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Ethereum for DeFi, DeFi for Ethereum: Protocol Users Move to Back Gitcoin Grants

Two headlines out of DeFi this week suggest that, like Ethereum, Gitcoin is also coming into its own as a real tour de force for backing Ethereum's key infrastructure projects. Allow me to explain.
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Ethereum has come into its own in 2020, and the recent rapid blooming of the reigning smart contract platform’s hit sectors — DeFi, DAOs, NFTs, tokenized bitcoin, social money, and so forth — is a testament to the project’s increasingly dominant presence in the cryptoeconomy.

But Rome wasn’t built in a day, and neither was the teeming Ethereum ecosystem we’re seeing today. The progress and momentum Ethereum is enjoying now comes courtesy of years of infrastructure work by some of the blockchain arena’s most talented builders.

However, Ethereum is an open-source public goods project, and adequately funding worthwhile open-source work around such efforts has been a longstanding problem in the wider software community. Such toiling can be thankless and low-paid at times, to be sure.

Yet Ethereum’s funding angel is already here in the form of Gitcoin, a collaborative community hub for open-source projects. And two headlines out of DeFi this week suggest that, like Ethereum, Gitcoin is also coming into its own as a real tour de force for backing Ethereum’s key infrastructure projects. Allow me to explain.

The Parasitic Protocol Problem

Ethereum has become the de facto home of DeFi in the cryptoeconomy. Indeed, the platform currently powers all of the largest and most popular DeFi apps, like Aave, Maker, Curve, yEarn, Synthetix, Compound, Balancer, Uniswap, and so on.

That said, in the past as DeFi has been going through its adolescent growth, its protocols have brought to the fore the free-rider problem. As Ethereum analyst Anthony Sassano has previously explained in The Daily Gwei:

“This is because they are “free-riding” on top of the platform – the only toll they (and their users) pay is in the form of gas fees which goes directly to miners. This fee is effectively washed back and forth between participants on the network: user buys ETH > user pays fee > miner takes fee > miner may sell the fee (ETH) back into the market > cycle begins again.”

In a later post, Sassano further explained:

“They may use ETH as part of their app (as a form of collateral, or as money) but these apps usually have their own native tokens which tend to accrue the value generated by their respective protocols.”

The takeaway? Ethereum is useful and can power many great things, e.g. all the amazing advances around DeFi. Yet in the past it hasn’t always been the case that Ethereum and ETH have directly benefited from the many success stories they’re currently powering. Here’s where Gitcoin can help in a big way.

Gitcoin: Funding Ethereum Public Goods Is Good

Gitcoin is many things and offers many products and services, but the project is perhaps best known for Gitcoin Grants.

This grant system is used to fund Ethereum public goods, like clients or privacy apps, in decentralized, democratic, and frankly optimized fashion.

Why optimized? Gitcoin Grants uses “quadratic funding” to match grassroots community donations with funds from large matching pools, e.g. $250,000 worth of ETH for the Ethereum Tech category. With enough distributed participation, this unique system allows a user to get +$100 in matching funds to a project of their donation for a donation as small as $1.

To date, we’ve seen these matching pools filled up with donations from community stalwarts like the Ethereum Foundation. But nothing is stopping other projects or organizations from making their own sizable contributions to Gitcoin’s matching pools. And that’s where two unprecedented DeFi headlines from this week come in.

The YAM Rebirth

Yam Finance kicked off out of nowhere earlier this month and for a brief span of time took DeFi’s yield farming arena by storm with its YAM distribution scheme.

But things went sour for the unaudited project as soon as it initially ramped up, as within hours of its launch a governance bug was discovered that jeopardized the protocol. Yam’s pop-up community rallied votes together to try and avert the bug, but the effort was ultimately inadequate and some $750,000 worth of assets became permanently stuck in the protocol’s treasury.

But the community’s efforts gave rise to a Yam migration plan, where a transitory V2 system would be deployed while audits were performed on a new V3 protocol. To help achieve this roadmap, the Yam team created a Gitcoin page for audit donations, and contributions immediately started flooding in. When all was said and done, more than $115,000 was raised through Gitcoin to help Yam rise from the ashes. So some karma was in order …

A Modest Proposal

Gitcoin helped give new life to Yam. In turn, Gitcoin CEO Kevin Owocki submitted a Yam governance proposal suggesting that 1% of future YAM treasury flows be redirected to the Gitcoin Grants wallet, which in turn would help fund Ethereum public goods via the Tech grants matching pool.

And why should the Yam community agree to this? Owocki said such a move would bring goodwill and publicity:

“We can shift the narrative around YAMs being a ‘degen’ project to having some ‘regen’ effects to the ecosystem, like funding the base layer upon which it depends. This will make YAMs part of the broader conversation around rainbow colored money in the Ethereum ecosystem, and public goods funding in the information age.”

At the time of this article’s writing, the proposal is set to pass with 82% “Yes” votes. And it inspired another major DeFi project to follow suit.

yEarn’s In

yEarn is a yield aggregator project that is absolutely on fire in DeFi right now. So heads turned in the space when a new yEarn community proposal also overwhelmingly tilted toward sending a portion of the protocol’s earnings to Gitcoin’s tech grants.

The yEarn protocol has been a money-making machine in recent weeks, so the passing of this yEarn proposal is no small matter. Combine yEarn’s allocations with YAM treasury inflows, and Gitcoin now has new revenue streams that can grow over time and help fund Ethereum’s key public goods for years to come. And this is just the start of what’s to come.

Let’s Be Clear

Many folks in Ethereum, much less the wider cryptoeconomy, are familiar with Gitcoin and how it works. So when the aforementioned Yam and yEarn proposals started getting traction, some users scoffed at what they saw as needless “charity.” But Gitcoin’s Owocki took to Twitter to dispel that misguided notion once and for all.

The point? Funding Ethereum public goods is, well, good for us all.

A New Paradigm for DeFi

Gitcoin’s been around for a while now, but these proposals marked the first times we’ve seen the notion of protocols directly allocating portions of their earnings to Gitcoin Grants come to the fore.

However, these proposals certainly won’t be the last, and so a full-on trend may be coming to DeFi. In the not so distant future, one can easily imagine it being commonplace for DeFi protocols to help fund Gitcoin matching pools in order to earn respect, reputation, and trust.

Ultimately what’s good for Ethereum is good for DeFi, so this new protocol-driven open-source funding avenue can increasingly grow into a gamechanger for Gitcoin and the Ethereum ecosystem. If “pay your dues” becomes the name of the game, then a positive feedback loop could ensue, i.e. more growth leads to more funding which leads to more tech, and then repeat on and on and on.



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William M. Peaster is a professional writer and editor who specializes in the Ethereum, Dai, and Bitcoin beats in the cryptoeconomy. He's appeared in Blockonomi, Binance Academy, Bitsonline, and more. He enjoys tracking smart contracts, DAOs, dApps, and the Lightning Network. He's learning Solidity, too! Contact him on Telegram at @wmpeaster

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