ARB's Wake-Up Call: A Critical Pivot is Necessary

Proposals
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Written by IOSG Ventures (Momir & Henry | Data Analysis by Darko)

Special thanks to Dong Mo & Krzysztof for valuable feedback and contributions.

TL;DR:

  • Problem: Arbitrum’s incentive programs have failed to deliver sustainable growth, with TVL and trading volumes of incentivized protocols reverting to pre-incentive levels. Past proposals lacked a cohesive strategic vision, relying on ex-ante rewards for individual projects often misaligned with the ecosystem’s best interests.

  • Why Now? Arbitrum faces mounting competition, especially from Base, with Solana and BSC also growing much faster. Arbitrum’s mindshare has been on the constant decline, making this a critical moment to strengthen network effects and reverse the negative trend.

  • Objective: Re-establish Arbitrum as the leading DeFi hub by building deep liquidity, attracting high-demand assets, and creating a flywheel of liquidity, trading volume, user retention, and innovation.

  • Guiding Question: How can we ensure that users never feel the need to leave Arbitrum? The answer lies in strengthening the spot market as the ecosystem’s backbone.

  • Core Strategy:

    • Deepen liquidity for blue-chip assets and stablecoins.
    • Expand token diversity to meet user demand and attract new projects.
    • Implement a KPI-driven, ex-post rewards framework, distributing incentives directly to liquidity providers based on performance.

  • Required Services: Successful execution requires support from:

    • A cross-chain bridge solution (e.g., deBridge, Wormhole) to onboard diverse assets.
    • A data analytics provider (e.g., Kaito AI) for insights on token prioritization and market trends.
    • A service provider (e.g., Brevis) to ensure fair and verifiable reward distribution.

The Failure of Current Incentive Schemes

Since November 2023, Arbitrum DAO has deployed over 116.4M ARB tokens for short and long-term incentive programs aimed at boosting user engagement, trading volume, and Total Value Locked (TVL) on its network. While these programs demonstrated positive short-term impact, they have largely failed to sustain growth, with TVL and volume metrics regressing to pre-program levels.

A prime example is GMX, the largest grant recipient, which received 12M ARB (~$18M at $1.5 per token). Despite allocating the majority of these funds toward maximizing TVL to ensure sufficient liquidity in their Automated Market Maker (AMM), the protocol has struggled to maintain long-term growth. This is evidenced by their TVL declining from approximately $480M to $380M—a 20% decrease—in the post-incentive phase.

Similarly, MUX protocol, the second-largest recipient with 6M ARB in incentives (~$9M at $1.5 per token), has shown concerning sustainability issues despite focusing on fee rebates. Their current TVL of approximately $30M represents a significant decline from their pre-incentive level of ~$48M (-37.5%). More worryingly, their daily trading volume has plummeted from a healthy range of $100-200M to merely $20M.

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Source: OpenBlock Labs

Ironically, verticals that received less incentives had comparatively better growth metrics compared to the biggest grantees. For instance:

  • CDP vertical saw a ~210% increase in TVL post-incentive.
  • Lending experienced a ~610% increase in lending volume after receiving incentives.
  • Unicorn like Pendle was NOT in the Top 5 grant receiver (7th) but it has achieved a 11.3x increase in TVL, significantly contributing to the Arbitrum ecosystem.

These figures suggest that there might be a more effective way to distribute resources within the Arbitrum ecosystem.

The Politics of Arbitrum & Unintended Consequences

The poor incentive program has also resulted in negative externalities.

Through our interactions as a venture capital firm, we have encountered numerous projects that opted against launching on Arbitrum, despite its position as the L2 with the deepest liquidity. These projects consistently cite concerns about market dynamics where established protocols have disproportionate influence through substantial ARB grants, which they use to attract users through incentive programs. This environment creates an uneven playing field where potential new entrants are pushed to other ecosystems like Base.

A Strategic Reset: Aligning Incentives with Growth

Arbitrum’s path forward should focus on maximizing potential MEV value capture through its core strength - the DeFi ecosystem. Rather than scattering resources, ARB governance must focus the incentive programs on strengthening this foundation and amplifying network effects.

The current approach of distributing ARB tokens ex-ante through subjective grant programs has proven inefficient. Instead, Arbitrum should come up with a metric-driven framework where rewards directly follow results. Projects should earn incentives by achieving specific, measurable objectives that benefit the entire ecosystem.

