The era of "mass coin distribution" on public chains comes to an end

Author: Dara_VC

Compiled by: Jiahua, ChainCatcher

The Grant (ecosystem funding) model of L1 has failed. It's not a failure that "needs fine-tuning," but a complete failure structurally, conceptually, and in terms of motivational consistency.

The L1 teams running these projects are either "blinded by their own involvement" or too worried about the negative impact of halting to admit it.

Where Did the Money Go?

NEAR once announced the establishment of an $800 million ecosystem fund, with $250 million specifically allocated for ecosystem funding over the next four years. Prior to this, NEAR had already granted over $45 million to more than 800 projects.

Avalanche promised to invest over $250 million in funding, committed to promoting the development of its ecosystem.

Aptos operates a milestone-based ecosystem funding model, with amounts ranging from $5,000 to $50,000, and funding for payment-related grants can go up to $150,000. BNB Chain provides up to $200,000 for each project.

Overall, across all major L1s, hundreds of millions of dollars have been poured into this "funding machine" over the past four years, possibly exceeding a billion dollars. As of 2024, there are over 50 active Web3 funding projects globally supporting various initiatives, covering public goods, DeFi, tools, AI, and infrastructure.

You might think that with such a massive influx of funds, we should see a plethora of groundbreaking companies, unicorn protocols, and ecosystems that can truly retain liquidity and users in the long term.

However, that is not the case. TVL (Total Value Locked) is leaking, and developers are chasing the next incentive mechanism. The impressive data reported to the board last quarter looks embarrassing six months later. And the question that no one dares to ask publicly is: where did all this money go?

Reclaiming the Original Intent of Ecosystem Funding Models

Fairly speaking, the ecosystem funding model once made sense. In 2020 and 2021, when L1s were genuinely trying to cold-start ecosystems from scratch, funding was a reasonable spark. You need developers before you have users, and you need protocols before you have liquidity. Funding can ignite the initial flywheel.

In the early stages of Web3 development, ecosystem funding played a crucial financial role. It supported open-source contributions, incentivized participation in new protocols, and allowed teams to build MVPs (Minimum Viable Products) without immediate pressure to monetize. Funding is an ideal choice for ideation and experimentation.

"Spark" is the keyword here. No one designed funding to be a permanent fuel. But this has become the reality for many ecosystems—a long-term "infusion" that allows projects to survive on life support without ever forcing them to learn to breathe on their own.

The proliferation of projects reliant on funding exposes critical limitations. Funding often encourages short-term thinking, with teams optimizing for funding rounds rather than sustainable operations. Projects may get trapped in a vicious cycle of writing proposals and soliciting sponsorships, paying less attention to building viable user bases or revenue-generating products.

The Hamster Wheel Trap of Spinning in Place

A team sets its sights on a mid-tier L1—those with well-funded foundations, active funding committees, and crucially, networks with lower competition for funding. They develop products that align with the current funding wishlist: DeFi tools, DEXs, NFT markets, some form of "AI integration" (whatever that means in this cycle).

They submit a polished proposal, meet the KPIs outlined in the milestone structure, receive funding in batches, and generate activity data that the foundation team can screenshot for quarterly reports.

A small group of mature teams repeatedly wins funding, opportunities, and attention. Even in systems like secondary financing, these same teams often dominate, keeping newcomers at bay.

Over time, smarter teams have figured out this cartel dynamic and navigate it with ease. They build relationships with funding committees, become "insiders" in the ecosystem's Discord, and position themselves as reliable recipients of recurring funding.

Then, when the ecosystem hits a ceiling, when TVL stops growing, and when real liquidity remains on Solana and Ethereum (where the real users are), these teams will act rationally. They start evaluating the next active ecosystem, transplant their code, write new proposals, and then leave.

Funding projects measure success by the amount of funding disbursed or allocated, but this does not tell the whole story. TVL charts reveal the truth, developer retention data reveals the truth, and lifeless Discord channels reveal the truth.

The Unmentioned "Hostage" Dilemma

The ecosystem funding model has created a strange dynamic that is rarely discussed openly: it creates a hostage relationship, with both sides being hostages.

Foundations become hostages to their own metrics. They commit to deploying capital and must report ecosystem growth to the board, and the simplest way to show growth is to provide more funding, more projects, and prettier data.

The Ethereum Foundation funded 105 projects before realizing it needed to pause open applications. The sheer number became a problem, overwhelming streamlined teams and making it impossible to assess real long-term impacts.

Even the most mature and credible Ethereum ecosystem ultimately had to stop and reflect… are we creating value, or merely generating activity?

The recipient teams are another hostage. Once you enter the funding cycle, your organizational structure will revolve 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 rather based on what can secure funding.

Web3 founders and developers must recognize that success is not only 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. They could create real value, but instead, they are optimizing funding applications and mingling in various Telegram groups to get familiar.

The True Role of Direct Equity Investment

Let’s compare this to L1's venture capital departments writing real checks—investing in promising companies 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 often co-designs development partnerships with game studios.

It is not just an investor but also a partner in infrastructure and market entry, helping teams build Solana-native game economies and integrations.

This is a fundamentally different relationship from funding. When you accept equity and tokens, you are betting that this company will make an impact. This changes everything about how you interact with them. You are now on the same side of the table.

