Ethereum has seen significant evolution over the past four years, transforming from a network only handling 15 transactions per second to a robust system capable of processing thousands while reducing transaction fees from $50 to mere cents. Layer 2 (L2) solutions and rollups have successfully scaled the Ethereum network without sacrificing its commitment to decentralization. However, the successes have unveiled a new challenge: fragmentation.

Today, Ethereum stands as one of the most adopted blockchains, comprising over 50 L2s, each functioning as a separate ecosystem. This fragmentation means users must manage multiple networks and bridge assets, complicating even basic transactions.

The funding landscape shows similar fragmentation, creating obstacles for developers at various project stages and hindering innovation, as securing consistent funding proves difficult.

To cultivate a more efficient ecosystem, Ethereum should implement blockchain-based funding models that cater to its complex, community-driven nature. Typical funding approaches often emphasize early-stage projects, overlooking the continued needs of Web3 developers. Relying heavily on prevailing crypto market narratives can mislead stakeholders about the viability of numerous projects. Notably, financial returns may not manifest in the immediate future, impairing long-term growth and complicating the fundraising process.

Rewarding Impact, Not Speculation

A promising funding model, Retroactive Public Goods Funding (RetroPGF), deviates from traditional methods by compensating projects for their demonstrated impact rather than speculative potential. This model aligns well with the fragmented nature of Ethereum, where public goods—such as open-source software and developer tools—struggle to attract initial investments.

RetroPGF emphasizes measurable project outcomes, pooling funds from decentralized autonomous organizations (DAOs) or ecosystem contributors and distributing them retroactively to projects that deliver value.

This approach ensures critical infrastructure, including cross-chain tools and developer frameworks, gets timely support. It aligns incentives, allowing projects to concentrate on delivering tangible benefits, with the awareness that their contributions will be acknowledged and rewarded.

Amplifying Community Support

Quadratic funding represents another vital tool in blockchain financing, allocating resources according to the extent of community backing instead of the magnitude of individual donations. This method democratizes funding opportunities, leveling the playing field for smaller projects competing with well-funded counterparts.

By matching the contributions from many supporters with a more extensive funding pool, quadratic funding reflects community will and ensures projects with significant grassroots enthusiasm receive vital financial support.

The tokenization of public goods projects allows creators to invite a wider range of investors, fostering community investment and decreasing reliance on traditional funding.

An illustrative scenario involves developers creating a cross-chain interoperability solution, enabling supporters to invest micro amounts for governance rights. This not only secures necessary funding but also cultivates a sense of shared ownership among supporters.

On-Chain Ownership

Central to these blockchain funding models is the principle of on-chain ownership. Tokenization enables creators to forge direct relationships with their supporters, eliminating middlemen and ensuring value returns to early believers. On-chain transactions ensure visibility and auditability of funding flows, reducing fraud and enhancing trust within Ethereum’s complex funding infrastructure.

To address funding for cross-L2 initiatives, consideration could be given to mandating funding Ethereum common goods for Stage 1 or Stage 2 rollups, supporting their continued growth. Alternatively, the Ethereum Foundation’s grant program could be realigned to tackle these challenges.

Ethereum’s fragmentation is primarily a funding issue. By embracing models like RetroPGF, quadratic funding, and fractional investing, the ecosystem can incentivize unity, bolster community backing, and democratize capital access, directing resources to projects that need them most.