Introduction

Web3, a decentralized internet field based on blockchain technology, is rapidly becoming a global hotspot for innovation. With the rapid rise of Web3 projects, financing methods have become increasingly diversified, and traditional equity financing and venture capital models can no longer meet the unique needs of this emerging industry.

This article will explore common funding methods in Web3 projects, including token financing, public chain ecosystem funds, DAO-driven financing, and the financing strategies for founders from the cold start phase to global expansion.

Overview of Funding

Source: rootdata

The cryptocurrency investment trends over the past five years show a total amount of $23.4 billion, with DeFi (28%) and NFTs (22%) dominating the market. From 2023 to 2024, funding has exhibited cyclical fluctuations, with monthly funding amounts between $200 million and $800 million. Investors are particularly favorable toward infrastructure and protocol development projects.

Ethereum remains the dominant Layer1 ecosystem (with over 2,500 projects), while Polygon, Arbitrum, and Optimism have performed well in Layer2 scaling, with project numbers ranging from 1,000 to 2,500, demonstrating the strong appeal of the Ethereum ecosystem. Meanwhile, the rapid growth of emerging chains (such as Base and Solana) indicates a trend toward ecosystem diversification.

Overall, capital is expanding from financial infrastructure into culture, governance, and technological innovation, but the risk of market cyclical fluctuations should be considered.

Information Query Channels

Funding Information Query

Source: rootdata

Venture Capital Firm Query

Source: rootdata

Comparison of Web2 and Web3 Investor Preferences

Web2 investors typically focus on mature business models, traditional profit models, and stable return cycles. They rely on validated business models and technological frameworks for investment.

On the other hand, Web3 investors emphasize the innovation of projects, particularly decentralized, community-driven projects and their potential long-term value. Regarding investment return models, Web3 investors are willing to take on more risk, participating in emerging crypto economies and innovative ecosystems. The return cycles may be shorter, but the risks are relatively higher.

Comparison of Web2 and Web3 Financing Methods

Web2 and Web3 have many similarities in their financing methods but also significant differences.

Web2 financing primarily relies on traditional forms such as equity investment, bank loans, corporate incubators, and crowdfunding platforms, while Web3, driven by decentralization, token economics, and blockchain technology, has developed new financing methods such as ICOs, IDOs, DAO funding, and NFT financing.

Web3 financing is more flexible and diverse and emphasizes community involvement and the application of tokenized assets, significantly transforming traditional financing models. By comparing the financing methods of both, one can better understand their advantages and applicable scenarios, providing entrepreneurs with insights to choose the most suitable financing route.

Examples of Funding Models

Web3, a decentralized internet field based on blockchain technology, is rapidly becoming a global innovation hotspot.

With the fast rise of Web3 projects, funding methods have also diversified, as traditional equity funding and venture capital models cannot meet the unique needs of this emerging industry.

VC Funding

Venture capital firms (VCs) are an important source of funding for Web3 projects, especially suitable for Seed and Series A stages. VCs typically focus on technological innovation, market potential, and team execution capabilities, providing funding support and helping with market expansion.

Case Studies

Filecoin: Secured early-stage funding from Sequoia Capital and Andreessen Horowitz.

Dapper Labs (CryptoKitties): Received investment from Andreessen Horowitz and Union Square Ventures, helping to drive its development.

Advantages

Abundant Funding: VCs typically have large capital pools, providing the funds needed for project expansion.

Resources and Networks: VCs provide funding and bring industry experience, market resources, and partner networks.

Management Support: VCs engage in project management, helping to shape strategies and optimize processes.

Challenges

Equity Dilution: VCs require equity allocation, which may affect the founder’s control over the project.

Short-Term Return Pressure: Some VCs focus on short-term returns, which could conflict with the project’s long-term objectives.

Applicable Stages

Ideal for projects that have completed market validation and are ready for expansion, particularly Seed and Series A stages.

Operational Details

Prepare Materials: The project team must prepare detailed business plans, white papers, technical documents, and market analysis reports. VCs typically assess these materials carefully, focusing on the project’s technological innovation, market potential, and team execution capabilities.

Referrals and Contact: To introduce the project, the project can contact VCs through network connections, industry conferences, or investment banks.

Terms Negotiation: Financing terms, including equity ratio, valuation, investment size, and rights for future financing, need to be negotiated with the VC.

Due Diligence: VCs conduct thorough due diligence on the project, including the team’s background, technology feasibility, and market conditions, to ensure the project’s viability and investment value.

Fund Release and Management: Once funding is secured, the funds are typically released in installments according to the agreement. VCs participate in strategic planning and execution, providing resources and market support.

Legal and Compliance Considerations

Equity Structure and Terms Agreement: It is important to define the investor’s equity share, voting rights, exit mechanisms, etc. Ensure that shareholder agreements and investment terms comply with local laws.

