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Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring?

Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring?

BlockBeatsBlockBeats2024/08/22 08:40
By:BlockBeats

Supply-side incentives are equivalent to burning money

Original title: Arbitrum's $85m Growth Campaign
Original author: Kerman Kohli, crypto researcher
Original translation: TechFlow


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 0


Imagine if you are a business and you launch a promotion that promises you $3 in value for every $1 spent. And, anyone can claim this offer, no strings attached. Whether it's your grandma, a homeless person on the street, a well-paid executive, or an ordinary middle-class person, everyone is eligible for this offer.


What do you think will happen? Well, those who need the money the most, and who are often the least likely to become repeat customers, will flock in and quickly deplete your funds or inventory until you can no longer maintain this offer.


The good news is that the real world doesn't work that way, and the free market will quickly eliminate such businesses.


The bad news is that the crypto industry does, and the free market continues to drive inflows.


Introduction


The above scenario is essentially what Arbitrum did, involving $85 million in funding, which ultimately resulted in a $60 million loss. Let’s dive into what exactly this scheme is, how it was structured, and what we can learn from it.


The Arbitrum DAO structured this scheme in a way that specific industries and their corresponding applications could earn ARB tokens to incentivize users to use their platform. The ultimate goal was to incentivize the use of these platforms, so that the Arbitrum network would earn more fees and the ultimate protocol would benefit. It turns out that one side is winning here, while the other is not (I’m sure you already know who the loser is here).


This analysis is of fairly high quality and the complexity of the measurements is on point, and I’d like to thank the Blockwork team for clearly laying out the why, what, and how of their approach.


You can view the results here.


Methodology


From a high-level perspective, you can break this activity down into two main components:


1. Creating a baseline to understand what percentage of incentives can be attributed to spending compared to a baseline. They call this the “synthetic control” approach and it uses some complex math. This isn’t too important because whatever our final number is, we’ll need to adjust it downward since not all results can be attributed to this single effort. You can learn more about this in the original forum post.


2. Incentivizing end users of applications on Arbitrum in different areas by giving them ARB tokens to boost their metrics. Three areas were chosen (perpetual contracts, decentralized exchanges, liquidity aggregators). Each application was told how to best use these incentives.


I did find some interesting excerpts that I thought I’d share here for you to judge for yourself:


“Many protocols missed several bi-weekly reports or didn’t publish a report at all. About 35% of STIP recipients did not publish a final report.”


“Protocols rarely strictly explain why a certain amount of incentives should be allocated to them when applying for a STIP. Instead, the final allocation is usually the result of back-and-forth communication between the protocol and the community, often resulting in an allocation similar to “we feel this request is too big/too small.”


Anyway, next, I’ve attached screenshots of the different categories, showing the payout amounts and mechanisms (no screenshots of the methodology for the DEXs, but basically they just incentivized liquidity). The key thing to remember here is that 1 ARB is roughly equivalent to 1 USD. So, yes, millions of dollars are being distributed here.


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 1


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 2


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 3


Results


I’ve broken down the results into two sections because this experiment was designed to understand two things:


1. The impact of these incentives on adoption


2. The impact of these incentives on ranker revenue


We’ll start with the first one because it makes for a slightly happier story. If we start from first principles, what do you think would happen if someone gave you free money to promote your business? Typically, business would improve — at least for a while. That’s the overall picture we saw in this experiment.


First up, Spot DEX, their results seem pretty good on the surface:


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 4


Basically, we see that for every $1 spent, TVL (Total Value Locked) ranges from $2 to $24, which sounds pretty good. However, we need to ask the real question — how much of that is being retained? This is where it gets a little tricky. Balancer’s TVL has essentially dropped after the rewards ended, which is evident in this chart:


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 5


Camelot, however, has managed to retain some of that TVL! I’m not sure why there’s a difference in retention between the two protocols, but if I had to guess, I’d say it’s probably to do with how they run their incentive programs and the types of users they attract. This is something I’ve flagged and will be analyzing in a future post.


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 6


Now that you understand some of the micro details, let’s zoom in and understand how effective this is for the app and the three important top-level categories (spot volume, perpetual volume, and lending). I’ll show you the key charts. I’ve annotated them a bit to help with understanding, so come along and take a look.


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 7


· I’ve drawn two red vertical lines marking the start and end of the program. This will help us understand the timeframes involved.


· I’ve then drawn multiple horizontal lines to understand the different metrics and visualize the impact the program has on these metrics over its lifetime.


· The first blue line shows that TVL spiked significantly (no doubt about it), but then dropped back almost to where it was at the start of the program, indicating little to no stickiness!


· The second line is spot volume. I want to pause here and mention that unlike TVL (supply side), spot volume represents demand. As we can see, demand is stable at best, but actually decreases towards the end of the program!


· The third line is outstanding loans, which is also a demand driver, but has not changed. While there is no incentive for any lending protocol, I would consider this another strong indicator of demand. In fact, this is down throughout the program!


So what can we conclude from all of the above? Basically, Arbitrum spent $85 million on these other businesses to boost their supply side metrics (which clearly worked), but without the corresponding demand to absorb this TVL and tighter liquidity, these efforts were rendered useless. Essentially, you could say that this money was wasted and given to farmers chasing short term profits. At least some protocols have higher TVL and higher token prices, making some people richer in the process.


Speaking of demand-side metrics, surely all this activity must be good for the chain and lead to higher revenues for all those transactions, right?


In reality, this is not the case.


The reality is simply not like this.


Here is a chart of sorter revenues from January 2022 to July 2024. The big move around April is when crypto started to surge higher, and synthetic control helps us adjust for that.


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 8


On the surface, we can see revenues rising, peaking at $400,000 per day in certain months. Here’s a clearer chart showing the impact just for Arbitrum, and taking synthetic control into account:


Throwing money around does not equal growth. What does Arbitrum’s 85 million ecological incentive plan bring? image 9


So what’s the area under the curve? $15.2 million. If synthetic control is removed, total collator revenue is $35.1M. Considering $85M was spent, we are still far from where we expected!


Learning Summary


To summarize all of the above:


· Arbitrum decided to spend $85M to incentivize activity on its network to drive market share and revenue.


· They did this by giving free tokens to applications and protocols, which were then distributed to end users.


· Upon analysis, it was found that these free tokens were primarily given to supply-side drivers, with little change on the demand side.


· A deeper analysis revealed that all of this activity resulted in $60M less collator revenue than spent.


The conclusion I draw from this is that supply-side incentives are equivalent to burning money, and should not be taken lightly unless you have a supply-side problem (and usually the real problem is demand).


The second point is a premise I mentioned at the beginning of the article: if you randomly give funds to strangers without identifying their identities and backgrounds, the results you will get in the end will be very bad. Those protocols that continue to provide funds to users without understanding who they are and their purpose will eventually fall into the situation described at the beginning of this article.


Let's imagine that if this incentive plan can identify the recipients of these tokens through the permissionless identity of the wallet and set the following criteria:


· Is this user actually using a DEX, or is this a brand new wallet?


· What is the net worth of this wallet, are they a potentially valuable wallet?


· How much does this wallet spend on fees? Do they stick with the platforms they use?


· Is this address using all the projects that are about to launch tokens? They could be a hedge fund.


What do you think the end result will be?


Original link

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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