Introducing Smart Capital Activation
Fixing Capital Allocation in Crypto Ecosystems
Why Does Capital Allocation Matter for Crypto Ecosystems?
Crypto ecosystems are driven by the goal of expanding the protocols they steward.
To achieve this, treasury capital is deployed strategically to increase the number of developers and end users.
Historically, capital deployment in Foundations and DAOs has taken various forms, including:
Hackathons
Incubators
Grants
Incentives
Builder Support
The current market standard follows a one-size-fits-all approach to capital allocation, which often results in significant funds being spent with limited outcomes, misaligned incentives, and poor tracking. While the challenges of effective capital allocation are complex, Foundations and DAOs have an opportunity to use it to their strategic advantage and stand out by adopting a more targeted strategy.
Beyond direct capital allocation, additional support services - such as audit or RPC subsidies, mentorship, and distribution support - are emerging as crucial tools for attracting and retaining builders in the highly competitive crypto market.
In this piece, we explore the sector’s current challenges and propose a tailored, strategic approach that goes beyond generic grants programs. By applying the strategy consulting principles at the heart of Areta, we shift from “capital allocation” to “smart capital activation”. This tailored, hypothesis-driven, and data-centric approach ensures that capital is deployed effectively, with a clear goal in mind, and in alignment with long-term growth objectives.
Capital Allocation in Crypto Ecosystems is Broken.
Let’s take a look at grant and incentive programs, the two most prevalent methods of capital allocation today. They have earned a poor reputation across the space, with many new foundations realising that generic grants programs fall short—highlighting the urgent need for a better solution.
We’ve gathered insights from some of the largest Foundations in the space; see our condensed findings below.
Grants
Lack of Transparency: Grant programs often lack transparency and oversight, are operationally complex, and have vague goals that make decision-making opaque.
💡 Filecoin, Optimism, Uniswap, and other Foundations have cited in their reports that improving impact measurement and transparency are major objectives for their grant programs.
Lack of Expertise: Delegates work long hours for low pay to judge thousands of applications, which they ultimately may not even have the relevant expertise to judge. This causes delegates to favour projects that they know or have a “favourable” opinion of.
Lack of Accountability: The high number of applications makes it hard to track and manage funds, resulting in funds being unused, mismanaged, or lost. For example: Optimism and Arbitrum.
💡 In 2023, there were cases involving 4M OP (~$4M) in mismanaged or unused grants in Optimism.
Lack of Value Capture: Grants follow the VC model by funding many projects to find a big winner, but unlike VCs, where investors hold equity and can realise value if a project succeeds, grants simply give away capital without any mechanism to capture value from successful projects. This makes their success unclear and hard to measure.
Incentives
Lack of User Retention: Incentives fail to drive long-term engagement. Protocols spend money to attract users and generate fees, but there is a lack of focus on long-term user retention when designing these programs.
💡 Analysis showed that Arbitrum’s $40M STIP incentive program failed to retain users, with 60% abandoning the protocol after incentives ended.
Unsuitable Metrics: Incentive programs focus too much on broad, “vanity” metrics that quickly spike but eventually revert to the mean. Metrics are not tailored to each project and how it earns revenue or attracts its core user base, leading to wasted capital.
💡 LooksRare’s incentive program to increase trading volumes allowed it to briefly boost volumes to $27B, however, 94% of this activity was wash trading.
Generic Distribution: Giving incentives in a generic, unfocused way often results in low or negative returns. For example, Arbitrum’s STIP only recovered $15M in sequencer revenue after spending $85M in incentives, and some projects saw their metrics drop once rewards ended.
More generally, most capital allocation programs are one-size-fits-all and aim to “do too much” by supporting all types of builders. This brings about multiple issues:
Generic Programs: Programs usually fail to differentiate between early and late-stage projects. Different types of projects are grouped into the same category, which doesn’t address their unique needs. For example, early-stage projects need the flexibility to pivot but are restricted by milestone-based funding, while late-stage projects require larger capital injections and targeted support to scale and grow.
Unfocused Approach: A one-size-fits-all approach to capital allocation tries to support all types of builders, but lacks focus and skin in the game, making it less effective at attracting and retaining builders compared to targeted, tailored funding that meets specific builder needs.
💡 Research from OpenSource Observer has shown that projects require tailored funding and support based on their unique characteristics, such as team size, and growth stage.
From Capital Allocation to Smart Capital Activation
Areta’s mission is to sustainably grow the number of quality apps in crypto ecosystems by lowering barriers for builders and providing them with resources and support from inception to growth.
We do this through Smart Capital Activation — a tailored approach to capital allocation rooted in strategy consulting principles that are hypothesis-driven and data-centric, backed by dedicated execution.
Each Smart Capital Activation initiative aims to answer the following question: ‘How does allocating this capital ensure that I, as the ecosystem, tangibly benefit from it?’.
As such, Smart Capital Activation is built on the following principles:
I. Strategic Analysis: Three core elements form the basis of program design - the ecosystem’s current state, its short-and long-term strategic objectives, and other key initiatives.
II. Tangible ROI: Each token allocated must have tangible, trackable, outcomes and a plan for measurable value creation, ensuring benefits flow back to the DAO, Foundation, or broader ecosystem.
III. Tailored Program: Each program is tailored to its target audience and their most pressing needs. We work together with builders, delegates, and the Foundation and Labs teams to make programs tailor-fit.
IV. Data Focus: Decisions are driven by data, not opinions, ensuring continuous optimisation and measurable impact.
V. Awareness Creation: Each program is used as a targeted tool for marketing and creating awareness across the ecosystem.
The Product Portfolio
Our immediate focus is on three products that we believe will have the greatest impact on builders in the near term. They serve as templates for tailoring bespoke programs for select ecosystems.
I. Builder Support Programs, such as subsidy funds for security audit costs, RPC services, and essential infrastructure, tooling, or support mechanisms that enhance developer participation;
II. Funding Competitions with elimination-based funding rounds, providing support to early-stage projects and accelerating the maturity of the best-performing projects;
III. Growth-Stage Incentive Programs providing sustainable, KPI-driven rewards directly aligned with onchain performance.
With this approach, we aim to smartly allocate capital across the builder funnel, getting capital, distribution, and support services to builders and sustainably activate capital for growth where it makes sense.
Smart Capital Activation in Practice
Uniswap - Uniswap Foundation Security Fund (UFSF): The Uniswap Foundation Security Fund (UFSF) is a $1M initiative created to strengthen security across the Uniswap ecosystem by subsidizing security audit costs for projects building Uniswap v4 hooks. The fund provides access to a customized, proprietary marketplace of vetted security providers, ensuring that projects within the Uniswap Protocol receive tailored support for secure development. (Official Announcement)
Uniswap - Uniswap Capital Allocation Program: We developed and led the first cross-ecosystem grant program for Uniswap and Arbitrum. From program design to execution and reporting. Following an onchain vote approval, we led the grant program for the 12 months, and are currently working on an extension that has been asked for by key delegates and the foundation. (Forum Proposal & Onchain vote)
SafeDAO - Development of DAO Contributor Efficiency System: In an effort to support SafeDAO’s key contributor initiatives, we developed a contribution efficiency system that enables the DAO to operate seamlessly, enhancing transparency and elevating process standards to an institutional level. (Forum Proposal & Snapshot Vote)
If you’re looking to refine your approach to capital allocation, enhance builder participation, or drive sustainable growth in your ecosystem, we’d love to chat!
Feel free to reach out via TG to Bernard or Sid - our DMs are open.
Follow Us 🫶🏽