Improving DAO Grant Sustainability Through Revenue-Based Buyback

General
1

Hi everyone,

I wanted to present a few ideas about improving the grant process and get the feedback from the community. I was thinking of current model of project grants and whether they actually benefit the the token holders as much as it should. It feel like the web3 ecosystem has changed a lot in the past few years and may be it’s time to consider adding a revenue-based buyback mechanism that would return more value to the ARB token holders.

As of now, most grants are awarded to projects with the explicit condition the grant amount gets redistributed back to the community. I know some grants are exceptions to this, but by and large this appears to be the model followed. This rule means that most grants just end up getting transferred as additional incentives to the users of the project. Often, this model attracts mercenary capital that leaves once the incentive stops.

I was thinking of a different model where project get a lot more freedom on how they use the grant, and in return, they commit to allocating a portion of their revenue (e.g., 1 or 2%) to buy back and burn ARB tokens until they burn the same amount of ARB tokens that were allocated to them. This would allow successful projects contribute back to the ecosystem. Ideally, also improving the overall financial health of the Arbitrum DAO by increasing the price of the ARB token. It’ll also give more leeway to grantees to use the capital as they see fit and come up with more innovative methods of using the grants.

How would it work?

Under this model, grant recipients will agree to implement a smart contract mechanism that automatically allocates a portion of their revenue to buy back and burn ARB tokens. The key components include:

  • Revenue Allocation: A predefined percentage of the project’s revenue (say 2%, 1% or 0.5%) will be committed to buying and burning ARB tokens.
  • Flexible Terms: Metrics like revenue percentage, amount of token bought back and burned are not fixed. They can vary based on the project, grant amount, and other factors like overall market condition.
  • Deferred Payments: Grantees can have a grace period before revenue sharing begins. This would allow them to build their project without immediate financial pressure.
  • Open to failures: Projects that do not generate sufficient revenue to buyback all the tokens doesn’t have to pay it all back. This will ensure that Arbitrum projects are still able to experiment and not be worried about repaying the grant. Nothing is expected from the current grantees anyway, so even if 50% of the recipients manage to buyback their grants, it will still be net positive for the Arbitrum community.

Assuming the ARB token’s price increase during the time period between the grant payment and token buyback, the DAO would actually benefit from the grant. The burn mechanism will also make the token scarcer in the long run increasing its value steadily.

Why this model is better for the DAO?

The current grant structure provides funding to projects with no direct mechanism for Arbitrum to capture value from successful recipients. If projects are successful then may indirectly benefit Arbitrum by increasing user activity and fee generation, but that doesn’t always happen.

The way L2 ecosystem is developing, it’s more likely that successful projects will just spin up their own chain. We have already seen examples of this with Uniswap, dYdX, and Axie which went their own way moving away from the mother chain. In such cases there would be zero long-term benefit for ARB holders. So with the current mechanism, projects extract more value from DAO grants than they provide for the ecosystem.

I’m not against the grant mechanism, I fully understand it’s importance in bootstrapping a network. However, I believe the current model just doesn’t benefit the DAOs as much as it should, especially in the long run.

By implementing a revenue-based commitment, the DAO can ensure long-term alignment between funded projects and ARB token holders, while also reinforcing the sustainability of the grants program.

Better tokenomics: With the buyback and burn mechanism, the underlying tokenomics should also improve. With the current model, the redistributed ARB tokens are just sold by the recipient (mostly mercenary capital). The new model will still have initial selling pressure, but it will also create buying pressure once the projects start using the revenue to buyback the tokens.

Bootstrapping new projects: With this new mechanism, the DAO could even boot strap new promising projects from the ground-up with a built in mechanism that their revenue would be used to buy back ARB token. The revenue percentage and the amount of token bought back could be decided through an open process. In such cases, there could even be perpetual revenue sharing mechanisms.

Why is this better for the recipient?

More leeway on how the grant is spent: As we discussed earlier, the current grant model often limits how the grant can be used. This means projects that want to experiment or build something new cannot do so with the grant amount. The new model will change that.

Less reliance on VCs: Token grant can even became a replacement for VC funding. Instead of going to VCs and allocating a large portion of tokens for them. Projects could get grants and avoid or at least reduce their dependence on VCs. This will provide more value to the Arbitrum community and their own community as the native tokens that would have gone to VCs can now be allocated to the recipient’s community instead.

Regulatory Considerations

I’m not a legal expert so I don’t know the exact legality of offering grant in exchange for buy-back and burn offer. But there are other instances were projects have offered a portion of their revenue in exchange for funding or debt

With this grant mechanism, Arbitrum isn’t even asking for a portion of recipient’s token but just that they buy back and burn ARB. So I’m assuming it’s less problematic on the regulatory front than the previous two examples mentioned above. Happy to be corrected, if it isn’t.

I’m interested in hearing what the community thinks about this idea. Is it feasible? If not, what are the issues that makes it not feasible. I plan to also post this on a few other DAO forums. If there are any good counterpoints from the other forums, I’ll add it here as well and try to improve the proposal.

TLDR

Instead of giving away tokens as grant and asking the project to share it with their community. Arbitrum would give grant with more leeway and the recipient promises to buyback and burn ARB token using their revenue.

2

Hi @Capt_Mal, Max from the Arbitrum DAO Grant Program here.
I think there are some misconceptions about how grants work at the DAO and I would like to clarify them.

That’s not accurate. Most grants are awarded to projects building new protocols, tools, or organizing events.
They’re distributed in USDC (so ARB has already been converted), and grantees are free to use the funds to cover their own expenses. There’s no requirement to redistribute the funds back to the community.

The goal is to help early stage builders reach a prototype, gain initial traction, and test product market fit.
At this stage, the vast majority of these projects aren’t generating revenue - and won’t for months, sometimes years (especially in crypto). So a revenue based buyback would be negligible and create unnecessary friction without delivering real upside.

The grant program’s intent is to foster experimentation and grow the app ecosystem - bringing in new users, increasing activity, and ultimately driving usage and fees across the network.

Just a quick reminder: Arbitrum has the Orbit stack . Any project can launch its own L2 or L3 using Arbitrum tech.
If that happens, I’d actually consider it a major win for the ecosystem. That’s exactly the kind of deep alignment we want to encourage.

That said, I do agree we should aim to capture more upside from the projects we support. The DAO is already exploring models where grant capital comes with deeper alignment, including structured investments where the DAO gets exposure in exchange for funding.