Basics of DAO Grants

Jun 22, 2023


As we've written about before, DAOs can complex and bespoke to the communities that rise up around them. Our last big topic was on the different ways DAOs can organize themselves and conduct decentralized voting. Today, we're breaking down an introduction to DAO grants and why they exist.

What are Grants? What is a Grants Program?

Grants are a form of financial assistance designed to help projects who need additional funding to succeed. Grants are NOT a loan and do not need to be paid back, but can be tied to mutually-agreed milestones that ensures funding is provided as projects deliver on their promises to better accelerate growth. The objective of grants is to encourage development within our particular eco-system, while supporting those projects who share similar visions to support the DAO.

A Grants Program, then, is how these grants make their way into the community - the application process, the screening process, the execution and monitoring of the process, and how the capital is approved then transferred. These programs are one of the areas being iterated on most within DAO frameworks today, and with good reason. When done poorly, a Grants Program can provide funding to projects or individuals who do not deliver on their applications, leading to a poor use of DAO resources. Similarly, grants programs introduce elements of legal risk regarding who money is being sent to and how much care has gone into verifying their identities to ensure no illegal activities are being supported. In the most basic sense, any program offering money for the "promise of work" can run into roadblocks with delivery.

Why do Grants Programs exist?

The idea of issuing grants is not a crypto-native concept; many would be familiar with this concept particularly with education and schooling. Often grants are offered to students of an under-represented group within a field, to encourage them to pursue industries where there is a societal need for more diversity (ie: grants issued by engineering and technology university programs specific to women). Other grants are designed to provide financial assistance to promising candidates with the right skill-sets to succeed but without the ability to fund their learning or development themselves.

Grants outside of decentralized organizations are diverse and quite common

In areas outside of education, grants are provided to support projects and individuals working to solve societal problems that provide a net benefit to the community at large but may not have an extrinsic business model to earn revenue in supporting these projects. Common examples are scientific grants, supporting experts who seek to cure illness and diseases both common and extremely rare, artistic grants to encourage expression from communities often unable to do so, and business-issued grants encouraging students or professionals to submit projects that could solve issues encountered by the business or open up new solutions they had not seen before (famously, NASA is a major issuer of technical grants)

To summarize, these programs exist because:

  • The recipients benefit - they receive funding without the need to take out a loan, allowing them to focus on achieving what they had set out to achieve
  • The grant provider benefits - Not only from the positive image of supporting a marginalized or less fortunate groups, but also from bringing on board candidates who are proven to be motivated and capable individuals (otherwise they would not have received the grant), who will now be more likely to promote or work for your firm in the future.
  • Society benefits - Grants provide a social good, in that they enable those who otherwise may not be able to pursue their passions/goals. Few would argue that having greater diversity and equality within professional and educational institutions is a net positive for all students who get to share their views. In similar ways, non-educational grants typically provide support for ideas and projects that may not have mainstream economic support (they may intentionally not have any revenue stream) but would be a positive boon to society for those programs to exist.

In decentralized organizations, Grants Programs exist for many of these same reasons. The DAO or Foundation/Labs entity may believe that through offering assistance to programs seeking to help grow their ecosystems, they can attract better talent who otherwise may have built elsewhere. Similarly, if the DAO sees a need within the community that has not be filled naturally (ie: no one is building entertainment in your community, because a market doesn't exists, because people haven't seen many successful projects launch in that space yet), the DAO could decide to allocate resources to requesting external proposals in that category and direct grant payments towards that purpose.

Ways to run a Grants program

There are an incredibly diverse number of ways that grants can be distributed across the community, so this section should be seen as a very brief summary of the core attributes of each alongside some examples where these can be seen in action.

Decision-Making Structures:

Full Community Vote - Every holder of your DAO's governance token can vote on every grant application; if the application exceeds certain thresholds (typically requiring a certain number of tokens voted, and a certain percentage of "Yes" votes), it is enacted. Funds are then either sent via smart contract to the requested address or through a service provider, and can either be provided immediately or split across a number of periods. This system is great for active communities who all want to be involved, however it suffers from many of the downsides noted in Quorum-based voting mentioned in our Voting article - mainly, big holders can sway votes against the will of the majority or act in self-interest. Decentraland's DAO uses this model with a high degree of success.

Council-Based Vote - Grants are submitted centrally then reviewed by a team of representatives who will decide whether to provide funding or not based on some set criteria (which may or may not be public). Grant Representatives may be elected from the community, appointed by a central body, or be employees of the Foundation company. While this is often quicker and more efficient than full community votes, it accomplishes this through greater centralization and required trust within a number of core individuals who could act against the interests of the DAO. These councils are sometimes run as stand-alone "Grants DAOs", which function the same but receive their full grants budget directly from the DAO on a recurring basis. Aave's DAO uses this system through their AaveGrants DAO.

Aside from these structures above, there have emerged a number of other systems that continue to explore how grants can be efficiently allocated while combatting fraud, theft, and misallocation. Some examples include where sub-sections of the DAO can vote on certain grants based on expertise in relevant areas, or where reputation and built-up community credibility is tracked then utilized to modify the weight of certain community members in participating in the grants process (or blocking members below certain credibility thresholds).

Allocation Structures

Traditional Grant Payment - You receive all of the grant payment up front, then use it to execute on your project. Recipients prefer this approach, as they are able to utilize that capital immediately without extra barriers that could delay their project. On the flipside, this system is most susceptible to theft and fraud, as applicants can spin up projects simply to earn a grant then disappear with the money as there is no built-in accountability within the allocation.

Time-Gate Unlocks - Once approved, your grant is available for your claim after certain time intervals (often through a smart contract which unlocks portions after set times, or linearly every minute/hour/day/etc). If a project disappears, the DAO or Grant Council can often stop subsequent payments. This system alleviates some of the concern from the traditional system, but can be problematic to many projects with irregular spending requirements - ie: if your project needs a grant to purchase critical infrastructure hardware, that is an up-front cost incurred at one time; a gradual unlock would not support this need.

Milestone-based Unlocks - Once approved, your grant is tied to the completion of agreed-upon milestones, with different amounts unlocking as each is accomplished. This approach solves the problem of time-gated unlocks, where payment can be tailored to meet specific needs of each milestone and projects need to show progress in order to receive payment. However, this system requires much more manual involvement than the others, as someone needs to verify that each milestone has been properly completed.

Many projects use a combination of these approaches, or introduces new elements into their allocation models, to arrive at their Grant Program-specific approach. Commonly, programs will have some amount of the grant paid up-front with the rest allocated over time to best match the needs of grant applicants.