[Lido] LTIPP Application Draft

SECTION 1: APPLICANT INFORMATION

Provide personal or organizational details, including applicant name, contact information, and any associated organization. This information ensures proper identification and communication throughout the grant process.

Applicant Name: Kenneth Tan

Project Name: Lido Finance

Project Description:

Lido is a family of open-source peer-to-system software tools deployed functioning on Ethereum and Polygon. It is mainly known for enabling users to stake their tokens with validators to receive rewards from validation activities on the blockchain, while being able to use the token on-chain in various capacities.

Team Members and Roles:

Marin Tvrdic, Protocol Relations, Head
Jakov Buratovic, Protocol Relations, Master of Defi
Kenneth Tan, Protocol Relations, Defi Generalist

Project Links:

Website - https://lido.fi/

Twitter - https://twitter.com/lidofinance

Blog - https://blog.lido.fi/

Github - https://github.com/lidofinance

Contact Information

Point of Contact: Kenneth - Kenx3495

Point of Contact’s TG handle: @KENX3495

Twitter: @Kenx3495

Email: kenneth@lido.fi

Do you acknowledge that your team will be subject to a KYC requirement?: Yes

SECTION 2a: Team and Product Information

Provide details on your team’s past and current experience. Any details relating to past projects, recent achievements and any past experience utilizing incentives. Additionally, please provide further details on the state of your product, audience segments, and how you expect incentives to impact the product’s long-term growth and sustainability.

Team experience (Any relevant experience that may be useful in evaluating ability to ship, or execution with grant incentives. Please provide references knowledgeable about past work, where relevant. If you wish to do so privately, indicate that:

Lido DAO was previously granted a 1,000,000 OP grant in February 2023, aimed at the growth of wstETH on Optimism. This grant was used by the Liquidity Observation Labs (LOL) to grow and bootstrap the usage of wstETH on Optimism.

Since the start of the program, the amount of wstETH bridged to Optimism has grown tremendously from 20k wstETH bridged at the start to approximately 50k wstETH bridged at the peak of the program. The program has also proven to be sticky, despite the surge in other ways of utilizing ETH and stETH in the market for rewards since the inception of Eigenlayer, 35k wstETH is still bridged on Optimism, accounting for approximately $120m of bridged value, in comparison to ETH bridged onto Optimism, this is about 10% of the total value of Ether bridged onto Optimism. Integrations such as the usage of wstETH across money markets, DEXes and other native defi dApps like Velodrome, Beethoven, Sonne Finance and Cian were also key to maintaining stickiness of wstETH in the ecosystem. Liquidity in the ecosystem has also been well maintained, allowing for lending markets like Aave to maintain an efficient 93% collateral ratio with a sizeable 34,500 wstETH cap.

Similarly, the LOL has been incentivizing actively every month on Arbitrum to maintain the liquidity and depth of wstETH on Arbitrum. The DAO has received an airdrop from the Arbitrum foundation and LOL has been actively incentivizing wstETH liquidity using the grant given by the Foundation. The incentives have been used primarily on the Uniswap and Curve pools and also to bootstrap AMMs that has seen promising volume/TVL ratios such as Ramses Exchange.

What novelty or innovation does your product bring to Arbitrum?

Lido wstETH has the highest market cap for all liquid staked tokens. Currently, the ratio of wstETH:ETH bridged onto Arbitrum is about 0.06 using numbers from L2beat. LOL and Lido contributors from the Protocol Relations team intend to push this ratio higher. The rationale behind this is to increase the composability and usage of wstETH on Arbitrum. Users should be able to interchangeably use ETH with stETH/wstETH and continue earning rewards for validating Ethereum’s network. With over 9m of Ether staked in Lido, LOL intends to continue this growth on Arbitrum by increasing this ratio to 2x of what it currently is. The growth of wstETH on Arbitrum will bring about more capital efficiency for users on Arbitrum as they are able to seamlessly use wstETH and continue getting rewards for validation activities on ETH.

Is your project composable with other projects on Arbitrum? If so, please explain:

wstETH is composable with various protocols on Arbitrum. For example, it could be used as collateral on money markets such as Aave, Radiant and Silo. wstETH can also be deposited into vaults that run levered staking strategies such as Cian and Sommelier, enabling users to execute such strategies with lower gas fees on Arbitrum. For CDP protocols, users are able to mint GRAI from Gravita Protocol using wstETH as collateral. Additonally, users are able to trade and speculate on Ether staking rewards rate on Pendle Finance.

Future integrations that the DAO contributors could potentially pursue to further expand on the composability would include integrations into derivative protocols - the Defi vertical that has seen exceptional product market fit on Arbitrum.

Do you have any comparable protocols within the Arbitrum ecosystem or other blockchains?

There isn’t any liquid staking protocol natively on Arbitrum at the moment. However there are liquid staked tokens on Arbitrum like rETH and frxETH that are bridged to Arbitrum.

