Kwenta x Perennial: Arbitrum Onboarding Incentives

Kwenta x Perennial: Arbitrum Onboarding Incentives

Authors (Telegram):

Perennial: Jacob (@JacobPPhillips), AJ (@eth_aj)
Kwenta: Andotlas (@Andotlas), Burt (@BurtRock69)

Abstract

Kwenta, one of the biggest DeFi apps in the Optimism ecosystem, is coming to Arbitrum, built on top of Perennial V2, an Arbitrum-native protocol. Kwenta & Perennial present this joint proposal to request 1.5M ARB over 3 months (4.5M total) to fund targeted onboarding incentives to bring Kwenta users over to Arbitrum.

Introduction

Kwenta is launching on Arbitrum — powered by Perennial.

Kwenta is a leading Perpetuals exchange, currently on Optimism and Base.

With a recent expansion into aggregation, Perennial will become Kwenta’s first non-Synthetix liquidity source, bringing new users to the Arbitrum ecosystem. Via specialization in best-in-class UX, Kwenta optimizes the onchain perps trading experience, prioritizing the trader experience above all else. Kwenta aims to become the defacto venue for trading perps onchain across DeFi.

The Kwenta DAO is operated by a diverse collection of Core Contributors primarily composed of Synthetix OGs and resident pro-traders. Voted into existence by the Synthetix DAO and fuelled via a community-led initiative, Kwenta’s roots are fully decentralized with notable community members including Framework and the founding Synthetix members.

Roadmap highlights:

  • Launch perpetual futures on Base
  • Early trials of onchain Quanto perps
  • UX optimization including web2 login and improved cross-chain navigation

Perennial is a leading Perpetuals primitive, currently exclusively on Arbitrum.

Perennial is: 1) An ecosystem-first primitive: Perennial is infrastructure, with economics to support a whole suite of trading apps, oracles, and higher-level protocols built on top. It’s modular throughout the stack — this allows Perennial to support customized (one day, permissionless) markets for any price feed (NFTs, RWAs, Power Perps, exotics). And It’s hyper-efficient — $1M in TVL can support $5M-$10M in OI.

The Perennial team is a group of DeFi natives from Coinbase, Polychain, Gearbox, Ajna, Tracer DAO, and more. Its founders started an early smart contract wallet based on account abstraction that was acquired by Coinbase, and the Perennial team placed 3rd at the Arbitrum Gov Hack. Perennial backers include Polychain, Variant, Archetype, Coinbase, Robot, and more.

Roadmap highlights:

  • NFT markets (RWAs, real estate, and more soon)
  • Leveraged (3-5x) delta-neutral Vaults
  • Perennial Intent layer :shushing_face:

Kwenta & Perennial Partnership

In January, Perennial put forth a proposal to the Kwenta DAO to expand to Arbitrum by building on Perennial infrastructure. This vote successfully passed the Kwenta Council in February, and the integration is currently underway.

Best of all — This all happened organically. Kwenta sought out an Arbitrum expansion & partnered with an Arbiturm-native team without promises of big incentives or any backroom deals — this is a testament to Kwenta’s genuine belief & commitment to the ecosystem. Perennial V2, native to Arbitrum & bootstrapped off a small STIP grant, helped facilitate the onboarding of Kwenta to the Arbitrum ecosystem, perhaps one of the biggest outcomes of the entire STIP program.

This is one of the (if not the) biggest wins for the Arbitrum DeFi ecosystem! Kwenta is the largest source of trader activity in the Optimism ecosystem, and one of the largest in all of DeFi.

The numbers say it all:

  • 30 day avg. daily volume: $130M
    • 30-day 24/hr high: $556M (March 5, 2024)
  • $44B volume in the past 12 months
  • Consistent $100M-$200M Open Interest (without incentives)
    • Currently $127M (as of March 23, 2024)

Source: Kwenta

Arbitrum has a HUGE (and urgent) opportunity to onboard these traders to the Arbitrum ecosystem.

The Proposal

Kwenta & Perennial propose allocating 1.5M ARB/month over the course of 3 months, for a total of 4.5M ARB, to facilitate onboarding Kwenta traders to Arbitrum.

Goal: To onboard new users to Kwenta on Arbitrum. This includes existing Kwenta users on Optimism, sidelined Kwenta community members who have demanded to trade on Arbitrum, and CEX traders (or new DeFi) traders.

Kwenta & Perennial will collaborate to distribute the ARB. Both protocols have experience with incentive mechanism designs (OP grants & STIP). As a first principle, Kwenta & Perennial will remain nimble in distribution methods. We will use off-chain distribution to maximize flexibility, and we will experiment with different forms of onboarding incentives and adjust based on what’s working or isn’t.

