This can be a great idea, if it's done well. For example, the Street­Complete app has achievements to encourage contributions to the OpenStreetMaps project:

I think the developers of https://habitica.com/static/home had a similar idea and it has been quite successful.

I think it's a good idea but implementing it well would take massive amounts of effort. That kind of project management is a beast in and of itself.

A big hurdle I see is how do you handle quality vs quantity? Who will be selecting the projects in order to stop someone creating twenty "open-source" projects and spamming merges they accept themself?

If you're going off financial donations to projects you need to make sure of the same thing. You'll need to balance rewards for total amount contributed vs time (like consistently for a year vs all in one month). You'll need to keep in mind that some will give everything they can and won't want to feel left in the dust just because someone else could drop daddy's credit card. Even though getting contributions is the goal you'll want it to feel rewarding at every level of contribution.

If you're going for in game items you'd need to make the game actually a solid and unique game otherwise someone will just use AI, rip it off, and spin up competitors and the whole thing will fizzle as everyone in all the little spinoffs won't feel a community. It's the kind of thing where concentration of users will be major.

And that's without even thinking about advertising the project or actually developing it. Just the rewards.