How do you measure and think about retention internally? (metrics, target KPIs)

Retention for Lido wstETH presence can be through the adoption and growth of wstETH on Arbitrum. Lido DAO analytics contributors created a dashboard that tracks the amounts of wstETH being bridged daily to Arbitrum, transactions for wstETH and usage of wstETH as collateral and LP asset. This allows LOL to have a better picture of what drives users to transact with wstETH as opposed to ETH on the Layer-2s that we have expanded to.

LOL intends to significantly increase the ratio of ETH:wstETH on Arbitrum through this grant The way LOL is looking at retention presently is from the lens of “where and what wstETH is being used for on Arbitrum” and how to work towards getting it to a point where organic traction is enough to sustain APRs. The steps that LOL works towards getting to a sustainable incentive program with high user retention would be to target the most sticky use cases of wstETH on Arbitrum historically, as well as target efficient and voluminous DEXes.

As such the metrics that LOL intends to measure for retention would be:

  1. TVL of wstETH on Arbitrum 2 months, 4 months and 6 months after LTIP
  2. Volume and fees collected from wstETH denominated pools on Arbitrum 2 months, 4 months and 6 months after LTIP
  3. TVL of wstETH locked in liquidity management protocols on Arbitrum 2 months, 4 months and 6 months after LTIP

With the grant matching from LOL, the intent of this LTIP is to drive activity for wstETH on a long-term basis on Arbitrum. The matched rewards are there to ensure that rewards don’t immediately go away post LTIP and is LOL’s commitment to furthering the adoption of wsstETH on Arbitrum. The matched grant will ensure that rewards can last for more than a year in Arbitrum, encouraging the use of wstETH instead of ETH and driving the DAO closer to its goal. This is further made easier by the fact that Arbitrum has one of, if not, the most robust DeFi ecosystem in an L2, allowing for opportunities to create usage of wstETH.

Relevant usage metrics - Please refer to the OBL relevant metrics chart 3. For your category (DEX, lending, gaming, etc) please provide a list of all respective metrics as well as all metrics in the general section:

Category: LSTs.

The following are the relevant metrics that the DAO contributors will be tracking as they are relevant to wstETH on Arbitrum’s growth

  1. TVL in wstETH denominated pools
  2. Total Circulating wstETH on Arbitrum - which indicates the TVL of wstETH on Arbitrum
  3. Trading Volume

Do you agree to remove team-controlled wallets from all milestone metrics AND exclude team-controlled wallets from any incentives included in your plan: [Yes/No]

Yes

Did you utilize a grants consultant or other third party not named as a grantee to draft this proposal? If so, please disclose the details of that arrangement here, including conflicts of interest (Note: this does NOT disqualify an applicant):

No we have not used any grants consultants to draft the proposal

SECTION 2b: PROTOCOL DETAILS

Provide details about the Arbitrum protocol requirements relevant to the grant. This information ensures that the applicant is aligned with the technical specifications and commitments of the grant.

Is the protocol native to Arbitrum?:

No, the protocol is native to Ethereum Mainnet

On what other networks is the protocol deployed?:

The protocol is only deployed on Ethereum Mainnet. However, the protocol’s receipt token, wrapped Staked Ether is available on multiple networks. This is the list of networks that wstETH is canonically available on:

  1. Arbitrum
  2. Optimism
  3. Polygon Proof-of-Stake
  4. Neutron (Cosmos)
  5. Base
  6. ZkSync
  7. Linea
  8. Mantle

What date did you deploy on Arbitrum mainnet?:

wstETH was deployed on Arbitrum on September 2022 following the “Enable bridging wstETH to Arbitrum and Optimism” snapshot proposal.

Do you have a native token?:

Yes. Lido DAO has a governance token LDO.

Token Contract Address on Mainnet:

etherscan.io/token/0x5a98fcbea516cf06857215779fd812ca3bef1b32

Tokenomics:

Past Incentivization:

The LOL incentivizes with only wstETH following the changes to strategy in incentives in August 2023 and does not incentivize with its governance token but rather a budget that’s approved from the DAO’s finance team for the LOL to spend on bootstrapping and liquidity purposes.

Past incentivization from the LOL includes the LOL’s use of the DAO’s 772,621 ARB airdrop from the Arbitrum Foundation. The DAO received an airdrop from the Arbitrum Foundation and has assigned the LOL to use the airdrop for incentivizing and growing wstETH on Arbitrum. Milestones that LOL has achieved with this airdrop to date includes growing the TVL of wstETH on Arbitrum to about USD $420m. Onchain liquidity is also sufficient to the extent that suppliers of wstETH on markets like Aave are allowed up to 70% LTV on their wstETH collaterals. Swaps in sizes of up to 3.3k ETH into wstETH (approximately USD $13m at the time of writing) can also be supported on-chain, allowing for ease of building levered staked ETH vaults on Arbitrum. This has made Arbitrum by far the most mature L2 for usage of wstETH, evident from the TVL of wstETH being significantly higher than it on every other L2. The maturity of wstETH on Arbitrum also gives LOL the confidence that it could be pushed further to mainnet levels.