Kwenta & Perennial will collect on- & off-chain data to distribute rewards to users in appropriate cadences.
Some ways we’ll do this:

  • Targeted onboarding incentives for existing Kwenta users on Optimism/Base to trade on Arbitrum
    • Small one-time bonuses to incentivize users to move over to Arbitrum
    • Mid-size ARB bonuses for existing users who meet certain usage (volume and/or OI) thresholds on Arbitrum
    • Large reward multipliers for consistent users who move over to Arbitrum to align & lock in these users longer-term.
    • [Non-kwenta users] One-off or customized onboarding incentives to other key high-value users identified by Perennial & Kwenta (any of these will be accompanied by transparent reporting on parties who receive these incentives)
  • Fee rebates to onboard traders to Kwenta
    • Capped at total fees paid to ensure sybil resistance
    • Reward vesting and/or loyalty bonuses that give bigger rebates to more committed traders
  • Liquidity bootstrapping for markets demanded by Kwenta traders
    • Liquidity boosts to major, high-demand markets (BTC/ETH)
    • Temporary liquidity incentives to bootstrap new markets (Long-tail cryptos)
    • Ongoing liquidity incentives for novel markets (NFTs, Power Perps, etc.)
  • Trading competitions, probabilistic rewards, and other experiments

To encourage retention, Kwenta & Perennial will experiment with these strategies when appropriate:

  1. Onboarding incentives — one-time or upfront compensation to help users overcome switching costs, with the goal of conversion to recurring users. For this initial grant we want to focus rewards on this category, as we see these as having the potential to be the highest ROI. Kwenta already has a large, active user base, so these incentives can be very narrowly targeted to users to move the needle on that which drives traders’ decision to trade on Arbitrum vs Optimism/Base.
  2. Loyalty-based incentives — bonuses in rewards that incentivize recurring usage.
  3. Rewards vesting — This could come in 2 forms: 1) rewards with a vesting component to encourage Arbitrum ecosystem alignment; 2) rewards given to users that vest conditional on future activity

Why this is structured as a one-off proposal to the DAO:

While there are existing grant programs (ex. STIP.b & LTIPP pilot) that we believe we would have been strong candidates for, Kwenta x Perennial are not eligible to submit this proposal to any active programs (Kwenta didn’t receive an initial STIP grant or backfill, and the deployment timeline is slightly too late to be included in LTIPP pilot, per the existing rules).

However, we feel strongly that the lack of a suitable existing DAO incentives program should not bar or delay Kwenta x Perennial from receiving a grant of justifiable size, given the magnitude of the opportunity to onboard users to the Arbitrum ecosystem — thus, we turn to the DAO for approval.

Kwenta, having a huge existing user base on Optimism, is perhaps the largest DeFi project to organically come to Arbitrum, and the incentive mechanisms discussed in this proposal — namely, direct onboarding incentives to users of Arbitrum’s biggest competitor — is both one-off in nature & a hyper-efficient method of distributing ARB, both unique offerings of this Kwenta x Perennial proposal.

The ask here is in the same spirit as the LTIPP pilot & STIP.b programs, which offer short-term incentives on aligned timelines with the hope of a unification of DAO incentive programs through a single long-term incentives program later this summer. We intend to align our grant timeline with that of other programs. This ask here is for a short-term grant that will act as a bridge to a future application included in a DAO-run program (ex. The start of an LTIPP (after the pilot) in July).

Accountability

  • Kwenta & Perennial will arrange similar oversight to the STIP & LTIPP alpha programs, including an oversight committee that will perform necessary onboarding tasks (ex. KYC), keep the partnership accountable, and have the authority to pause the incentives.
    • We would even welcome this being tacked on as part of LTIPP (or another DAO grants program), such that it would be subject to the same requirements.
  • ARB grant will begin on the day Kwenta goes live on Arbitrum, powered by Perennial (target May 2024).
  • ARB Grant will vest linearly over the course of the grant — and the stream can be stopped at any time by the oversight committee. Any unused funds at the end of the 3 month grant will be returned to the Arbitrum DAO.
  • Kwenta & Perennial will provide biweekly updates.
  • Within 2 weeks of the end of the 3 months grant, Kwenta & Perennial will provide an in-depth analysis of how the program has gone, with detailed analysis & data showing the results.
  • Kwenta & Perennial will provide a stats page to track activity on both protocols.

Grant Size Justification

Qualitatively:

  • Kwenta would be the #2 on-chain derivatives protocol by volume & OI on ARB (some days, even #1)
  • Onboarding Kwenta users to Arbitrum brings net-new flow to the ecosystem — from one of Arbitrum’s biggest competitors.
  • This sets a strong ecosystem precedent of supporting projects that organically join the ARB ecosystem, hopefully helping to support the next wave of project onboarding.
  • Kwenta x Perennial are Arbitrum aligned & not here just because of incentives. Perennial has been live on Arbitrum since Feb 2023, and Perennial V2 is native & exclusive to Arbitrum. Kwenta sought out an Arbitrum deployment in response to genuine interest & user demand — not in response to an incentive program.
  • An opportunity to expose Arbitrum users to a tier-1 interface frequently praised as the best perps experience in DeFi. The best products will deliver outsized returns for the Arbitrum ecosystem, and Kwenta is, without a doubt, a category leader.

Quantitatively:

Using STIP rewards as a baseline (in ARB):

Protocol ARB per Month Total ARB
GMX 4.0M 12.0M
MUX 2.0M 6.0M
Gains 1.5M 4.5M
Kwenta x Perennial 1.5M 4.5M

Kwenta is doing volume & OI numbers that are well above almost every on-chain derivatives protocol in the Arbitrum ecosystem.