Why now?

The competition among L2s has never been more intense, and we believe that changes are necessary at this very moment due to the following reasons:

  1. Base, BSC, and Solana have surpassed Arbitrum by generating larger on-chain spot volumes in the past 90 days. Arbitrum needs to strengthen its network efforts to build up its defensibility.

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Source: Artemis.xyz, 2024.11.27.

  1. Arbitrum spot volumes have dropped sharply as a percentage of Ethereum on-chain volumes, reflecting the fading demand to trade on Arbitrum and an urgent need for a better strategic incentivization program.

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Source: IOSG

  1. Blob has brought down gas fees on L2s and provided a valuable and perfect window for layer 2 solutions to attract liquidity, users, and capital from Ethereum.

  2. Arbitrum Orbit has been losing the race to OP stack and currently Arbitrum’s main battle is to ensure its main chain remains the most dominant integrated DeFi hub on Ethereum.

  3. The overall decline of interest in Arbitrum can be reflected in its mindshare compared to the overall market (Including other L2s).

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Source: KaitoAI

Incentive Principles

In analogy to Web 2.0 mantra of “people, product, profit”, Web 3.0 projects also need simple guidance principles. In the case of chains looking to build an ecosystem we believe that the paradigm should be - users, ecosystem, MEV.

Any strategic initiative must be grounded in comprehensive user analytics, addressing fundamental questions:

  • Who are our most valuable users?
  • What attracts them to Arbitrum?
  • What challenges do they face?
  • How can we create an ecosystem where they never need to leave?

The proposed growth framework operates as a self-reinforcing system, beginning with comprehensive user analysis and service optimization. This foundation attracts high-calibre projects to the ecosystem, fostering healthy competition in serving user needs. As these projects optimize their offerings, they generate sustainable MEV through organic user activity, creating a virtuous cycle where enhanced user retention drives ecosystem value. This increased value, in turn, attracts both additional users and innovative projects, perpetuating the growth cycle and strengthening Arbitrum’s network effects.

Who are Arbitrum’s users?

Identifying the most valuable user group of Arbitrum is a relatively straightforward task. Arbitrum managed to attract a significant number of whales (users that trade more than $100k daily) from Ethereum and nowadays whales generate 90% of Arbitrum’s on-chain volume. This is approximately in line with whales contribution to on-chain volume on Ethereum.

Through observing the trading behaviour of Arbitrum whales, we have identified two key patterns:

I) Arbitrum whales still trade on Ethereum because they need deeper liquidity.

Below is a table showing the trading behaviour of Arbitrum whales. As illustrated these users simultaneously trade on both Arbitrum and Ethereum. For the most popular and in-demand trading pairs, the average trading size is significantly larger on Ethereum than on Arbitrum, reflecting that part of the reason Arbitrum whales are trading on Ethereum is due to deeper liquidity.

Moreover, stablecoins, in particular, have the most significant disparity, which also suggests that Arbitrum currently lacks stablecoin liquidity.

Token Pairs (90D) When trading on Arbitrum When trading on Ethereum
Stablecoin-WETH 1.6K 4.9K
Stablecoins 2.8K 95.0K
WBTC-WETH 3.1K 17.8K
Stablecoin-WBTC 2.1K 8.6K
ARB-WETH 1.4K 2.1K

Source: IOSG Ventures

II) Besides the demand for deeper liquidity Arbitrum whales leave Arbitrum only for the reasons of getting exposure to more diverse tokens.

Over the last 90 days, Arbitrum’s leading traders generated almost $37.67B in volume on Arbitrum versus $1.86B in volume on Ethereum, showing that whales are typically loyal to Arbitrum and only moving to Ethereum for trades due to the necessity for deeper liquidity and diversity of token choices, including the recent trends such as memecoins etc. These same users have interacted with about 3500 tokens on Ethereum mainnet and 800 tokens on Arbitrum mainnet over the recent three months, further supporting the hypothesis that Arbitrum whales demand more diversity.

Introducing Proposal Arbitrum Summer (working name)

Arbitrum Summer aims to develop the ecosystem such that its most valuable users never have to leave the chain.