Data Protection and Privacy: The project must protect personal and sensitive information, especially when operating globally, and comply with relevant privacy regulations such as GDPR.

Anti-Money Laundering (AML) and KYC: VC funding typically requires strict KYC procedures to ensure the legitimacy of the fund’s source.

Source: rootdata

Token Funding

Token financing is a common fundraising method for Web3 projects. The project raises funds by issuing tokens, which play multiple roles within the project ecosystem.

Case Studies

Bitcoin: Became the prototype for token financing through community support and whitepaper release.

Ethereum: Raised $18 million through an ICO in 2014, evolving into a leading smart contract platform.

Filecoin: Raised over $250 million through an ICO in 2017, advancing decentralized storage development.

Advantages

Fast Fundraising: Token financing can quickly attract global investors, helping the project raise funds rapidly.

Community Involvement: Token sales incentivize users to participate in the project, enhancing community engagement.

Secondary Market Liquidity: Tokens can be traded on decentralized exchanges (DEX), providing the project with capital support from the secondary market.

Challenges

Compliance: Different regions have varying regulatory requirements for token issuance, and projects must ensure compliance with relevant laws.

Speculation Risks: Excessive speculation can lead to token price crashes, affecting ecosystem stability. A well-designed token economic model is essential.

Operational Details

Design Token Economic Model: The project team must design a token economic model, defining the total supply, distribution ratios, circulation mechanisms, and use cases (e.g., governance, payments, incentives).

Smart Contract Development: Develop smart contracts that meet project needs, ensuring normal functioning of token issuance, transfer, distribution, and burning.

Whitepaper Writing: Release a whitepaper detailing the project’s objectives, technical architecture, token distribution, and fundraising plan, ensuring transparency in the fundraising process.

Choose Issuance Platform: Select appropriate fundraising platforms like ICO or IDO (e.g., CoinList, Polkastarter) based on the project type for token sales.

Marketing and Community Building: Conduct online promotions and community building to increase exposure and attract investor participation.

Legal and Compliance Considerations

Compliance Review: Different regions have different regulatory requirements for token issuance, especially the U.S. SEC, which has strict regulations on whether tokens qualify as securities. The project must ensure compliance to avoid being viewed as an illegal security.

KYC and Anti-Money Laundering (AML): Token financing requires KYC/AML checks to ensure the legitimacy of investor identities and prevent money laundering.

Risk Disclosure: The project must fully disclose risks in the whitepaper to avoid future legal disputes arising from information asymmetry.

Source: cryptorank

Public Blockchain Ecosystem Grants

Large blockchain projects (such as Ethereum and Polkadot) support developers and innovative projects through ecosystem grant programs, helping Web3 projects secure initial funding.

Case Studies

Ethereum Foundation Grants: Funded multiple projects like Uniswap and Chainlink, promoting ecosystem development.

Polkadot Web3 Foundation: Provides funding support to Polkadot-based projects.

NEAR Protocol: Supports several decentralized applications through its ecosystem reward program.

Advantages

No Equity Dilution: There is no equity or token dilution involvement, allowing the founding team to maintain control.

Accelerated Development: Leverages public blockchain resources to accelerate technical development and community building.

Challenges

Intense Competition: High application barriers, requiring projects to demonstrate strong technical innovation.

Strict Requirements: Each ecosystem reward program has specific criteria and evaluation standards, requiring careful preparation.

Operational Details

Application Process: Projects must submit detailed project plans, technical solutions, target markets, and fund usage plans according to the foundation’s or ecosystem grant’s application requirements.

Funding Approval: The foundation typically reviews applications, focusing on the project’s innovation, technical feasibility, and contribution to the ecosystem.

Fund Usage and Reporting: Once funded, projects need to use the funds as planned and submit regular progress and financial reports to the funding organization.

Resource Sharing: Many public blockchain ecosystem grant projects provide additional support, including technical consulting, marketing, and partnerships.

Legal and Compliance Considerations

Intellectual Property Protection: Ensure the project’s technological achievements comply with relevant intellectual property laws, especially when applying for public blockchain funding. Patents or copyrights for the technological results should be clear and well-defined.

Compliance Contracts: Sign clear funding agreements outlining the scope of fund usage, reporting requirements, and intellectual property ownership after project completion.

Source: esp.ethereum.foundation

DAO Funding

A Decentralized Autonomous Organization (DAO) uses smart contracts and community governance to achieve decentralized fundraising and decision-making, emphasizing community autonomy and participation.

Case Studies

Gitcoin Grants: Community-funded grants supporting open-source developers and blockchain projects.

Aave Grants DAO: Funds DeFi innovation projects through community voting.