Kwenta x Perennial incentives example:

Onboarding Incentives:

Target 500-1000 high-value traders at an average onboarding cost of $1-2K/month (higher for big traders) = ~$1,000,000 / month

(# of traders & cost of onboarding may vary — whales will cost more to onboard but will also be higher-value long-term users)

Fee rebates:

Target $100,000,000 daily volume at 0.04% fees = $1,200,000 / month

Liquidity bootstrapping:

Target average of $50,000,000 in liquidity * 10.00% APY = $416,667 / month

(here, we will target more efficient liquidity providers – i.e. those who are more capital efficient, and thus, have a lower cost of capital. Because LPs are able to use leverage to LP in Perennial, a 10% APY + in-protocol yield can easily stack into the 30-50%+ APY range with respect to underlying collateral)

Total / Month:

$1,000,000 + $1,200,000 + $416,667 = ~$2.6M USD

Timeline

Kwenta & Perennial are currently collaborating on integrating Kwenta on Arbitrum, powered by Perennial.
Targeted launch date: May 2024

Additional Info

Security:

Perennial Audits & Bug Bounty Info

Kwenta Audits

Links:

Kwenta DAO Vote

Kwenta Announcement

Perennial Announcement

Kwenta Stats Page

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[Reserving 1st comment]

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Some first glance questions/comments.

  • Does Kwenta plan on integrating to Synthetix once synthetix moves over as another liquidity layer? I ask because synthetix has requested a similar grant size and that is what perennial will be competing with, and want to ensure kwenta isnt double dipping. Maybe one way to capture this is fee sharing for any integrations post perennial, ie 35% would be split 20% kwenta, 15% arbdao.
  • is the KIP conditional? i see it in draft state and not approved, or is it just lagging behind the snapshot vote?
  • How can we ensure an arbitrum native project like Perennial can be best suited to capture the upside of a large scale initiative like this.
    • some initial ideas maybe being the revenue split to other kwenta integrations, can we potentially get some market maker commitments or liq providers agreements to ensure success at launch? Maybe this is a good use case to onboard some market makers to integrate into the kwenta/perennial sdk? Ideas welcome, just some food for thought.
  • I like the idea of tracking wallets that migrate capital over from other chains as a success metric.
  • Has Kwenta committed to launching their token on Arbitrum as they have on Base so that other ecosystem projects can also benefit (I am thinking things like DEX liquidity for Ramses/Camelot, etc).
  • It is difficult for me to get behind something like this without some sort of assurances that the focus of kwenta will be arbitrum, knowing that both kwenta and its investors/builders/community have been very loyal to competitor ecosystems for the last few years, then when the competitor ecosystems spin up incentives for this sector on their chain for them to put arbitrum down like a toy they no longer want to play with.
    • with that said, I understand the meta, and the client acquisition costs in this space are hefty, and am confident that once they move over to arbitrum they will be hooked.
  • a lot of those metrics afaik are conditional based on the synthetix liquidity layer on optimism, the numbers in base don’t really compare (understood its early) so for the justification section may want to caveat the statements.

So the plan is to launch this product on Base, then deploy on Arbitrum? Can you disclose any Coinbase incentives that are going to building this joint venture? Or is the base deployment built solely on synthetix? Or is this more of a recently deployed rather than a roadmap per se?

Anywho, will have a think in the coming days to see if anything else comes to mind, don’t take my comments as discouraging, the perennial team knows I am a supporter of their work and dedication to arbitrum, I just want to make sure incentives are aligned, and if the DAO was to fund the initiative, how can we make sure its a great economic investment into the ecosystem. Happy to help where I can as well, you know where to find me.

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@andotlas can speak to this from the Kwenta side.

On the Perennial side, Since we’ll be distributing these rewards together, we’d obviously make sure that the funds are used exclusively to benefit Perennial (and the Arbitrum ecosystem), so no double dipping would occur there.

Also worth noting that Kwenta’s plan all along has been to build an integration to Perennial on Arbitrum. This has been in the works for some time. They’ve had the opportunity to build on other protocols for some time and instead chose to integrate with Perennial V2, an Arbitrum-native protocol. Synthetix opportunistically making an incentive proposal is independent of Kwenta. So it’s really 2 different proposals to bootstrap 2 different infrastructure layers, one historically Optimism loyal & one Arbitrum native.

The KIP has been voted on and dev work has started. Believe this is just a lag behind the snapshot vote.

See here: Snapshot

This is a great question, and really appreciate the sentiment behind this. This applies to both this proposal and many other grants the Arbitrum DAO is considering.

How can the DAO set up Arbitrum-aligned projects (especially native projects, but also non-native) to have outsized success? We would definitely appreciate the DAO & community’s support. In the context of these big incentive programs, it would be really cool for the DAO to think of this a bit like how a VC fund helps its port co’s — basically lining up key support infrastructure to help ensure effectiveness of the grants/investments. This would include things like lining up key ecosystem partners (market makers, infrastructure providers, users, etc) to help grease the wheels on these grants.

One idea: when Avalanche & Fantom & many other ecosystems did big incentive programs, it was treated & marketed as a major ecosystem wide event, where the foundation & other key parties in the ecosystem pushed a unified message to onboard users. There was definitely some spirit of the in STIP, but I think it could have been much more significant.

For Perennial specifically, ways the DAO could help Perennial/Arbitrum capture this opportunity:

1 — Structure incentives with this goal in mind — As a starter, create incentives that work in favor of Perennial & Arbitrum-native projects, not against them. Or at the least, give us an equal playing field. Ex. equal/better grant treatment for Perennial relative to big competitors from other ecosystems getting grants from Arbitrum DAO incentive programs.

2 — Liquidity support — Create central resources for projects to allow them to quickly scale liquidity. As DK mentioned, grant leads and/or the broader ecosystem could rally together to create some central resources to make sure that teams are able to quickly act to scale liquidity.