In principle Arbitrum Summer significantly differs from previous incentives schemes:

Arbitrum Summer Previous Incentive Schemes
Reward criteria Ex-post Ex-ante
Ecosystem strategy Top down Bottom up
Strategy Nurturing ecosystem & network effects Rewarding influential players
Primary focus Users Projects
Project participation Anyone from a given category Those with political influence
Discriminates against new projects No Yes
Beneficiary vertical DeFi, spot market Unfocused
Empirical results Untested Poor

Focus on spot market

Arbitrum’s governance strategy should mirror the proven business model of successful exchanges. Just as leading exchanges prioritize their highest-value users, Arbitrum must focus on providing two fundamental elements: deep liquidity and access to high-demand assets in the spot market.

While comprehensive functionality—including lending, leverage, and derivatives—remains important, data reveals the primacy of spot markets. Analysis of the top 1,000 Arbitrum traders shows that only 39 actively engage with borrowing protocols, underscoring where user priorities truly lie. This insight suggests a clear strategic sequence: establish robust spot markets first, as they form the foundation for broader ecosystem development.

This approach creates a natural progression: deep, efficient spot markets attract complementary DeFi protocols, which then build around this core liquidity. Like a successful exchange, Arbitrum’s growth should follow this tested path—starting with excellence in spot trading before expanding into more complex financial instruments.

Dynamic framework

The proposed distribution model shifts ARB token incentives from protocols to liquidity providers directly. Eligibility criteria for participating DEXs would be strictly defined: platforms must demonstrate sustained stability with a minimum TVL of $10M over six consecutive months. This approach ensures that only battle-tested protocols serve as venues for liquidity provision to avoid driving new capital into untested smart contracts.

Implementation Strategy

  1. Direct rewards to liquidity providers who supply specific assets to qualified DEX pool
  2. Initial focus on deepening liquidity for:
  • Stablecoin pairs
  • Established, high-volume tokens
  • Dynamic token inclusion based on emerging market demand
  • Consider for extra rewards if the in-demand tokens are paired with ARB in liquidity pools
  1. Automated reward adjustment via bonding curve mechanics:
  • Higher rewards during initial liquidity building phase
  • Gradual reduction as liquidity depth approaches target levels
  • Automatic tapering once key metrics (depth, volume, spreads) meet predetermined thresholds

To ensure data-driven decision making, partnership with a professional analytics platform is essential. Kaito’s analytics suite could provide valuable insights for identifying tokens that command significant market attention and trading volume. Additionally, this framework necessitates collaboration with a strategic bridging solution to facilitate seamless asset transfers, particularly for newly incentivized tokens.

Different from previous incentive programs, this incentive program distributes rewards directly to liquidity providers instead of projects/business entities. Direct distributing ARB rewards to end users from the Arbitrum Foundation may trigger fairness ,security and compliance concerns. To make the program fully trust-free, we propose to build a trust-free Continuous Liquidity Incentivization system powered by Brevis ZK Coprocessor. With this system, Arbitrum Foundation only needs to allocate a certain amount of ARB tokens to a reward distribution smart contract and an LP will be able to claim their rewards when they successfully verify a self-generated ZK Proof of its historical liquidity contribution score to Arbitrum. This allows the program to run in a fully decentralized, transparent and trust-free fashion. Other projects are adopting similar systems such as Usual Money’s continous protocol incentive system.

Target Boost stablecoin and short-tail asset liquidity as well as the liquidity of assets that trend on mindshare metrics
Cooperation requirements for successful execution Data analytics provider (e.g. Kaito) and bridge provider
Reward distribution Directly to LPs of eligible spot DEXs according to the specific weights of the dynamic framework
Eligible spot DEXs Consistently more than $10M TVL over a 6 month period

Fly-wheel effect

Through this framework, we aim to establish a flywheel effect:

  1. Arbitrum obtains the deepest liquidity and broad coverage would make a best product for the target customers, incentivizing them to increase exposure to the ecosystem.

  2. With increased liquidity, volume, and users in the Arbitrum ecosystem, it attracts more developers and new projects to build on Arbitrum, offering greater diversity natively.

  3. The deep liquidity in the spot market supports a strong foundation for other DeFi verticals.

  4. The successful ecosystem provides greater room and opportunity for experimentation and exploration of new verticals, propelling Arbitrum to new heights.

