Over the past four years, Ethereum has experienced a remarkable evolution. It began as a network that could only manage 15 transactions per second and has now grown into a robust platform capable of processing thousands, with transaction fees dropping from $50 per transaction to only a few cents. The introduction of Layer 2 solutions and rollups has enabled Ethereum to scale effectively without sacrificing its decentralization principles. However, this successful expansion has introduced a new challenge: fragmentation.
Presently, Ethereum stands as one of the most utilized blockchains, characterized by a network comprising over 50 L2s, each functioning as a distinct silo. This fragmentation complicates matters for users who must coordinate various networks, transfer assets, and navigate an intricate array of processes to execute even simple transactions.
Reflecting the splintered technological environment, Ethereum’s funding situation has also become cumbersome for developers at all stages, impeding innovation as projects battle to obtain consistent financing.
To develop a more effective ecosystem, Ethereum must embrace blockchain-based funding systems that resonate with its intricate, community-driven, and experimental nature.
Conventional funding models often prioritize early-stage projects, overlooking the ongoing requirements of builders within the Web3 space. It can be deceptive to observe dominant narratives in the crypto market and assume activity is thriving. Many of these initiatives may not yield immediate financial returns, leaving creators grappling with the path to sustainable development. Funding frameworks should support innovators throughout the entirety of their product journey.
Focusing on impact, not speculation
A particularly promising funding approach powered by blockchain is RetroPGF, which transforms traditional funding paradigms by compensating projects based on their verified impact rather than their speculative appeal. This model is especially relevant for Ethereum’s fragmented landscape, where essential resources like open-source software, developer tools, and interoperability solutions often fail to receive initial funding.
RetroPGF emphasizes the quantifiable results of a project by collecting funds from DAOs or ecosystem participants and distributing them retroactively to initiatives that have shown value. This strategy ensures that vital infrastructures, such as cross-chain bridges or developer frameworks, obtain timely support.
This funding approach is advantageous because it aligns incentives; projects can concentrate on delivering substantial value rather than vying for speculative investments, knowing that their efforts will be acknowledged and rewarded. For a fragmented ecosystem like Ethereum, RetroPGF provides a means to consolidate funding efforts and direct resources toward the most impactful projects.
Enhancing community engagement
An additional robust mechanism in blockchain funding is quadratic funding, a model that allocates capital based on the extent of community support rather than the magnitude of individual contributions. This strategy levels the playing field for smaller projects and grassroots efforts, which typically have difficulty competing with well-funded counterparts in traditional funding ecosystems.
Quadratic funding functions by pairing small contributions from a broad array of supporters with a larger fund pool, reflecting the community’s collective insights and ensuring that projects with widespread grassroots backing receive the lion’s share of funding.
By tokenizing the value of public goods projects, like governance rights or revenue streams, founders can widen their project’s appeal to a larger audience using fractional investing techniques. This expands the investor base, allowing for a more diverse and committed group of supporters while democratizing capital access and decreasing dependency on traditional funding channels.
For instance, developers creating a cross-chain interoperability solution could tokenize their project’s governance rights, enabling supporters to make small investments in return for a stake in its success. This not only provides essential funding for the project but also cultivates a sense of ownership and alignment among its backers.
In a fragmented space like Ethereum, fractional investing can bridge the divides between chains by motivating collaboration and shared ownership. Projects that might otherwise remain isolated can access a communal pool of funding, leading to a more cohesive and resilient ecosystem.
On-chain ownership
Central to these blockchain-driven funding models is the principle of on-chain ownership. Through tokenizing their work and utilizing blockchain’s transparency, creators and developers can forge direct connections with their supporters, bypassing intermediaries and ensuring that value flows back to those who invested in them from the outset.
On-chain transactions also provide visible and verifiable funding pathways, diminishing the risk of fraud and enhancing trust. This transparency is crucial in a fragmented setting like Ethereum, where users and developers often find it challenging to navigate convoluted and opaque funding mechanisms.
A key consideration is how to secure funding for these x-L2 initiatives.
One potential strategy involves making the funding of Ethereum common goods a requirement for becoming a Stage 1 or Stage 2 rollup. Once these rollups achieve a certain level of decentralization, they depend on a distributed community and governance tools. Funding for these shared resources is not just justified but essential for their further development.
Alternatively, the grants program could focus on addressing this challenge, ensuring better support for the cross-L2 experience and funding collective resources.
The fragmentation within Ethereum manifests not only in technical dilemmas but also as a fundamental funding challenge. By incorporating blockchain-powered funding mechanisms like RetroPGF, quadratic funding, and fractional investing, the ecosystem can realign incentives, bolster community support, and democratize access to finance, guaranteeing that resources are directed toward the projects that require them the most.