We feel confident Perennial is already well positioned to scale well to match the demand from Kwenta traders. Perennial is built with native LP leverage, requiring only a fraction of the TVL of other protocols (capital efficiency also lowers incentives costs). And we are in the process of lining up LPs who have the ability to scale liquidity significantly if needed.

3 — Incentive mechanism design critique & support — I think this is a big one for this proposal. Perennial & Kwenta have a very ambitious goal with ecosystem-wide benefits: bring users over from other chains to trade on Arbitrum-native deployments. We think we’re really well positioned to do so, since we’ll be able to offer direct onboarding incentives served to daily users within the UI + create easy onboarding flows to Arbitrum + structure conditional rewards and ARB vesting to lock users in. However, some of this will require experimentation, especially given the scale of this opportunity, so additional mindshare on creative ways to ensure users come to ARB & stay would be much appreciated. Additionally, we’d love to partner with projects who can help with this. For example, the more targeted the incentives (and the prettier the onboarding flow), the more manual effort / dev time it takes to structure this, so to help Perennial & other projects be successful, the DAO/grants programs could work with teams to build effective incentives & onboarding infrastructure. Boost, Galxe, Socket are all examples of projects that should probably play a big role in this effort as well (and maybe @gauntlet & @BlockworksResearch on the incentive mechanism design side).

4— See the question below for two other thoughts on how the DAO can approach ensuring success for arbitrum projects (“Trust but verify”…)

Agreed here. Will add this as a KPI in the prop.

Will let Kwenta speak to this.

I think this is a very fair point. Here’s how I think the DAO should position itself with regard to onboarding projects from other ecosystems.

1 — Trust but Verify — The DAO should be critical of long-term intentions of projects coming to Arbitrum & demand that their actions — not just words — show commitment to the ecosystem. How a project will do this should probably be part of all grant applications. I agree that broader meta inherently requires some degree of trusting upfront, and I think this is why all grants in the ARB ecosystem have been structured as short-term up front, with longer-term grants to follow… almost like a trial period for incentives. DK outlined a couple things he would like to see from Kwenta to show some commitment (launch $kwenta on Arbitrum), and I think we could work with Kwenta to outline a deeper plan for Arbitrum integration.

From Perennial’s perspective, we feel strongly that Kwenta has shown commitment upfront. Kwenta made the choice to come to Arbitrum well before any incentive programs existed & they chose to partner with an ARB-native project — this was a fundamental decision for them in spite of some risks. Kwenta recognizes the size of the opportunity to serve Arbitrum’s userbase.

Compare this to all the projects whose decision to come to Arbitrum was primarily motivated by the LTIPP grants — especially those who deployed a day or two before the deadline. How committed will they be to Arbitrum long-term?

2 — Arbitrum user integration — From the Arbitrum DAOs perspective, another way to look at this is that through these onboarding grants, Arbitrum has an opportunity to retain projects & users from other chains. So how does the ARB DAO help create the right conditions such that projects are flourishing on Arbitrum & not tempted to leave once other ecosystem incentives pop up.

With respect to retaining users, a project that brings over a ton of users ramps up the top of the funnel for Arbitrum but cannot be solely responsible for conversion to long-term users. Projects have a responsibility to make effort towards this with how they structure their incentives; however, there are likely things the DAO can & should also be doing to support. This is another area worth some discussion. One route would be to bake this into the incentive program requirements — i.e. Requiring some form of ARB vesting for users, mandating some cross ecosystem incentives (or multiplier for users using other arb protocols). Or maybe this even means the ARB DAO runs its own incentive program focused on user retention & alignment in tandem.

Yes, that is correct. Kwenta’s Optimism deployment basically allows for uncapped usage. My understanding from Kwenta is that the base instance has had severely limiting caps in place for security reasons since SNX V3 is a brand new protocol. This has been a pain point for them. Perennial’s V2 has been live on mainnet since October, stress tested with STIP, and is set up to scale imminently.

Will let Kwenta speak to this.

100%, appreciate your work on this. Very constructive feedback.

5 Likes

Kwenta has been very Optimism native, and I’m not sure strategically this gives Arbitrum much value considering the heavy amount of perpetual platforms already on Arbitrum.

I would rather see Kwenta come to the ecosystem first, prove their value and commitment, and then ask for a grant for innovative purposes.

Nothing against Kwenta, but they have been Optimism stalwarts for a very very long time, and I don’t think it makes much sense to incentivize competition against the native ecosystem with 1.5m ARB while they retain much of their ecosystem across Base, Optimism.

2 Likes

Hey, thanks for your questions! Here are a few answers, with as much detail as I can provide.

Does Kwenta plan on integrating to Synthetix?

Kwenta plans to pursue perps aggregation as a long term strategy, so this could include them, other liquidity sources, our own liquidity, etc. Likewise, there’s no exclusivity agreement between Kwenta and Synthetix, so if Synthetix comes to Arbitrum they’ll be distributing incentives agnostically to anyone who integrates.

Given the fact that Synthetix would likely be integrated with Arbitrum native projects like Rage Trade, Kain’s project Infinex, etc., it seems odd that Kwenta would be explicitly excluded due to partnering with Perennial as part of our larger vision.

…want to ensure kwenta isnt double dipping.