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Conclusion

We believe the proposal would be the key to fostering a strong DeFi ecosystem, attracting new users and projects to build on the ecosystem and subsequently motivating users to remain loyal to the chain thanks to the ample amount of resources and liquidity on Arbitrum.

As competition from other L2 intensifies, the Arbitrum community must adopt a new approach to maintain its dominant position. We believe that the past incentive programs have serious misalignments and misuse of resources that hinder newcomers from joining, and causing users to lose interest in Arbitrum.

To keep users within the Arbitrum ecosystem, we must focus on attracting the “right” liquidity, where a low-slippage environment can encourage user stickiness while driving the growth of the economic flywheel. This, in turn, strengthens the network effects that are crucial to defending Arbitrum’s dominance from any challenges from all the L2s.

APPENDIX

More detailed implementation plan

To enhance Arbitrum’s liquidity ecosystem and attract high-value assets, we propose the following structured approach:

  1. Monthly Epochs: Conduct incentive distribution on a monthly basis, enabling regular evaluation and adjustments.

  2. Dynamic Point Distribution: Allocate dynamic reward points across asset categories such as:

  • Stablecoins (objective: improve liquidity depth for Arbitrum whales)
  • Blue-chip assets (objective: improve liquidity depth for Arbitrum whales)
  • High-mindshare assets (objective: offer more diversity for Arbitrum users)

  1. Incentivize Arbitrum-Paired Liquidity: Offer additional reward multipliers for tokens paired with Arbitrum in liquidity pools, fostering ecosystem integration.

  2. High-Mindshare Asset Monitoring: Maintain a dashboard, managed by Kaito, to identify and prioritize high-mindshare assets that Arbitrum should target for each epoch.

  3. Bridge Support for Non-EVM Assets: Collaborate with cross-chain bridges like Wormhole/deBridge to onboard assets from non-EVM ecosystems swiftly. DAO could provide the requirements and let different cross-chain bridges that satisfy requirements bid (examples of requirements: at least X months of operating time without security incident, at least X amount of volume facilitated, ability to introduce new assets in less than 24 hours upon receiving the request from DAO, etc.)

  4. KPI-Based Reward Adjustments: At the end of each epoch:

  • Evaluate whether target KPIs for each category are met.
  • Adjust rewards accordingly:
    • Reduce the rewards in the next epoch for categories that achieve their target levels.
  • For existing assets (stables and blue chips), measure KPIs as the market share of traded volume pre- and post-incentive implementation. While not ideal, this metric provides a baseline for assessment.
  • For high-mindshare assets, KPI measurement could be based on their share of Arbitrum’s on-chain trading volume (e.g., [target asset volume / total Arbitrum volume]). If these target assets don’t capture X% of Arbitrum on-chain volume in the first few months of the incentive period, the incentive scheme would be classified as failed and recommendation to stop it shall be issued.
  1. Professional KPI Analysis and Formula Design: Engage professional service providers like Gauntlet to define precise KPI measurement methodologies and develop an optimal reward distribution formula.

Proposal integration requires support of several entities:

  • Cross-chain bridge (non-EVM support required)
  • Kaito analytics (they have industry standard for mindshare analytics that should drive the decision of what assets should be incentivized)
  • Brevis to implement the dynamic algorithms of distributing the rewards in a fair and verifiable fashion
  • Consulting a service provider that could develop exact formulas for measuring KPIs according to the above objectives
13 Likes
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fk yes

This is an incredible idea and will lead to much more dollar for dollar impact on ARB incentives. I wish Offchain Labs or a DAO council was more actively helping curate LPs.

I’m opposed to this as a requirement, I think it will have an unintended effect. we want to spin up new innovative protocols and start flywheels like the post calls for. The cold start of getting from 0 → $10m for a new protocol is very competitive right now. For those unaffiliated, most new protocols that succeed right now get the first $10m in TVL almost entirely added by VCs who are invested or LPs being directly bribed under the table to add short term liquidity. Obviously, neither of those demonstrates potential for real growth.

One of the single most impactful things we can do to massively boost TVL and spot trading is help new protocols break out of the cold start chicken-egg problem. This will attract a ton of talent and defi apps to the network who are currently being scalped every single day with extremely small incentives to deploy elsewhere.

