Explore the broken crypto funding models and discover solutions to align incentives, enhance transparency, and promote sustainable growth.
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3/6/2025
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Crypto funding models are failing, but they can be fixed. Here’s why they’re broken and what can be done:
The future of crypto funding lies in transparency, fairness, and aligning stakeholder interests. Implementing these solutions can stabilize the ecosystem and drive sustainable growth.
Crypto funding faces challenges that go beyond market volatility, exposing deeper structural problems. These issues threaten not just individual projects but the overall health of the ecosystem. Misaligned incentives and a lack of transparency further complicate efforts to achieve steady growth.
Structural misalignments between builders, investors, and communities often undermine the long-term success of crypto projects. Token distribution tends to benefit early investors and team members, allowing them to cash out early. This creates an "exit over entry" problem, where funding models fail to support sustainable growth.
Here’s how it plays out:
A lack of clear processes and disclosures in crypto funding fosters information asymmetry, often leaving the broader community at a disadvantage. Insiders benefit from this opacity, which has led to notable financial losses.
"Ultimately, inadequate disclosures persist because opacity serves sponsors, executives, and other crypto industry insiders. It is far easier to profit when customers are left in the dark".
Key transparency issues include:
Market volatility creates a ripple effect of risks for crypto funding. Although the total market value of crypto assets skyrocketed to $2 trillion by September 2021 - a massive jump from early 2020 - this growth has masked significant stability concerns. Experts warn that crypto-assets could pose risks to broader financial systems.
These risks often create a destabilizing cycle:
Projects relying heavily on token value for funding are particularly vulnerable. Their financial health becomes tied to market sentiment, rather than consistent value creation. Addressing these flaws requires rethinking funding models to better balance stakeholder interests and reduce reliance on market volatility.
Blockchain and community-driven methods are changing the way crypto projects are funded, offering more clarity and equity. Let’s break down some key approaches making waves in the space.
Quadratic Funding (QF) is giving smaller contributors a stronger voice in Web3 projects. This method ensures that the number of contributors, not just the size of donations, plays a big role in funding decisions. Gitcoin has already distributed over $60 million across 245+ funding rounds using QF. It works through a mathematical formula where matching funds grow exponentially with the number of unique contributors, cutting out human bias.
In the Cosmos ecosystem, the Dora Factory launched a $1 million initiative for 10 QF rounds through its ATOM Economic Zone (AEZ) Grant program. To prevent fraud, Gitcoin Passport makes it harder to create fake identities while keeping contributor privacy intact.
Decentralized Autonomous Organizations (DAOs) are changing the way funding decisions are made. They rely on transparent, automated systems where every action is recorded on-chain for real-time verification. Here are some examples:
| DAO Example | Key Feature | Outcome |
|---|---|---|
| MakerDAO | Smart contract–based stablecoin management | Clearer governance for DAI issuance |
| Compound | Automated protocol updates | Faster implementation of community-approved changes |
| Gitcoin | Open-source funding | Global collaboration among developers |
These examples show how DAOs can manage governance efficiently while maintaining accountability.
Creating effective tokenomics is all about balancing incentives for stakeholders with long-term project goals. Cardano’s approach stands out, with its research-driven methodology and structured treasury system. Key features include:
"The overall focus beyond a particular set of innovations is to provide a more balanced and sustainable ecosystem that better accounts for the needs of its users as well as other systems seeking integration".
To stay resilient, projects must regularly review and adjust their tokenomics to reflect changing market conditions, all while sticking to principles of transparency and alignment with stakeholders.
Blockchain tracing allows for real-time tracking of fund movements, improving both transparency and accountability. According to TRM Insights, this technology now makes it possible to detect discrepancies early on.
| Oversight Tool | Purpose | Impact |
|---|---|---|
| Smart Contracts | Automate agreement execution | Cuts down on manual errors and reduces manipulation risks |
| Immutable Ledgers | Permanently record all transactions | Provides verifiable audit trails |
| Real-time Monitoring | Instantly track fund movements | Allows quick responses to irregularities |
| Tokenization | Document operations and budgets | Boosts financial clarity |
These tools create a stronger foundation for aligning the interests of all stakeholders involved.
The 2016 DAO hack highlighted the importance of aligning the goals of builders, investors, and the broader community.
"Start from a fairly centralized approach (so that you have the flexibility to correct mistakes) and then gradually start introducing voting mechanics, incentives and hand over more and more control to your community." – Hristo Piyankov
To achieve this balance, the following steps are crucial:
Emerging platforms like Bionic DAO provide practical tools to help implement these strategies effectively.
Bionic DAO offers a range of resources tailored for projects in iX, DeSci, AI, and xR. Their platform includes:
Through their cohort program, Bionic DAO helps founders improve tokenomics and position their projects for success in the market.
With regulations constantly evolving, Web3 projects must stay ahead by ensuring compliance. Events like the Terra stablecoin collapse in May 2023, which led to a loss of over 99% of its value, have heightened global demands for stricter oversight.
Here are key areas to focus on:
| Requirement | Implementation Strategy | Impact |
|---|---|---|
| AML/KYC | Use automated verification systems | Minimizes fraud risk and aligns with laws |
| Data Protection | Employ privacy-preserving protocols | Builds trust and meets legal obligations |
| Securities Laws | Align token structures with rules | Avoids legal challenges down the road |
| Consumer Protection | Ensure transparent disclosures | Boosts credibility and user confidence |
"We are flexible in our approach to building tech, therefore we need to figure out regulatory requirements first to be able to build a protocol that will be 'compliant by design'. However, the current global regulatory environment for Web3 is very complicated, so where do we even start?" - Legal Nodes Team
This push for regulation highlights the shift from chasing short-term profits to focusing on sustainable, long-term growth.
Traditional venture capital models often prioritize quick returns, which can undermine lasting success. This short-term mindset creates opportunities for platforms to rethink their strategies. To build for the future, projects should:
Adopting these approaches ensures a stronger foundation for growth and success.
Modern platforms are stepping up to improve operations and funding transparency, which are critical for long-term success. For instance, Keyrock's accelerator program, which raised $72 million in Series B funding and facilitates over 550,000 daily trades across 85+ exchanges, demonstrates how advanced tools can enhance development and build trust.
Emerging tools include:
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