I have no explicit knowledge of what Synthetix is asking for, but we wouldn’t be offering traders any opportunity to simultaneously earn both incentives. You’d only qualify for these incentives as part of our Perennial partnership for volume done through Perennial liquidity.

This is actually more conservative than approaches we saw with other aggregators in the past:

I’m not aware if there are any issues with the MUX distribution, but in this case an aggregator actually put their own rewards on top of rewards delivered by their other integrators. In our case, we’re not asking for any additional rewards on top for other integrations, but we’re definitely making a commitment here to support Perennial in the distribution of these rewards, specifically for use of the Perennial integration.

In terms of future non-Perennial integrations, we’d just expect the same treatment other aggregators and integrators have gotten in terms of the opportunity to distribute rewards from other partners. Although, to be clear, I don’t know what Synthetix is asking for, so I can’t really comment on their proposal specifically.

is the KIP conditional?

It’s officially passed, no conditions. Just lagging behind snapshot (Although good to know – I think we currently don’t have a CC assigned to gov page maintenance and need to fill that gap ASAP).

How can we ensure an arbitrum native project like Perennial can be best suited to capture the upside of a large scale initiative like this.

The very obvious answer is that, as far as I understand it, interacting with Perennial would be the only way to earn these incentives through Kwenta. This proposal is explicitly directed toward this specific integration.

We chose to partner with Perennial in our Arbitrum expansion because we believe they’re the best positioned to deliver our users a very high quality AMM perps experience, deep liquidity, and a wide variety of markets, from both the trading and LP side. Kwenta has an existing base of loyal, high value users, and we’re simply trying to deliver them the best product. We believe this means delivering them a perennial integration.

It is difficult for me to get behind something like this without some sort of assurances that the focus of kwenta will be arbitrum

I’m personally a huge fan fo the Arbitrum ecosystem, and while I’m sure there are a wide variety of views within our community, the Arbitrum ecosystem is a great place to explore aggregation. I 100% understand
the hesitancy to reward incentive mercenaries, but I think if you believe Arbitrum is the best place for decentralized perps, then our aggregation goals would be most at home here.

This is ultimately the call of the KWENTA stakers to figure out the best strategic direction for the DAO, and aggregation is certainly a bit beyond the scope of this particular ask – we’re currently hoping to focus on maximizing our Perennial integration and we don’t have anyone working on, nor any proposals to begin integrating another partner on Arbitrum – but I’m confident we’ll be focused on the best chain to continue work on our aggregation interface.

Can you disclose any Coinbase incentives that are going to building this joint venture? Or is the base deployment built solely on synthetix?

Solely on Synthetix at this time, and I’m not aware of any incentives provided by Coinbase yet.

Has Kwenta committed to launching their token on Arbitrum

Not yet, but I have a proposal coming soon which will suggest an approach to a multichain token. I can’t really get ahead of governance on this, but the main hurdle is that we have no current solution for crosschain staking. If my solution is approved, then I’d be happy to propose taking our token to Arbitrum and see what governance thinks.

My own thoughs

I tried to focus here on answering your questions and providing some detail which might be more specifically related to Kwenta’s larger goals beyond just the Kwenta x Perennial integration.

I think one of the largest concerns I’d like to get ahead of is our relationship with Synthetix and Optimism. Personally, i’ve been involved in Synthetix governance, both as a bagholder and as a representative from Kwenta, and I’m a huge fan of what they do. Part of the reason I’m so excited to work with Perennial is because they’ve gone down a very similar path in terms of AMM design, which I believe represent the best approaches for capital efficiency and risk management.

Despite being a fanboy, however, I want to make it clear that Kwenta is an independent project. This means that Synthetix is not considering our priorities when it comes to deployments, and we’re not directing their grant applications or incentive spends. They’re also actively seeking other integrators, and have partnered with about a dozen different integrators including a competing frontend from their founder, and an internally produced SDK. Here’s why this is important: if Kwenta is still absolutely dominating Synthetix volume after all this, it’s because we’re delivering a superior experience.

Likewise, Optimism has supported us in several ways, but our loyalty lies with our users and our stakers. Our goal is to deliver the best experience, which includes expanding our liquidity offerings. Arbitrum has priortized DeFi derivatives, and this is why Kwenta is excited to work in the ecosystem. The same quality and commitment which led to us dominating perps on Optimism is what we intend to bring to Arbitrum, and specifically this integration with Perennial. I believe if Arbitrum DAO welcomes our users, and the Arbitrum ecosystem proves the best place to build, then our users and our contributors would continue to focus where they’re most welcome.

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In the interest of disclosure, I typed in the above message that I wasn’t aware of any incentives from Coinbase.

This was true at the time I wrote it, however literally while I was typing this out, Synthetix publicly released a proposal to distribute USDC incentives on Base. Obviously, I am now aware, along with everyone else.

4 Likes

The strategic value is bringing in new users via Kwenta which has proven volume and a consistently active user base without any incentives. This proposal is an obvious opportunity to capture exposure to the Base and Optimism perps user ecosystem that we’ve developed in isolation from Arbitrum.

The value here is new high-value users for Arbitrum in a format that supports a new legitimate entrant into the perps war (Perennial) offering them a strong opportunity to thrive on your chain for a reasonable amount of ARB based on similar proposals.

4 Likes

Ouroboros Capital gives full endorsement of Kwenta & Perennial’s joint proposal for the ARB onboarding incentives. Since our collaboration began in December 2023, we have closely observed the remarkable ascent of Perennial to become one of the foremost DeFi applications within the Arbitrum ecosystem.

