The ReFi Funding Trilemma

The recent conclusion of another successful Gitcoin Grants season (GG21) has once again shifted the spotlight to the question of funding in the ReFi space. Namely, is there enough of it to sustain and grow the level of impact that ReFi projects are making?

For the vast majority of ReFi projects, funding sits at the top of the priority list. They want to be able to make sustained impact while earning a living wage. It isn't a big ask. We need to move away from this idea that impact should come at the expense of everything else.

But where is that funding going to come from?

There are, broadly speaking, three paths: grants, token sales, and venture capital (VC). Each has its advantages and disadvantages. Grants are plentiful but small in scale, token sales are low friction but hard in a bear market, VC money is big but difficult if you're not in decentralised finance (DeFi) or distributed ledger technology (DLT).

When deciding between the three, the choice boils down to three factors: access, amount, and commercialisation.

Access refers to the relative ease with which the funding can be secured; amount is the size of funding available; commercialisation refers to whether a viable commercial model is required. Note that this is different from a revenue model. It isn't just about making money, but doing so at scale with millions of users/customers (a reality ReFi projects have been known to shun because it gets in the way of impact).

It's a trilemma, of sorts, without an easy decision. There is, however, one combination missing that is making it difficult for ReFi projects to sustain and scale their impact.

The trilemma

If you're not familiar with the term "trilemma", it's best expressed as three options of which you can choose two. The classic example is the quality, speed, cost trilemma in project delivery. As the client, it's not possible to have all three. You can have it fast and cheap, but the quality will suffer. You can have it high quality and cheap, but it will take a long time. And so on. Blockchain is plagued by its own trilemma: security, scalability, and decentralisation. Choosing two of the three is a difficult choice in a competitive landscape.

For ReFi projects, there's no such thing as funding that's easy to access, comes in big amounts, and doesn't require commercialisation. Even two of the three is difficult at this point, with the exception of grants, which are easy to access and don't require commercialisation but come in small amounts. They have become the default source of funding for the space as a result.

Token sales don't require commercialisation, but the amounts aren't as big as they used to be and access has become a lot more difficult. Venture capital comes in big amounts, but is hard to access and requires commercialisation.

Not surprisingly, due to the amounts attainable, venture capital remains popular as the funding option to optimise for.

Chasing the holy grail

I've been around Web3 long enough to know that there is no bigger source of validation than a venture capitalist forking out dollars to your project. It makes headlines, expands your network, and gets you membership in a club few projects get access to. We've also seen enough investments in scammy or worthless projects (or even ideas) to convince us that investors are willing to put their money into projects making impact. When they express their inevitable reticence, we chalk it up to them not understanding the space instead of taking a long, hard look at ourselves.

Leaving aside philosophical concerns over the extractive nature of venture capital, I'm not even convinced it's a good option for most ReFi projects. The revenue pressure, I suspect, would force founders into a lot of uncomfortable decisions around impact. Come to think of it, impact and commercialisation feel like a zero-sum game at this point: the more of one you want the less of the other you can have.

There are exceptions, of course. Impact DePINs, ecological credit projects, and oracles have the commercial potential to unlock revenue at scale. Most everyone else in pursuit of venture capital is walking the same tightrope: how to build a viable commercial model without sacrificing impact.

Is this really the funding option we want to aspire to?

Losing interest in token sales

Token sales, at least those raising millions, are a rarity these days for most of us. Initial centralised (IEO) and decentralised exchange (IDO) offerings have taken their place, but have brought with them stricter eligibility requirements and lower funding amounts.

Launchpads have proven popular in other sectors, particularly Web3 gaming, but have yet to become viable at any sort of scale in ReFi. This is likely related to the fact that retail investing in ReFi projects feels more like philanthropy. There just isn't the ROI potential of other Web3 sectors.

The other reality of token sales worth mentioning are their regulatory, technical, and economic complexity. It's one thing to simply launch a token and hope for the best. It's quite another to do so legally and securely, while stewarding the token's value to provide investors with ROI. Not to say it can't be done, but rather that it's yet another thing that can get in the way of impact.

Settling for public goods funding (PGF)

The generosity of the PGF community is heartwarming. It has kept so many projects in the Web3 space going over the last half decade. Grants are great because commercialisation isn't a criterion by design. Those targeted at the ReFi space care most about one thing: impact. If you can demonstrate it, you stand a good chance of raising some funds.

But concerns have been expressed. Amounts are too small and the number of projects too large; quadratic funding mechanisms too much resemble popularity contests; funding platforms are too difficult for non-Web3 natives. We also need to talk incentives for grant round operators. It's neither fair nor regenerative to expect them to work for free.

These issues highlight the need to have an honest conversation about the sustainability of the current Web3 grants ecosystem. Where do we go from here and what does that future look like?

In my mind, we've yet to unlock the one combination in our trilemma that could really drive us forward.

The missing combination

If you had to choose two of access, amount, and no commercialisation, what would be your preference? If you didn't want to commercialise, would you rather big amounts that are harder to access or small amounts that are easier to access?

The one combination we need to unlock is bigger amounts that don't require commercialisation but are harder to access. In other words, an evolution of the current grant system but with a more robust evaluation and verification layer to attract atypical funding sources. Easier said than done, of course, but something to aspire to.

Where can we find these funding sources? In last week's ReFi Recap, I referenced the need for a bridge to connect development finance with the ReFi space. The former has more than enough capital to help ReFi projects make impact while keeping the lights on. It's up to us to build the bridge to bring them into the ReFi space.

This would make the trilemma a lot more palatable, and perhaps even end the infatuation with venture capital.