For example, there are dozens of teams planning to deploy on unichain instead of arbitrum over $7.5k grants. thats basically nothing.

under these proposed requirements your example of an incentive failure, MUX (and several others) would qualify. But Dolomite (one of the most recent hugest successes, shoutout to the real builders and innovators over there) would not because it has <$5M tvl for over a year after launch.

Something to consider.

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Completely agree here, though I think it is a separate program. Each program should have one goal and the program that makes Arbitrum the leading defi hub by building deep liquidity, attracting high demand assets, and creating a flywheel of liquidity, trading volumen, user retention, and innovation - is not going to also be the one to crack cold start problems.

As long as this is a discussion of focus, I think the overall incentive program should have 3 parallel workstreams with different objectives. This program may be one, encouraging new protocols to get over the cold start problem is another. Maybe native issuance is another.

As long as we recognize that

  1. To acheive multiple goals, we need multiple focused workstreams
  2. The highest priority is bringing deep liquidity
  3. Data driven with humans in the loop on monthly epochs is likely best approach

then I’m all for this.

Thanks for the great analysis and insights @momir_iosg

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Thank you for your inputs @cupojoseph @DisruptionJoe

I believe that @cupojoseph may be right, we don’t have to discriminate against eligible spot DEXs by imposing extra requirements. After all the market can very well decide on this alone and less trusted protocols will naturally attract less liquidity.

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Thanks for the great proposal @momir_iosg!

Yes. I have to say that this is indeed an alarming fact.

Previously stellar projects have instead declined after receiving huge ARB incentives. Maybe there’s a bear market to blame, but the current incentives themselves do have huge problems. The arbitrum’s TVL is consistently the highest of all L2s, and we must recognize and build on this advantage, yet we seem to be going in the wrong direction.

Is there a more detailed proposal that can be advanced immediately? The bull market is already here, so I don’t think this question can be delayed.

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Just sharing some thoughts, because I’ve been thinking about this lately, too.

I agree Arbitrum needs to find the right focus or the right target audience. In the past there were attempts to make Arbitrum the go-to place for web3 gaming, but afaik this hasn’t been successful (correct me if I’m wrong, though).

Another option is to get more end users (aka retail), but in that case we’d need a successful dedicated mobile wallet, similar to what Solana has in Phantom and Moonshot. This is where Base is also trying to compete and it would seem quite an uphill battle for Arbitrum to have.

I think focusing on DeFi, as @momir_iosg wrote, is the right direction, especially targeting whales. I’d also suggest reaching out to tradfi institutions and neo-banking/fintech startups, although I understand this is easier said that done. But with the right incentive programs, it could work, especially because friendlier regulatory environment is coming and I’m sure tradfi/fintech interest in blockchain will grow significantly in 2025.

When we were discussing the events where Arbitrum should be present (with booths or side-events), @krst said that we should also think about attending non-crypto events. In the context of this topic, it would make sense to attend events for fintech startups, for example.

To sum up, one part of the puzzle is getting enough liquidity, which we should definitely do. However, attracting the right audience/partners (e.g. whales, fintech) may be the more challenging part.

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Thanks, @momir_iosg, for the proposal! This is very much aligned with current discussions and Gauntlet’s perspective. A few thoughts:

  • Spot liquidity as a Growth Catalyst: Assets need sufficient liquidity, targeting depth and slippage, to support liquidations, leverage, and oracles. Raising this capacity for blue chips and other high-volume assets is important. Arbitrum hasn’t directly targeted this in the past, but it’s certainly a realization within the DAO.
  • Focus on Assets vs Protocols: The key here is defining what blue-chip assets entail. I’ll touch on ETH below, but a key focus highlighted by DeFi protocols on Arbitrum (beyond ETH/Stables) has been RWAs and wrapped BTC (including restaked BTC). Related to this point are theoretical security and retention benefits of native-minting these assets to Arbitrum rather than bridging (where possible).
  • Pivoting from Protocol Grants: This has been discussed for a long time, and it’s safe to say the DAO-aligns. The true reckoning is what tactical approach makes sense for which use case. For users, project-agnostic validation of user actions makes sense, allowing users to choose their preferred trading venue. For strategies (i.e., bootstrapping levered ETH or RWA strategies), it’s important to consider integrations and align liquidity with liquidators and aggregators. Liquidity/Assets is slightly more difficult to be agnostic, but we believe these are generally solvable problems, especially with targeted KPIs and performance goals.
  • Rapid Bridging for High Mindshare Assets: This is an interesting point, and Arbitrum has missed speculative volume that has surged on other ecosystems. We’re curious about how this would be conducted operationally and the decision process regarding which assets to incentivize. The ROI must be clearly defined to ensure the strategy results in retention and the DAO does not overspend chasing transient volatility/volume.