Another particular note is also Kwenta’s outstanding performance, evident in their trade volume and open interest numbers, which surpass those of almost every other on-chain Perp DEX operating within the Arbitrum ecosystem. Despite their remarkable achievements, Kwenta & Perennial have put forth a request of 4.5 million ARB (lower than what GNS/GMX/MUX received). This prudent approach reflects their commitment to efficient resource allocation and responsible stewardship.

By supporting Kwenta & Perennial, we are not only endorsing a project but also fueling the future of DeFi on Arbitrum. We believe that backing this initiative will contribute significantly to the continued growth and innovation within the DeFi landscape on Arbitrum.

7 Likes

Disclosure: Gauntlet has an ongoing engagement with Perennial for risk management and optimization

Gauntlet has historically been against one-off incentive proposals to the Arbitrum DAO, given the initial DAO-decided structure for STIP and other incentive-related proposals. With that being said, we have also watched as the DAO has shifted away from the original plan with programs like the LTIP, and now the STIP-bridge. The original plan for STIP was to let it end, analyze the results, and use those learnings to optimize future programs. Given how fast the market has moved (and with competition heating up), the DAO opted to forego that original plan. As such, Gauntlet’s stance on one-off incentive proposals has also shifted. In this case, given Kwenta’s historical performance, Perennial’s track record on Arbitrum, and the increasing volumes coming from perpetuals, we are supportive of this one-off incentive proposal.

7 Likes

My historical stance on one-off grant requests like this has been that I prefer to see these be lumped into the broader grant programs already set up (Quest books, STIP / LTIP). Mainly due to competitive fairness, in that this bypasses the grant process that 100s of other programs to have to go (and to clarify, I’m speaking as a broad process - not that Kwenta or any other programs that ask for funding in this manner have done anything wrong).

I see that was addressed in the initial post - it is unfortunate the launch date just barely missed the time to qualify for the LTIP. I will add too that it is appreciated that your proposal is setup to be within the spirit of the LTIP. Unfortunately what can’t be replicated is the Council’s review of the project. This is obviously beyond your control, but is the inherent issue with these one-off requests — instead of being checked by the Domain Allocations of Questbooks or the Council in the LTIP, it comes down to direct delegate decisions.

With that all in mind and combined with the LTIP only be 3 months… I would not be in favor of this. This does not speak to my opinion on the team or the project at all, simply a byproduct of the DAO going the council route for grants and my own stance on not wanting to set a precedent. I would strongly encourage Kwenta to take the opportunity to launch their product and gather crucial info over the next 3 months to be ready for the next integration of the LTIP that I would imagine will be launching over the summer.

2 Likes

Hey @jacobpphillips, excited for KWENTA to launch on Arbitrum!

Would incentives still be needed if (as it looks like) Perennial receives additional ARB from the STIP-Bridge?

I tend to agree with @Bob-Rossi that creating single, ad hoc proposals is not the best practice for the DAO.

Would you guys consider using the STIP Bridge to start playing with incentives, and then apply to the LTIP once live?

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The relevant content is still very professional, although I can’t understand many parts of the content, but I see your attitude and determination to do things, kudos to you!

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@Bob-Rossi @maxlomu appreciate the thoughtful replies.

Totally get this viewpoint. Mentioned on the ARB governance call that myself (former gov lead at fund), Kwenta (a DAO), and the Perennial team (former DAO core devs) all get the sentiment here.

However, in our view, the DAO should still retain the ability to make exceptions to the rules of existing programs and pass truly one-off proposals (too much rigidity would be suboptimal). In this case, we view going to the DAO, instead of a council, as a materially higher bar required to receive approval on the grant.

Frankly, this prop is one-off in nature: A massive player from Arbitrum’s biggest competitor organically choosing to build on an ARB-native protocol AND asking to bring its users over to ARB. In many ways, this is a dream prop for the Arb DAO.

Haven’t done a full sweep of LTIPP props, but I’d say quite pretty confidently that few, if any, come close to having the ability to drive the amount of impact that this proposal presents.

Given that, we feel like this merits a full review.

It helps, but doesn’t move the needle for this partnership.

STIP.b would give Perennial $187K /month vs. this proposal requests $2.25M /month — and order of magnitude difference because the potential impact is an order of magnitude larger.

Perennial was evaluated for that grant size when we were just launching our V2 protocol (a tiny protocol at the time)
VS
Kwenta, with $100mn+ OI & $5 billion in monthly volume, partnering up with Perennial to onboard net new users & capital to the ecosystem.

Nonetheless, think STIP.b is really important program for the broader competitive dynamics of the ecosystem given LTIPP pilot excluding STIP projects.

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Hey Jacob, thanks for the reply and thoughts. I totally understand where you are coming from, the rigidness does have it downsides. Others have expressed support so I may well be in the minority on this. While I may be against it myself, I’d obviously never be against taking it to vote to get broader feedback and opinion.

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First, as far as I can tell, the Kwenta team holds no longstanding loyalty or ‘stalwart’ status with OP: that vibe has always been more intertia from being affiliated with Synthetix. Kwenta is actively branching out into multiple chains and will likely take the most pragmatic path towards realizing the vision of a decentralized aggregator.