Moloch DAO: Focuses on funding Ethereum ecosystem projects.

Advantages

Decentralization: DAOs ensure transparency and fairness in project funding, with direct community involvement in decision-making.

Community Endorsement: Receiving funding from a DAO means gaining widespread community recognition, which helps enhance the project’s brand value.

Challenges

High Community Management Demand: Successful DAOs depend on active and cohesive communities, requiring founders to invest significant time in community management.

Longer Fundraising Cycles: DAO decisions require multiple rounds of voting, making the fundraising process potentially longer and delaying fund disbursement.

Operational Details

DAO Creation: Establish a Decentralized Autonomous Organization (DAO) to decide on fundraising and project funding methods through DAO governance mechanisms.

Proposals and Voting: DAO members propose funding ideas and vote, ensuring democratic and transparent fund allocation.

Community Participation: DAO fundraising often relies on active community involvement, so projects must engage the community through activities and discussions to increase participation.

Smart Contract Execution: Fundraising and distribution usually rely on smart contracts, ensuring transparent and automated fund allocation.

Legal and Compliance Considerations

Legal Entity Establishment: Although DAOs are decentralized, some jurisdictions still require DAOs to establish a legal entity for contract signing and fund management.

Governance Structure Compliance: The DAO’s governance structure must comply with legal requirements to avoid compliance risks, particularly in situations involving shareholder rights protection and conflicts of interest during decision-making.

Tax Compliance: DAO’s fund flow and profit distribution must comply with local tax laws, especially in cross-border operations, where different tax policies must be considered.

Source: molochdao.com

Analysis of Financing Strategies from the Founder’s Perspective

Cold Start Stage

In the early stage of a project, founders can initiate the project through self-funding or applying for entrepreneurship grants. At this point, the capital demand is relatively low, and the focus can be on validating the product’s market potential and developing prototypes. The project can receive better technical support and financial backing if it can participate in early incentive programs from emerging blockchain platforms (such as Polkadot’s Web3 fund).

User Growth Stage

When the project validates market demand and begins acquiring users, founders can combine token sales and equity financing to ensure a more stable funding source while avoiding excessive dilution of equity. At this stage, the design of the token economic model is crucial to ensure that the token’s value aligns with the long-term development of the project.

Global Expansion

As the project matures and enters the global expansion phase, founders should bring in professional, institutional investors to gain more strategic resources. Simultaneously, utilizing the power of DAOs and the community for fundraising can enhance the project’s decentralized governance, as well as increase brand recognition and market coverage.

Financing and Market Cycles

The cryptocurrency market currently follows a clear 4-year cycle, including stages of growth, expansion, decline, and recovery. Founders should adjust their financing strategies according to different stages of the market.

During the rebound and bull market phases, funds can be quickly raised through token sales and equity financing; however, financing becomes more difficult during the bear market and market correction phases. Founders should focus on product optimization and stabilizing the core user base. Understanding and adapting to market cycles helps founders effectively adjust financing strategies to ensure sufficient and sustainable funding in various market environments.

Legal and Compliance Considerations

Web3 financing involves complex legal and compliance challenges, especially regarding token issuance. Founders need to thoroughly understand the regulatory requirements of different countries to ensure the financing process complies with local laws.

For example, the U.S. Securities and Exchange Commission (SEC) has strict regulations on token issuance. If a token is classified as a security, the project must register and comply with relevant laws. Singapore has more lenient crypto asset policies, but token issuance must still follow the Payment Services Act. The EU’s MiCA regulation also provides unified supervision of crypto assets, and projects must comply with this new law.

Additionally, token issuance, cross-border fund flows, and issues like KYC/AML (Know Your Customer and Anti-Money Laundering) require special attention.

Avoiding Potential Risks

To avoid legal disputes, founders should collaborate with professional lawyers to ensure the financing structure complies with legal regulations. In designing the token economy, careful attention should be paid to prevent tokens from being classified as securities, minimizing potential legal risks.

Team Structure

Establishing a well-organized team structure is crucial to ensure the project’s success in attracting investors and securing funding. An efficient, collaborative team not only demonstrates the professionalism and execution capability of the project but also enhances investor confidence in the project’s future development. A clear team structure helps the project stand out in a highly competitive market, increasing the chances of winning more investment opportunities.

Conclusion

Web3 financing methods have opened up new paths for entrepreneurs. From traditional equity financing to decentralized token economies and DAO-supported community funding, Web3 startups have more diversified funding options.

However, this also means that founders face higher challenges: they need clear strategic planning and the ability to navigate complex regulatory environments and market fluctuations. By carefully selecting the right financing approach for their project, Web3 entrepreneurs can stand out in a competitive landscape, seize market opportunities, and achieve sustainable development.