Beyond spot liquidity, a potential phasing the DAO has discussed to support more sophisticated strategies is:

  1. Set depth and slippage targets for strategic asset liquidity on Arbitrum DEXes.
  2. Whitelist and incentivize lending market liquidity and utilization for strategic assets.
  3. Subsidize trading volume for strategic assets on Arbitrum protocols across DEX and Perpetual marketplaces.
  4. Subsidize Arbitrum-based yield and leverage-based strategies and products for strategic assets.

Exploring Beyond Stables and WETH

One takeaway from LTIPP was that 75% of ETH bridged to Arbitrum during the program returned to Mainnet after incentives ended. Presumably, this capital fled partly due to staking and ETH restaking farming. Notably, stablecoins and LRT/LST tokens had stronger retention on Arbitrum following LTIPP. Two insights from this are 1) DeFi yield (without incentives) may be insufficient to retain native ETH on Arbitrum, and 2) to maintain Arbitrum’s DeFi dominance, it must create a sufficient liquidity environment for LRT/LST tokens.

The LRT/LST ecosystem is approaching a critical growth stage, and chain abstraction solutions like Everclear are gaining traction, pointing toward a world where users will stake and re-stake ETH directly from L2s themselves. Some L2s, such as Blast, have gone so far as to stake assets in their native bridge directly.

A few trends we’ve heard discussed also align with this goal:

  • Chain Abstraction: Setting up a thriving DeFi ecosystem for blue-chip assets means the DAO must focus on robust DEX liquidity, healthy lend/borrow markets, yield-derivative products, levered ETH strategies, and perpetual strategies ensures that as chain abstraction accelerates, Arbitrum is the most attract venue to earn yield and trade onchain.
  • Growth Management Committee (GMC): The GMC proposes an RFP process seeking protocol partnerships by deploying the DAO’s ETH, which must target the use of ETH itself or ETH-pegged assets. This program has the potential to attract partners willing to match DAO incentives through its targeted LST/LRT incentive programs, help seed a baseline of POL to provide sophisticated LP depth that supports aforementioned DeFi vaults and strategies, and create a competitive environment for LST/LRT dominance on Arbitrum.
  • Arbitrum-based Oracles: The Opportunity for ETH alignment transcends beyond Arbitrum goals, allowing for additional ecosystem-wide benefits only Arbitrum can provide. At DevCon, perps teams pointed out that ETH/wstETH and BTC onchain oracles can rely on slower mainnet pools. With sufficient depth on Arbitrum, onchain oracles might benefit from Arbitrum’s settlement, providing data feeds fast enough to enable new use cases.

Conclusion
Whether these points are integrated into the above proposal or repurposed into separate and complementary proposals, we look forward to discussing with IOSG and welcoming Momir and Henry into the ecosystem.

There are many routes to more capital-efficient and targeted incentive distribution, with a number of service providers, protocols, tools, and solutions that, with varying degrees of specialization and competency, could likely do the job. That said, extra diligence should be given toward the tactics, capital efficiency, and KPIs the program intends to achieve.

3 Likes
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Thank you for sharing your insights on the proposal. I agree that a critical pivot is essential, especially given the competitive landscape with the chains you mentioned (Base/SOL/BSC). Their strong ties to major CEXs and superior UI/UX are clear areas where Arbitrum can improve its offerings.

Incentivizing Arbitrum’s liquidity ecosystem could indeed drive more adoption, but it’s a complex challenge with no easy solutions. I believe adding utility to the ARB token, as already being explored through the staking proposal, will also be a big step forward.

Daniel’s research proposal on why people choose Arbitrum versus other chains is incredibly timely. The findings will give us some solid insights to help fine-tune our strategy. Personally, I’d also love to see more Arbitrum content making waves on social media to boost awareness and engagement.

