Web3 Venture Capital Funding: Challenges and Alternative Blockchain-Powered Models

Despite a slight increase in funding in Q1 of 2024, venture capital backing for web3 startups continues to decline, dropping by 82% year to year. This exclusivity of opportunity sidelines many potential contributors and limits the diversity of ideas that receive funding.

Why Traditional VC Models Fail Web3

Web3 projects often struggle within the constraints of traditional VC funding due to a fundamental mismatch of incentives. VCs prioritize profit and short-term growth, which doesn’t align with the experimentation and collaboration-driven nature of web3 projects aiming to create public good and build for social impact.

Public good projects lack the incentive of lucrative exits associated with for-profit businesses. Decision-making in traditional VC funds is also centralized, leaving the destiny of web3 startups in the hands of a select few. This structure opposes the ethos of decentralization and community-led decision-making encouraged in the web3 ecosystem.

Blockchain-Powered Funding Models: A New Realm of Opportunities

Blockchain technology introduces new opportunities for funding in the web3 space, particularly for those building ambitious public goods projects, such as open-source software.

Retroactive Public Good Funding (RetroPGF)

RetroPGF rewards projects based on their proven impact rather than their speculative potential. Exit incentives are reimagined as rewards for creators delivering measurable outcomes to ecosystems or society at large. A recent success story for RetroPGF is Optimism, which has generated over $2 billion in impact-based funding.

Fractional Investing through NFTs

Founders building in web3 can tokenize the value of their public good projects, such as governance rights, and allow a broader pool of supporters to contribute via micro-investments. This creates a diverse pool of passionate investors who believe in the project’s mission and growth trajectory.

Quadratic Funding: A People’s VC

Quadratic funding, a mathematical formula for funding distribution based on donor numbers, has gained traction in web3. It taps into community support, amplifying smaller contributions from a broad base of supporters by matching these funds with a larger pool.

Projects with widespread grassroots support receive the most funding, evening out the playing field in a way traditional funding models prioritizing large investments from a few players never can. An example of the power of quadratic funding is Tornado Cash.

On-Chain Ownership: A Novel Way to Monetize and Engage with Supporters

Blockchain allows creators and builders to tokenize their work, providing novel ways to monetize and engage with supporters. Creator tokens enable subscription-based models whereby fans pay a recurring fee to access premium content.

Mechanisms like these create more stable, recurring revenue streams welcomed in a space that thrives on volatility. On-chain transactions make funding flows visible and auditable, reducing fraud and fostering trust.

A New Capital Allocation Category

This new capital allocation layer consisting of funding mechanisms like community grants and quadratic funding has the potential to replace or complement traditional venture capital in the web3 ecosystem.

By adopting and propagating the availability of these funding options, we can increase the likelihood of launching the next web3 unicorn and ensure that web3’s promise of decentralization and equity becomes a reality.

“The future of web3 funding lies in blockchain-powered models that prioritize community support and decentralization.”

For more insights on the web3 ecosystem and alternative funding models, visit Global Crypto News.

Post Views: 1