As an active trader (full disclosure, also a new Kwenta Council member) who has always traded much more on Arbitrum, I’d like to add a perspective. I do primarily funding rate arbs. When I take directional positions, I tend to pick the venue with favorable funding rates, and take the other side elsewhere to neutralize funding. Most of the time, that’s an Arbitrum / OP split, but the short side is 80%+ of the time on Kwenta. Why?

I think it is difficult to overstate the uniqueness of the retail flows that pass through Kwenta: the $100mn+ OI and $5b monthly volume is some of the highest quality retail flows in crypto. It’s mostly degenerate eth maxis and cex-allergic ideological types. Nowhere in dex-perp-land have I seen more abjectly irrational longs for all sizes into unfavorable skew (including 7-8figs) than on Kwenta when better prices/rates are a <5min bridge away. As a supplementary point, Ethena has a nice dashboard of cex/dex funding rates. On any given day, Kwenta is consistently in the top 3 funding for both BTC and ETH, and one of the few DEXes Ethena has decided to use for their cash-and-carry trade.

Contrast this with other perp dexes who have raised significant VC capital and have a treasury + war chest to lobby for / attract incentives, along with non-trivial probability of grey/affiliated wash trading to farm back said incentives. I think the Kwenta team is underselling the “organic” aspect of what Kwenta has built on Optimism (and by extension, what Arbitrum an ecosystem has to gain by supporting Kwenta’s multi-chain expansion efforts). Delegates, please take into account that UI-only retail flows are the lifeblood of any perp ecosystem; while incentives run hot there’s no way to quantify exact proportions, but Kwenta clearly has a lot more going for it than the average perp dex.

I hope to see this go to vote, as I feel there are likely to be delegates who share this view. Thanks.

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It’s great to hear that the Arbitrum ecosystem is expanding! Below are some thoughts, questions, and preferred modifications from the Blockworks Research team:

Arbitrum has lately put a lot of emphasis and effort into its accelerator programs (e.g., STIP & LTIPP), with applicants subject to certain terms while going through a somewhat standardized procedure to be considered. The proposed terms here seem to be more lenient compared to the aforementioned programs, and if this proposal were to be approved, would incentivize other protocols to apply outside of the dedicated programs as well. This again would put more strain on the community/delegates and nullify much of the process made concerning the official programs.

Looking at comparable one-off requests, Curve Finance is seeking 237.5K ARB from the DAO with an equally sized co-investment to mainly support the launch of its ARB lending market on Arbitrum One. In addition to incentives being allocated based on a wider deployment area (protocol vs. pools), how would you justify the size of your ask (4.5M ARB) and not contributing capital in comparison? Given that Kwenta is already a well-established protocol, we believe a co-investment requirement would be highly beneficial to ensure long-term incentive alignment (see below) and set a precedent for projects that are looking for one-off grants. For example, 60% of the requested 4.5M ARB incentives would come from Kwenta/Perennial, and 40% from the DAO.

Perennial already received 750K ARB through STIP Round 1 and the protocol will have the possibility to apply again if the STIP-Bridge proposal passes on Tally. This comes back to our first point—operations quickly become messy when existing frameworks are not followed, with Perennial possibly having the opportunity to double dip into incentives. One important question that is still unclear to us is how the requested ARB would exactly be split/utilized between Kwenta and Perennial. Moreover, we think that this proposal should include a commitment from Perennial to abstain from applying to the STIP-Bridge if this one-off proposal passes.

Outside of our concerns directly related to the one-off incentive structure itself, we are interested in hearing your rationale regarding how the onboarding of Kwenta to Arbitrum through incentives would grow usage sustainably. Arbitrum is already home to some of the largest perp DEXs—what value add does Kwenta bring to the table? The initially obvious answer here is incentivizing Optimism users to migrate to Arbitrum. However, Kwenta seems to have historically been aligned with Optimism, and our concern is that if/when additional L2s begin distributing incentives to onboard projects in the future, Kwenta will similarly migrate to those L2s, again promising to move existing users to the new blockchains.

We also believe this proposal necessitates additional execution details to create accountability. Some examples of this are cementing the initial reward distribution mechanism with specific numbers on how much capital would be allocated for targeted onboarding incentives/fee rebates/etc. to begin with, and expanding on what the main KPIs are that the community should follow to gauge the success of the program (as well as what growth figures constitute a successful program in your opinion). Another important factor that requires more elaboration is the proposed oversight committee. Who would this include, how would they be elected, what authority does the committee have, what would their salaries be, and who would pay for these?

It’s great that an increasing number of projects are showing interest in Arbitrum, and Kwenta would undoubtedly be a valuable addition to the ecosystem. Incentive allocation is an incredibly difficult task, and the Arbitrum DAO is doing its best to create a framework to make the process as effective as possible. It’s clear that exceptions have to be made from time to time, but they need to be made in a way that still encourages projects to mainly apply through the dedicated programs. As such, we believe that the terms of one-off proposals should be subject to more scrutiny. One such solution is to have the one-off applicant co-invest together with the DAO, which would be especially warranted here to align long-term incentives.

Without the aforementioned changes, additions, and specifications, we largely agree with the well-constructed reasoning by @Bob-Rossi:

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Note

This review is my personal view and does not represent @CastleCapital, although much of my thought process and opinion is shaped by my representation of Castle as an Advisor on the LTIPP.