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Hi. Your proposal is ambitious and necessary, and it really addresses some key points that can benefit the Arbitrum community. However, I’d like to offer a perspective that could strengthen it even further: the strategic communication component that would complement the technical and economic aspects of “Arbitrum Summer.”

One of the biggest challenges Arbitrum faces is the lack of a structured and coherent communication strategy to solidify its identity within the ecosystem. This problem not only affects user retention but also makes it harder to attract new projects and talent. In a market where perception is just as important as technical capabilities, communication plays a central role in ensuring that the proposed advancements translate into trust and loyalty toward the network.

To maximize the impact of this proposal, I’d suggest integrating a parallel focus on well-designed communication strategies. For example:

  • Proactive visibility strategies: Beyond economic incentives, it’s crucial for “Arbitrum Summer” to have a clear narrative that communicates not only the technical benefits but also the long-term value and vision of the ecosystem. This can be achieved through targeted campaigns, participation in relevant forums and events, and collaborations with influential figures in the space.
  • Strategic positioning: Arbitrum’s identity should focus on clear differentiators. Right now, competitors like Base or Solana dominate specific narrative spaces: Base as the “easy entry point” thanks to its connection with Coinbase, and Solana as a symbol of high performance and speed. Without a similar message that resonates, even the best technical advancements can go unnoticed. My question here is: How could this communication approach be integrated to further enhance the initiatives you propose?
  • Precise targeting: Not all players in the DeFi ecosystem have the same priorities. A tailored strategy for different audiences — developers, retail users, and institutions — not only ensures that the message is more effective but also strengthens the network’s value proposition.

In this sense, I see “Arbitrum Summer” as a unique opportunity to address not just technical and economic issues, but also to lay the groundwork for a strategic repositioning of the network. In my opinion, incorporating this approach could have a direct impact on future decision-making, as it would strengthen the relationship between the community, developers, and users.

Do you think these ideas could be integrated complementarily into the proposal without diverting from its main focus? If you need further details on how to implement these points, I’d be available to collaborate.

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Thank you for detailed feedback! @gauntlet

When it comes to blue chips, it might be best to focus on ETH and stables in the first version. As for everything else, rather than trying to pick and choose the right categories (I’m sure everyone would have different opinion on this) we could have a neutral framework and listen to the market:
I) in each epoch look for top 5 trading assets on Ethereum L1
II) then, analyze the key metrics: A) liquidity depth & slippage differentials between Ethereum and Arbitrum; B) average trading size of Arbitrum whales for given asset on Ethereum vs on Arbitrum
III) then, update the rewards in the next epoch with the objective of attracting these assets until we close the gap in metrics discussed in step II)

Kaito has industry leading mindshare analytics. My suggestion is that the DAO works with Kaito in maintaining high-mindshare asset dashboard for the purpose of this incentive proposal. Each epoch the reward distribution could be updated to reflect the change in market environment.

In order to support timely solution DAO would have to work with an external bridge provider, thus there would be additional security risk that would have to be assumed in order for this to be possible. To what extent could different bridging solutions offer timely bridge for a specified asset is still something that requires more diligence.

" * For high-mindshare assets, KPI measurement could be based on their share of Arbitrum’s on-chain trading volume (e.g., [target asset volume / total Arbitrum volume]). If these target assets don’t capture X% of Arbitrum on-chain volume in the first few months of the incentive period, the incentive scheme would be classified as failed and recommendation to stop it shall be issued."

I think that spot market deserves disproportionally large attention because it is the foundation for everything else:
“While comprehensive functionality—including lending, leverage, and derivatives—remains important, data reveals the primacy of spot markets. Analysis of the top 1,000 Arbitrum traders shows that only 39 actively engage with borrowing protocols, underscoring where user priorities truly lie. This insight suggests a clear strategic sequence: establish robust spot markets first, as they form the foundation for broader ecosystem development.”

I believe that the DAO could be more effective should it choose to concentrate its effort on one key thing.

True. Cross-chain swap solutions (e.g. 1inch’s new product) are becoming very good and this is new risk/opportunity for each chain/L2. Having the deepest liquidity becomes critical.

These are interesting initiatives but beyond the scope of this proposal so I won’t comment further.

