The Puzzling Reality of Optimism Grants Pt 1: Introduction and Movements

Castle Capital Research Report

Have you ever wondered…

Where do ecosystem grants actually flow to?

What types of projects are funded?

How do these projects use the tokens?

Is it really “free” money? Or is there more to it?

We decided to investigate Optimism RetroPGF Round 2 to answer these questions.

In an effort to help the Optimism community and chain grow, the Optimism Collective started a grant program called Retroactive Public Good Funding (RetroPGF). The Optimism Team committed to “giving all our profits made from sequencing (prior to decentralizing the sequencer) to public goods funding experiments, including the first public goods exit” as per a blog they posted in July 2021.

This program was kicked off back in 2021 with $1 million in stablecoins set aside for public goods. Earlier this year, a second round was held and 10 million OP tokens were distributed. In Q4, the Optimism Collective will be distributing another 30 million OP tokens.

Overview of the three RetroPGF rounds (Source).

Like other ecosystem grant programs, the RetroPGF calls on the community to help build useful tools and products that benefit the overall network. It plays into the strengths of a broad, diverse community and incentivizes them to put their specific expertise to work.

Since the first round, the RetroPGF process has been iterated and improved on. The second RetroPGF round (RetroPGF 2) lasted over several months and involved a voting process by Badgeholders. Here is a descriptive overview of this voting process taken from Optimism’s blog RetroPGF2: Learnings & Reflections published on May 25th, 2023.

  1. Badgeholder selection - badgeholders have the power to distribute OP tokens to projects. They’re instrumental in running an effective RetroPGF round. For RetroPGF Round 2, badgeholders were selected across four different criteria.

    • 14 badgeholders were selected based on their participation as badgeholders in round one of RetroPGF

    • 21 badgeholders were selected by the Optimism Foundation

    • 10 badgeholders were elected by Optimism’s Token House

    • 29 badge holders were nominated by badgeholders from the three categories above

  2. Nominations (Jan 17 - Jan 31) - anyone could nominate a project in the forum by providing a name, impact description, and link to Github/Twitter

  3. Project profile creation (Feb 7th - Feb 21st) - Projects had to create a profile where they were asked for general information, as well as a description of their project and its impact. Information provided by Projects can be viewed on the RetroPGF discovery page.

In that same blog, Optimism reflected on the process of the grants, pointing out several key improvement points.

A TL;DR:

  • Lack of high-quality data: The information provided during the nomination process and project profiles did not offer sufficient context or data to help Badgeholders evaluate past impact accurately.

  • Difficulty in evaluating impact: The evaluation of impact proved challenging without a quantitative framework for assessing either "impact" or "profit." There was a call for clearer guidelines on evaluating impact and reaching a consensus on the categories of projects that RetroPGF should endorse.

  • Evaluation of project scope: Evaluating the impact of a large number of projects proved overwhelming for Badgeholders. The current evaluation model may not be scalable if RetroPGF supports hundreds or thousands of projects in the future.

  • Ambiguity in impact = profit: Applying the concept of "impact = profit" was complex without a clearer definition of what constitutes impact. Badgeholders sought better evaluation heuristics and criteria for different categories.

  • Collaboration challenges: Badgeholders faced challenges collaborating and leveraging collective intelligence. More structure and guidance were necessary to succeed in future iterations.

  • Voting tooling issues: The voting experience needed to be more suboptimal, and the system needed a user-friendly, integrated voting interface. Future rounds should aim for a better voting experience for Badgeholders.

Furthermore, Optimism outlined measures to address these issues and promised to improve on them before RetroPGF3.

We applaud this effort: even though Optimism did not mention concrete solutions, they did hint at some potential measurements that would improve the current process substantially. We are confident that the necessary adjustments will be made before RetroPGF3.

Inspired by our previous research into the Arbitrum DAO airdrop, we were curious about what recipients of the RetroPGF did with their received tokens and whether they delivered substantial public goods or output in line with the grants they received. By doing so we hope to help better evaluate the impact of grant receivers and bring more transparency and accountability to grant issuance.

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Disclaimers

The goal of the grants is to fund public goods. We expect that most of the receivers will be selling their granted tokens for USDC, either through a DEX or more likely, transferring to a CEX because it is easier to immediately off-ramp the money. We expect them to do so to either fund their own activities, their teams' activities, or any resources they have taken the burden of (such as servers, etc.).

For a full overview, you can consult our public sheets, where you can see how much each project has received, and at which address, followed by an analysis of their movements (for the majority of the receivers). The subsequent section highlights some of the major findings from analyzing the behavior from a high level. We wish to emphasize again that the scope of this research is an effort to introduce some transparency and accountability to Optimism's grant program and is in no way, shape, or form, an attack, insult, or dig on the Collective or the DAO.

