide more funding, more projects, and better-looking data.
The Ethereum Foundation funded 105 projects before realizing it needed to pause applications. The sheer number became problematic, overwhelming the lean teams and preventing them from assessing the true long-term impact.
Even the most mature and trusted Ethereum ecosystem in the field eventually had to stop and reflect... Are we creating value, or are we just generating activity?
The recipient team becomes another hostage. Once you enter the funding cycle, your organizational structure is built around it. Your roadmap becomes the funding proposal, and your KPIs become whatever the committee wants to see. You no longer make product decisions based on user needs, but on what will get you funding.
Web3 founders and developers must recognize that success is not measured by funding rounds or community hype; long-term impact comes from building infrastructure and applications that stand the test of time. Funding can be a spark, but it must never be fuel.
The tragedy is that truly talented teams are trapped in this situation. They could have created real value, but instead, they're busy optimizing grant applications and hanging out in various Telegram groups to gain recognition.
The true role of direct equity investment
Let's compare this to L1's venture capital arm writing real checks—investing in companies they genuinely believe in, in the form of equity plus tokens.
Solana Ventures, as the strategic investment arm of Solana Labs, has a clear mission: to accelerate the development of the Solana blockchain itself, using its funds as leverage for ecosystem growth. The company frequently designs and develops partnerships with game studios.
It is not only an investor, but also an infrastructure and market entry partner, helping the team build Solana's native game economy and integrations.
This is completely different from funding. When you accept equity and tokens, you're betting that the company will achieve something. This changes everything about how you interact with them. You're now on the same side of the table.
You want them to find Product-Market Fit (PMF), you want them to complete a genuine Series A funding round, and you want them to reach a valuation of one billion dollars, because that one billion dollar valuation has a greater impact on your ecosystem reputation, your token price, and your long-term narrative than the combined value of 50 grant recipients.
A16z Crypto invested $50 million in its core Solana protocol, Jito, in exchange for tokens, with the explicit aim of fostering long-term alignment between the two companies. This is the right approach, not a $50,000 grant with a milestone report due in 90 days.
This is betting on a company that will have a real impact, and it's a real, substantial bet.
In 2025, global blockchain venture capital funding reached $35 billion, with institutions such as a16z Crypto and Pantera Capital leading multiple major funding rounds. This is the pool that L1 venture capital firms need to compete for.
Developers are only loyal to users and liquidity.
Another strategic mistake the eco-funding model makes is that it assumes developer loyalty can be bought with non-dilutive capital. This is not the case.
In 2025, L1 activity diverged into different players: Solana, BNB Chain, and Hyperliquid captured significant speculative flows, while Ethereum solidified its position as the settlement and data availability layer. The base layer continued to segment into specialized chains covering privacy, performance, and application chain coordination, making interoperability and cross-chain routing increasingly important.
The best builders understand this. They are not loyal to any particular chain, but to the users and liquidity. They go where the users are, where there are exit mechanisms, and where there is real trading volume and capital flow.
Now, this is a multi-chain reality. The winners of the next cycle will be protocols and applications that make meaningful integrations across multiple chains.
Layer-1 chains raised approximately $2.71 billion between 2023 and 2025, with nearly 48% of the funds going to early-stage projects. Investors remain supportive of new execution environments but increasingly expect faster ecosystem delivery.
The market is getting smarter; it's abandoning the ecosystem that relies solely on subsidies to fuel fake activity. Now, the rewards are real throughput, real users, and real revenue.
So what exactly should L1's venture capital arm do? Get into the best companies as early as possible with equity and tokens, make real strategic involvement in a multi-chain portfolio, and make your chain integration a part of their roadmap, not an optional sideline.
If you support a company that's destined for greatness, you'll partner with them, making your chain a natural home for their activities. You earn that loyalty by becoming the best technological environment for them to build their products, not by renting it out with grant checks.
A billion-dollar company vs. 200 zombie projects
Scenario A: You've deployed $10 million in grants to 200 projects over two years. Your quarterly board reports include daily active users (DAU) data, some GitHub activity, and a bunch of comments from teams active on Discord trying to optimize their grant KPIs.
Two years later, half of those projects either died or migrated to places with real liquidity. Your TVL stagnated, and your developer retention data was abysmal. You reported "funded over 200 projects," then prayed no one would ask what happened to them.
Scenario B: You have the same $10 million and deploy it in the form of direct equity plus tokens to 10 truly promising companies in your ecosystem, and develop an integration roadmap to tie their success to your chain.
You provide genuine strategic support—not chasing milestone reports, but introducing hiring, token economics design, and market entry strategies. Three years later, one of the companies was valued at $1 billion, and the other two at $200 million each.
That billion-dollar company is proof that it can change everything. It changed how other builders think about building products in your ecosystem, how venture capitalists think about writing checks in your ecosystem, how exchanges view your on-chain projects, and how liquidity providers (LPs) view your tokens.
The narrative pull of a truly groundbreaking project is enormous, and its compounding effect is something that 200 "zombie" projects surviving on grants can never achieve.
In the first quarter of 2025 alone, blockchain and crypto startups raised $4.8 billion, the strongest quarter since the end of 2022. Startups that can demonstrate their practicality, compliance, and scalability are not only able to attract funding, but also strategic partners and long-term support.
Smart capital is starting to flow to real companies that can produce tangible results. L1 venture capital firms need to embrace this trend, rather than isolating themselves by running parallel funding projects.
Kill vanity metrics. Stop reporting the number of funded projects and start reporting portfolio company valuations, TVL of portfolio companies, and developer retention rates that are truly tied to organic growth, not incentive-based retention rates.
Make a clear distinction between infrastructure funding and company investment. Some things are worth funding—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 what about a DeFi protocol or a gaming app? That's a company. Invest in it like you would invest in a company.
Those who keep throwing money around will eventually be eliminated.
The L1 landscape in 2026 will be vastly different from that of 2021. The total market capitalization of the L1 sector will remain stable above $2.96 trillion, and competition has shifted from theory to practical applications, stablecoin payments, games, perpetual contract DEXs, creator tools, and application-specific chains. Winners are differentiating themselves through throughput, fees, decentralization, and developer appeal.
The era of grants was meaningful in the cold start era. That era is over. What remains is a true competition for the best builders, the best deals, and the most genuine economic activity. You can't win this competition by being the most generous grant committee.
You win because you have a group 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're the right long-term partner.
L1s that understand this within the next 18 months will appear to be visionaries. Those L1s that still prioritize funding projects as their primary ecosystem development strategy will eventually have their true colors revealed: they have mistaken activity levels for value creation and are paying hundreds of millions of dollars for this self-deception.
