Market Watch #2
The $41M Arbitrum Stimulus
Amidst a challenging bear market, the Arbitrum team is set to inject a $41M stimulus into the Arbitrum ecosystem. 50M $ARB is bound to be distributed to eligible projects, and these will eventually make its way to users through project incentives.
To evaluate the impact of this short-term incentives program (STIP), we studied another ecosystem which has done something similar; Optimism. Through their Governance Fund, a total of 232M $OP — making up 5.4% of total supply — were designated to incentivize the growth of the Optimism ecosystem.
The first phase of the distribution, aptly named Phase 0, saw 35.1M $OP distributed to 24 existing projects. These projects have played a pivotal role in driving the evolution and adoption of the Optimism ecosystem. Subsequently, 71% of these projects then launched their incentives program to disperse these rewards to users.
The incentives program had an immediate and pronounced impact on network activity, and this effect remained evident throughout the program's duration. Following the distribution of $OP tokens to the protocols, the latter half of 2022 witnessed a substantial upswing in user engagement and key performance metrics on the Optimism platform.
Adjusting for distributed incentives as a ratio to market cap, we can arbitrarily project a 20% impact from Optimism’s growth for Arbitrum’s STIP. The projected figures suggest a 10% to 90% growth for Arbitrum’s user metrics while the incentives are live. With the $ARB distribution scheduled for Oct 7th and Nov 5th, the Arbitrum ecosystem is poised to benefit from the STIP stimulus through to February 2024.
While the objective of the STIP is to stimulate short-term growth, the most important hurdle is successfully obtaining the funds. After reviewing the results of the Phase 1 of $OP Governance Fund, we identified a few common denominators between proposals that ended in failure. Some important criteria studied were the distribution of incentives, the requested amount of tokens, and the presence of matching incentives from the protocol.
It is worth noting that the STIP is purely used to incentivize growth on Arbitrum, and as such all funded $ARB should eventually make its way directly to users. Therefore, the critical criteria for a successful STIP proposal should be the amount of incentives requested. If the requested amount of tokens do not lie within the recommended grant categories, the proposal may likely be rejected by the review committee. Historically, proposals without explicit support from the committee did not pass the snapshot vote.
As the grant categories are already defined during the voting, proposals from protocols have started flowing in. We have listed a few notable projects that have requested for large grants; however, it is our opinion that some of these requests may fail. A few reasons are an oversized request allocation not matching the tranche’s TVL and daily volume criteria, and also a distribution strategy that is out of scope, directing allocations to their own team.
Ultimately, Arbitrum's STIP is strategically designed to yield short-term results, primarily aimed at solidifying their position as the foremost L2. Mercenary capital will certainly migrate to Arbitrum. However, a few events that could delay the migration of mercenary capital are the return of unclaimed $56.56M $ARB airdrop and the potential activation of $ARB staking. The unclaimed airdrop could fuel the next wave of incentives on Arbitrum, and while the staking proposal is still in the early stages, it is something to pay close attention to.