As part of our methodology, we have labeled the wallets based on specific behavior:

  • Sold: the receiving team has sold the majority of their grant on-chain or through a CEX

  • Holding: these chads have received their grant but decided to hold on to it for whatever reason

  • Untraceable: for various reasons we were not able to track the exact amounts or movements of grants for some projects

We received word from Jonas, who leads the RPGF grants program, that some of the projects did not receive the grant on their multi-sig address included in the sheets, however, Optimism distributed it immediately. We have no vision of this nor the data, thus we decided to include these projects along with teams that have not received their grant yet in the Untraceable category.

We would love for Jonas to provide us with this information to complete this transparency report.

The Numbers and Moves

Let’s look at some numbers.

All the figures were made in Plotly and all the image descriptions will contain a hyperlink that takes you to an interactive version, helping you to pinpoint and view specific values.

Again, all the data can be found in our public sheets as well.

The chart above shows that the majority of tokens have been distributed to Infrastructure projects, compared to Tooling and Utilities, and Education. Interestingly, Infrastructure also held onto notably fewer tokens compared to the other two.

These results are in line with our expectation that most recipients would sell their grants.

Note: we have assumed that any transfers of OP tokens to a CEX were made to sell them.

To gain full insight into who sold and who held, please refer back to the sheets. However, for visualization purposes, we have created three Sankey diagrams for the top 60 projects.

Out of the top 20 projects, only ZachXBT (~$340k), Lighthouse (~$270k), and wagmi (~$170k) have sold their entire grants.

L2Beat has sold $50k and BuidlGuidl $6k, but the latter has also been distributing tokens to individual wallets.

The other projects are either still holding or have not received their grants. Remember, that some of the contributors to projects have received a part of the grant directly from Optimism, but have been flagged as Untraceable.

As we move to the Top 21-40 projects, the amount of receivers that have sold their grant is much higher than for the top 20.

In total 13 projects sold all their tokens, apart from Nethermind who sold around half of their grant and holds the other half.

Of those 13 there are some teams and individuals that have been providing public goods and material free of charge for years such as Vyper, CryptoZombies, and Goerli. It makes a lot of sense for them to treat the grants as alternative income streams and sell them to fund their activities.

Surprisingly, in the top 41 to 60, a lot more projects have chosen to hold all or a portion of their grant. Though, again, 13 projects out of 20 have sold at least a part of their grant.

Conclusion

That’s it for the first part of our investigation series into Optimism’s RetroPGF2. This piece has illustrated the program’s objectives and process, as well as the behavior of its recipients. The RetroPGF program is important for providing crucial funding to projects and other Optimism community members who have promoted and built products in public for the ecosystem.

Unfortunately, about 40% of the granted tokens remain untraceable to us, significantly limiting our analysis. The remaining 60% were traceable, with 35% having been sold and a surprising 25% held in multisigs or EOAs. Notably, these tokens are not actively utilized in Optimism's DeFi protocols, likely due to recipients' risk aversion, preserving their capital for future needs.

But we are not stopping here.

The upcoming Part 2 of this investigation will analyze the public goods built by some of the recipients, shedding light on how they utilized the grants and whether they delivered what they were expected to. This transparency aims to evaluate the RetroPGF’s effectiveness and provide insights for optimizing resource allocation in future iterations.

Castle Capital is very supportive of initiatives like RetroPGF, which shows promise in stimulating community development. Overall, this series aspires to bring more transparency, accountability, and a contribution to enhancing the process around grants, ensuring rightful projects that bring the most value receive the necessary funding.

Key Takeaways

  • The RetroPGF program aims to provide funding to projects within the Optimism community, contributing to the growth of the ecosystem.

  • This investigation categorized grant recipients based on their on-chain behavior (Sold, Holding, and Untraceable) and helps understand how recipients are utilizing their grants.

  • As expected the majority of the recipients sold their grants.

  • Unfortunately, some grants were distributed to unknown private addresses rather than team multi-sig addresses. This has led to an inability to fully track and analyze the flow of grants from Optimism.

  • Challenges lie in evaluating the impact of the grants and the contributions of recipients to public goods, highlighting the importance of transparency and accountability.

  • Part 2 of this series will focus on analyzing the public goods built by some of the grant recipients to sample the effectiveness of the program to a certain degree.

Thanks for reading, please give us a follow on Twitter at @Castle__Cap and visit our website to learn more about our services.

Virtually yours,

The Castle

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