Redfern Aboriginal Tent Embassy (RATE), led by Wiradjuri elder Jenny Munro, gathered outside the Supreme Court in Sydney on Thursday to celebrate the news.
"That was always our battle cry from day one that affordable housing be built first for our people. I think we can rightfully today claim that victory," Ms Munro said.
NITV NEWS WILL BROADCAST LIVE FROM THE BLOCK TONIGHT. 5.30, 7, 11PM. CH 34 / 144.
The grant will allow the Aboriginal Housing Company (AHC) to organise a bank loan to fund the community housing on The Block - where protesters have been camping out for 450 days.
Protesters were concerned about the $70 million Pemulwuy project planned for The Block by AHC.
It has planning approval for student housing, a commercial and retail space, and 62 units and townhouses for indigenous families.
But when the AHC said they would not be able to finance the community housing until the commercial building had been completed, protesters were worried it might never happen or the space might be sold to developers.
That was 15 months ago, when RATE began camping at The Block.
On Monday they lost their court case against AHC, involving a possession order for the land.
But with the federal government grant, they feel safe knowing The Block will still have affordable housing for indigenous people.
"One thing I think we can say after this is that the black heart of the city is still beating," she said.