Informational Comments

  • Writing the application in the LTIPP template would have made it easier to review
  • Whenever possible we recommend the protocol to provide more details on past and current incentivization programs — how successful was the STIP for attracting and retaining users, volume, and liquidity? how has this led you to design a better program for this proposal?
  • You could demonstrate the performance of V2 much better: recommend you highlight key metrics and include standout charts to help the reviewers of the application — you want to make their lives as easy as possible.

Grant Justification Comments

  • Justification for Grant Size and KPIs — The justification for your grant size should be much more robust and arrived at through detailed calculations — Please refer to our guidance document when completing these.

    • Comparing grant sizes to previously awarded STIPs is not a great way to justify your ask imo
    • You are stating a large increase in usage (due to the new Kwenta frontend), but the actual growth (from X to Y) isn’t easily identifiable. You need to fully justify why you think this growth is achievable, possibly demonstrating where the liquidity, users and volume will come from and possible how this can be evidenced from previous incentive campaigns or from other campaigns in other ecosystems.
      • You can likely talk much more about the inherent value in the Kwenta frontend and its current userbase that will now have access to an innovative perp AMM (that I hope you can back will give some of the best rates on the market, most often, for example).
  • I would like to see a more granular grant breakdown - outlining current and target metrics for each incentive bucket, why this is realistically achievable, and how it will impact your protocol and the wider ecosystem – Within these buckets it would be beneficial to understand your targets:

    • Pool-by-pool breakdown of LP bootstrapping
    • Trading volume and fee targets along with relative historical success of ramping up activity on new chains and previous incentive programs
    • More information about the ‘Onboarding Incentives’ would greatly help
      • How will these traders be targeted? Using DAO funds for targeted and high-value user acquisition could cause indifference.
      • Why is this required on top of the liquidity and fee-rebate incentives?
  • Re: Stickiness design → you should write in more depth about your proposed vesting requirements – this is a positive and may alleviate concerns around trader acquisition costs

  • Please ensure you have estimated your growth success with respect to your KPIs along the length of the program. We advise the inclusion of clear KPI milestones and distribution targets at each of them (e.g. how much ARB is unlocked at which milestone, and where your performance should be, for example, at the end of each month).

Other LTIPP-wide General Program Comments

  • Ensure your stated goals are realistic within the scope of a 12-week program - do you genuinely believe you can scale to your goals in this period of time? If so, clearly demonstrate it as best you can.
  • This is a pilot, so please keep the following in mind:
    • What does my product need (at a minimum) to achieve the next phase of growth that will prove to the DAO/ecosystem that it is moving towards PMF
    • Remember there will be a full LTIP afterward you can come back for, so make sure this proposal focuses on proving good incentive mechanisms and sustainable, sticky growth!
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Appreciate the thorough review here.

Many great callouts here. Have been working on proposal edits that address many of the concerns here. Should be out within a day or two.

Our intention here was to basically mimic the requirements & oversight of other programs, so as to not sidestep anything and perhaps even set a higher bar/standard for projects applying outside of DAO programs (as I think there should be). Will keep you posted with the updated prop, which should match the format of other programs.

(Our honest thinking here was that a shorter/sweeter version of the prop would have been preferred by delegates for a first review, but all things considered, clear that a fully-detail LTIPP-style prop is preferred)

Agreed here. Updated prop coming with Co-investment.
Though I would note that Curve, a well resourced, multi-billion protocol matching a small grant vs. Kwenta (~$100mn) & and Perennial (no token) might not be able to be compared apples to apples. Nonetheless, we’re going to propose terms that show alignment/commitment.

Will be addressed in next post. We’ll allocate the capital together, so will do whatever is mutually beneficial. The intention is to remain a bit flexible here. We’re going to define KPIs & allocate capital where it makes sense. The majority of incentives should be go to Kwenta, with Perennial benefiting indirectly (i.e. taker incentives that drive volume, creating more attractive yields for Perennial LPs, which boosts Perennial liquidity). However, using a portion of the capital to boost liquidity on Perennial markets, where mutually beneficial.

100% agree. We’ll have this explicitly stated in the next draft.

I think you nailed it — it’s net new traders, defi users, capital, etc. My guess is that a full review of STIP will probably indicate that most of the rewards sloshed around among existing ARB users. In retrospect, projects, including Perennial, could have done more to onboard net-new capital. This proposal is specifically focused on that KPI.

Re: alignment — I think Kwenta can speak to this a bit better. But I’d just note that from working with them over the past couple months, it’s clear that Arbitrum has been on their wishlist for some time (held back by technical reasons) & is fundamental to the direction they’re heading (see here). Tldr; defi aggregator play. Arbitrum is the perfect home for Kwenta, so it feels like no-brainer for Arbitrum to bring them in with open arms. Arbitrum is probably the only L2 that can fundamentally support the vision they’re trying to build (you don’t really see perp aggregators in other ecosystems). So it’s pretty clear in my mind that there’s a conscious business decision being made here that isn’t motivated by incentives.

There’s a broader ecosystem meta that @dk3 touched on a bit — incentives are always going to be flying around. Arbitrum has to win on building an interconnected ecosystem that has fundamental benefits over others, even in the case of competing incentives.

Agreed on all of this here. Updated post will address these.

Totally makes sense, and I agree on the sentiment here. Appreciate the rigorous review.

Confident our updated prop will go above the standard of projects from STIP/LTIPP to justify the one-off nature.

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Super helpful feedback sir. Thanks for taking time to do a deep dive. Nothing major to respond to at the moment other than all this will be included in the updated LTIPP-style format (with some of the additional points clarified here).

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