You want them to find product-market fit (PMF), you want them to complete real Series A funding, and you want their valuation to reach a billion dollars because that billion-dollar valuation has a greater impact on your ecosystem's credibility, your token price, and the long-term narrative than the combined total of 50 funded recipients.

A16z Crypto invested $50 million in the core Solana protocol Jito in exchange for equity and tokens, with the explicit goal of fostering long-term alignment between the two companies. This is the right approach, not a $50,000 grant that requires a milestone report in 90 days.

This is betting on a company that will truly make an impact, and it’s a bet with real money and stakes.

In 2025, global blockchain venture capital funding reached $35 billion, with firms like a16z Crypto and Pantera Capital leading multiple significant rounds. This is the pool that L1 venture capital departments need to compete for.

Developers Are Only Loyal to Users and Liquidity

Another strategic mistake of the ecosystem funding model is that it assumes developers' loyalty can be bought with non-dilutive capital. This is not the case.

In 2025, L1 activity will differentiate into various roles: Solana, BNB Chain, and Hyperliquid will capture significant speculative capital flows, while Ethereum will solidify its position as a settlement and data availability layer. The base layer continues to segment into specialized chains covering privacy, performance, and application chain coordination, making interoperability and cross-chain routing increasingly important.

The best builders have understood this. They are not loyal to any particular chain; they are loyal to users and liquidity. They will go where the users are, where there are exit mechanisms, and where there is real trading volume and capital flow.

And now, this is a multi-chain reality. The winners of the next cycle will be those protocols and applications that integrate meaningfully across multiple chains.

Layer-1 chains raised approximately $2.71 billion from 2023 to 2025, with nearly 48% of the funds flowing to early projects. Investors still support new execution environments but increasingly expect faster ecosystem delivery.

The market has become smarter; they are abandoning ecosystems that rely solely on funding to support false activity. Now, rewards go to real throughput, real users, and real revenue.

So what should L1 venture capital departments do? Enter the best companies early with equity and tokens, engage in real strategic participation in a multi-chain portfolio, and make your chain's integration a part of their roadmap, not an optional add-on.

If you support a company that is bound to make an impact, you will collaborate with them to make your chain the natural home for their activities. You earn that loyalty by being the best technical environment for them to build products, not by renting it with funding checks.

A Billion-Dollar Company vs. 200 Zombie Projects

Scenario A: You deploy $10 million in funding to 200 projects over two years. Your quarterly board report includes daily active user (DAU) data, some GitHub activity, and a bunch of statements from teams active in Discord to optimize funding KPIs.

Two years later, half of the projects are either dead or have migrated to places with real liquidity. Your TVL stagnates, and developer retention data is dismal. You report that "200 projects were funded," and then pray that no one asks about their whereabouts.

Scenario B: You take the same $10 million and deploy it in the form of direct equity plus tokens to 10 genuinely promising companies in your ecosystem, creating an integration roadmap that binds their success to your chain.

You provide real strategic support—not chasing milestone reports, but introducing recruitment, token economics design, and go-to-market strategies. Three years later, one of the companies reaches a valuation of $1 billion, and two others are valued at $200 million each.

That billion-dollar company is proof that can change everything. It changes how other builders think about building products in your ecosystem, how venture capitalists think about writing checks in your ecosystem, how exchanges view your chain's projects, and how liquidity providers (LPs) view your tokens.

The narrative gravity brought by a truly groundbreaking project is immense, and its compounding effect is something that 200 "zombie" projects surviving on funding can never reach.

In just the first quarter of 2025, blockchain and crypto startups raised $4.8 billion, marking the strongest quarter since the end of 2022. Startups that can prove their utility, compliance, and scalability not only attract funding but also strategic partners and long-term support.

Smart capital has begun to flow to companies that can create real outcomes. L1 venture capital departments need to integrate into this trend rather than running parallel funding projects that isolate themselves from it.

Choke off vanity metrics. Stop reporting the number of funded projects and start reporting the valuations of portfolio companies, the TVL of invested companies, and developer retention rates that are genuinely tied to organic growth, rather than retention rates tied to incentive programs.

Strictly differentiate between infrastructure funding and company investment. Some things are worth funding—real open-source public goods, core infrastructure, security research. These are true public goods that benefit everyone in the ecosystem without needing a business model. But what about a DeFi protocol or a gaming application? That is a company. Invest in it like you would invest in a company.

Those Who Keep Throwing Money Will Eventually Exit

The L1 landscape in 2026 will be vastly different from that in 2021. The total market capitalization of the L1 sector stabilizes above $2.96 trillion, and competition has shifted from theory to practical applications, stablecoin payments, gaming, perpetual contract DEXs, creator tools, and specific application chains. Winners are pulling ahead through throughput, fees, decentralization, and developer appeal.

The funding era made sense during the cold start phase. That era is over. What remains is a true competition for the best builders, the best protocols, and the most genuine economic activity. You cannot win this competition by being the most generous funding committee.

You can win because you have a group of truly great companies that choose your chain (often among many options) because it is the best place to build, and they stay because you are the right long-term partner.

L1s that understand this truth in the next 18 months will appear visionary. Those that still regard funding projects as their primary ecosystem development strategy will ultimately reveal their true nature: they have mistaken activity for value creation and have paid hundreds of millions for this self-deception.