How Funding Fragmentation Holds Ethereum Back

Ethereum has undergone a big transformation in the last four years, starting as a network capable of handling just 15 transactions per second, and evolving to a powerhouse processing thousands, with transaction costs decreasing from $50 per swap to mere cents. L2s and rollups have helped scale Ethereum without compromising its decentralized ethos. But this success has led to a new problem, one of fragmentation. Today, Ethereum is one of the most widely adopted blockchains, consisting of a network of over 50 L2s , each operating as its own siloed ecosystem. What this means for end-users is having to juggle multiple networks, bridge assets, and navigate a maze of processes just to perform basic actions. Mirroring the fragmented technological landscape, Ethereum’s funding landscape has become difficult to navigate for builders across the lifecycle, stalling innovation as projects struggle to secure sustainable funding. To create a more efficient ecosystem , Ethereum needs to start adopting blockchain-based funding mechanisms that better align with its complex, community-based and experimental nature. Traditional funding programs often focus on early-stage projects, neglecting the long-term needs of builders in Web3. It can be misleading to look at crypto market narratives dominating the investment landscape and assume a booming activity. Financial returns for many of those projects might not come in the short-term, leaving builders struggling to navigate to sustainable growth. Funding mechanisms have to be able to support builders throughout the entire journey of the product lifecycle. Rewarding impact, not speculation One of the most promising blockchain-powered funding models is RetroPGF , which flips the traditional funding script by rewarding projects based on their proven impact rather than their speculative potential. This model is particularly well-suited to Ethereum’s fragmented ecosystem, where public goods like open-source software, developer tools, and interoperability solutions often struggle to attract upfront investment. RetroPGF focuses on measurable outcomes of a project. It pools funds from DAOs or ecosystem contributors and distributes them retroactively to projects that have demonstrated value. This process ensures that critical infrastructure — like cross-chain bridges or developer frameworks — receives the support it needs at the right time. This funding mechanism is preferred because it helps align incentives. Instead of competing for speculative investment, projects can focus on delivering real value, knowing that their contributions will be recognized and rewarded. For a fragmented ecosystem like Ethereum, RetroPGF offers a way to unify funding efforts and ensure that resources flow to the most impactful initiatives. Amplifying community support Another powerful tool in the blockchain funding toolkit is quadratic funding, a model that distributes capital based on the breadth of community support rather than the size of individual contributions. This approach levels the playing field for smaller projects and grassroots initiatives, which often struggle to compete with well-funded competitors in traditional funding models. Quadratic funding works by matching small donations from a large number of supporters with a larger pool of funds, reflecting the collective intelligence of the community and ensuring that projects with widespread grassroots support receive the majority of funding. By tokenizing the value of public goods projects, such as governance rights or revenue streams, founders can open their projects to a broader pool of supporters with the help of fractional investing mechanisms. This creates a diverse and passionate investor base, democratizing access to capital and reducing reliance on traditional funding sources. For example, developers building a cross-chain interoperability solution could tokenize their project’s governance rights, allowing supporters to contribute micro-investments in exchange for a stake in its success. This not only provides the project with much-needed funding but also fosters a sense of ownership and alignment among its supporters. In a fragmented ecosystem like Ethereum, fractional investing can help bridge the gaps between chains by incentivizing collaboration and shared ownership. Projects that might otherwise operate in isolation can tap into a unified pool of capital, creating a more interconnected and resilient ecosystem. On-chain ownership At the heart of these blockchain-powered funding models is the concept of on-chain ownership. By tokenizing their work and leveraging blockchain’s transparency, creators and builders can establish direct relationships with their supporters, eliminating intermediaries and ensuring that value flows back to those who believed in them from the start. On-chain transactions also make funding flows visible and auditable, reducing fraud and fostering trust. This transparency is particularly important in a fragmented ecosystem like Ethereum, where users and developers often struggle to navigate complex and opaque funding structures. An important question to address is how to source funding for these x-L2 initiatives. One strategy is to make funding Ethereum common goods a condition of being a Stage 1 or Stage 2 rollup. These rollups, once they’ve reached that level of decentralization, are relying on a distributed community and tools for governance. Funding these common goods and tools is not only justified but necessary for their continued growth. An alternative would be to redirect the Ethereum Foundation grants program towards solving this issue. The EF needs to better support the cross-L2 experience and funding common goods to solve these challenges is key to doing so. Ethereum’s fragmentation goes beyond technical challenges, it’s a funding challenge above all others. By adopting blockchain-powered funding models like RetroPGF, quadratic funding, and fractional investing, the ecosystem offers a way to align incentives, amplify community support, and democratize access to capital, ensuring that resources flow to the projects that need them most.