Thanks again, I would love to work further with your team in pushing this proposal to a more refined version that could be something DAO would be able to vote on. My DMs are open in case you want to chat.

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Thank you @Larva;

We have shared everything we have at the moment. I agree that timing is critical. We have scheduled meetings with several Arbitrum stakeholders next week and plan to iterate on this proposal as we gather additional feedback.

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Thanks for your input @TempeTechie

I have strong opinions on this but didn’t want to share here to avoid diluting the attention from this proposal.

This extends beyond the scope of our current proposal. Measuring ROI for such activities would be challenging. I believe we should prioritize establishing Arbitrum’s dominance in the core crypto market first. Once Arbitrum has cemented its position as the preferred L2 solution for crypto developers, users, and institutions, we can then explore opportunities beyond the traditional crypto ecosystem.

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Alright. Looking forward to the coming meetings. You know, as a full proposal, we need more details.

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Thanks for your input. These points need more thought, as they touch on deeper issues that no single proposal can fix. The challenge is that OffChain Labs’ neutral stance on DAO matters has left a leadership gap - and Arbitrum DAO is too young to operate without clear leadership and structure. While this proposal can’t solve those fundamental issues, it does aim to get Arbitrum back to basics: focusing on DeFi and making our most valuable users happy.

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If this wants to be achieved then there is the need to boost lending markets like Aave to attract liquidity in a longterm LM campaign together with partner protocols like Ethena.
Currently people are heavily borrowing and depositing on Ethereum despite the high gas costs.

Arbitrums goal should be to get those bigger protcols on Arbitrum and then help boost smaller ones but not with grants, but either by depositing liquidity into those that seem valuable. If they aren’t valuable the DAO can move on and deposit into another protocol boostrapping liquidity from day one. Which is a better approach then simply handing out grants and hoping that the developers aren’t leaving over time.

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Thanks for sharing your thoughts in here, this is a good read.

As others may have already pointed out, Arbitrum DAO is finishing a review of the previous incentives programs, exactly to act upon some of the findings you highlighted here. Your suggestions are a good extra material for the discussion.

I invite you to add more data into your analysis, building upon the extensive research being conducted, as the one I’m pasting in here.

All in all, the time is ripe for we, as DAO, to lay the foundations of a new incentives program.

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17

I hope you are able to participate on the weekly Incentive program call this Wednesday at 5pm UTC. It is on the governance calendar. DM for details if needed.

18

Interesting analysis and very detailed.

However, I lack specifics in the actions of the Arbitrum. You say that liquidity needs to be increased by paying incentives to liquidity providers.

But it seems to me that this will not solve the problems, since the issue is in specific projects. If a project gives a good percentage for staking, all liquidity will go there and no incentives will help the Arbitrum - fight against all projects on other chains - no ARB will be enough to cover the costs.

It seems to me that the basis for attracting liquidity is still projects. If there are good projects, the user will come. If there are no good projects, the users will have nothing to do and they will go elsewhere.

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19

Hi @momir_iosg, thanks for the proposal!

I have a lot of thoughts going through my mind. I do think you raise a relevant topic, as competition is increasing and ARB is losing ground. I totally agree with your analysis that incentive programs only work for a specific period of time and need to be rethought. I also agree that ARB should be at the center of DeFi, and we should focus more on this.

However, the proposed solution seems to lack substance and clarity. Yes, better liquidity helps, but in my opinion, users will go where better apps are built, where innovation is happening, and where the experience is better.

I look forward to hearing a lot more about this on the call!

20

Thanks for the proposal! I have to admit, you’re right that we’ve been expecting projects with higher rewards to perform better than those with less. But the fact is not :slightly_smiling_face:

It seems that GMX and MUX lose not due to incentives, but simply due to stronger competition like Hyperliquid that benefited from Airdrop program.

Perps/spot markets are just too competitive and leaders constantly change.

Still, I see the current reward system has its short-term impact and is easier to implement and monitor.

However, if the new plan is adopted, it will definitely attract high-value assets into the Arbitrum ecosystem, boosting liquidity and creating a more sustainable market.

As a LP, I much prefer direct rewards to users vs grants to protocols that might misuse the funds.

Overall, I think this is a smart strategy to strengthen liquidity and stability for Arbitrum ecosystem.

I shared my thoughts on this topic on X. Feel free to check them out here: x.com

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