Other examples of incentives also include the earlier mentioned OP grants from Optimism which has successfully grew wstETH’s market share on Optimism, sitting at approximately 150m in TVL (compared to 1.4b in Ether). The grants also allowed LOL to successfully increase the depth of wstETH on the network, allowing for swaps in sizes of up to 1600 ETH with minimal slippage. The grant size was approximately 1m in OP tokens which as of time of writing is about USD $4.5m.

In terms of grants effectiveness, the pools that LOL have chosen to incentivise with the OP grants and Arb airdrop can be seen from the screenshots below:

Specifically for the Arbitrum and Optimism Uniswap incentivized pools, the pools have seen utilization of up to 200% on high volume days on-chain, showing the effectiveness of the incentives on these chains.

In addition to that, past incentivization on Arbitrum has seen a reasonably high ratio of TVL per dollar of incentives as well as volume per dollar of incentives. The charts above show that the incentives were able to effectively bring in $8000 worth of TVL per dollar in incentive spent as well as volumes of over $2000 per dollar of incentive spent. The charts above demonstrate the stickiness of TVL as well as in the two months that we have tracked above, the second month of incentives was comparatively lower vs the first month by about 40%.

The performance of these incentives disbursed in the past should be an indicator of LOL’s successes in running incentive programs. With the additional grants, LOL will be able to expand the program to other DEXes on Arbitrum, increasing liquidity venues and depth for wstETH which will in turn result in a better user experience for stETH holders making them more likely to interact and use wstETH on Arbitrum.

For more information on the effectiveness of grants and incentives that are being disbursed by the LOL refer to the wstETH incentives efficiency dashboard attached in the follow up appendix.

https://dune.com/lido/incentives-monitor

What liquidity mining/incentive programs, if any, have you previously run? Please share results and dashboards, as applicable?

Current Incentivization:

LOL does not currently incentivize Lido Protocol, but rather the adoption of its liquid staked token through LP rewards and liquidity mining incentives for protocols building on top of wstETH.

Current incentives that we are running include the aforementioned monthly incentivization from LOL for L2s that wstETH has expanded to including Arbitrum, Optimism, Base, zkSync, Linea and Cosmos. Additionally LOL also incentivizes protocols that have integrated and wstETH into it such as Gearbox, Cian and Sommelier.

Have you received a grant from the DAO, Foundation, or any Arbitrum ecosystem related program?

Lido DAO has previously accepted a 772,621 ARB airdrop from Arbitrum Foundation which was accepted by the LOL (formerly known as the reWARDS committee). The funds were used in a similar fashion to what LOL intends to do with the LTIPP grant.

Protocol Performance:

Lido protocol’s performance and revenue is dependent on the ETH deposited into the protocol. It is the largest liquid staking protocol in crypto and 31% of all the ETH staked is staked with Lido.

The wstETH:ETH’s rate of divergence is more or less predictable and has a small margin of variance. It has been well maintained with barely any significant deviations. This enables a higher LTV on wstETH as an asset.

For more details on the protocol’s overall performance check out the dune dashboard below:

https://dune.com/lido/lido-finance-extended-10

On Arbitrum specifically, Lido wstETH is an asset that has been widely engrained into the Arbitrum ecosystem. The TVL of wstETH on Arbitrum is approximately USD $320m as of the time of writing. On Arbitrum lending markets there’s cumulatively about USD $200m of wstETH being supplied as collateral across Aave, Radiant and Silo. On liquidity pools, there’s about $30m of wstETH being used to pair against assets like USDC and ETH.

The dashboard below tracks wstETH’s performance on L2s like Arbitrum:

https://dune.com/pipistrella/wsteth-on-ethereum-l2

Protocol Roadmap:

The roadmap for Lido includes the continued decentralization of the protocol through initiatives such as the Simple DVT module, which will increase the node operators set on Lido exponentially thus further decentralizing the protocol. Additional initiatives to decentralize the protocol also includes the Community Staking module which will enable more community staking participation.

L2 expansions are also a focus for the Lido Network Expansion Workgroup (NEW). In the past 3 months, Lido DAO has formally recognized wstETH bridge endpoints on Base, zkSync, Linea and Mantle. There are already 3 new proposals publicly available on the research forums for expansions on Scroll, BNB Chain and StarkNet.

In addition to these, research on native rebasing stETH on Layer-2s are currently in progress as well as potentially staking from L2s.

Audit History & Security Vendors:

Lido protocol has gone through multiple audits from multiple vendors. The bug bounty has been live since May 2021 with a maximum bounty of USD $2m .

Repository of Lido Finance audits:

Bug Bounties:

Security Incidents:

The protocol has never been exploited but has gone through slashing incidents in the past. The DAO has a cover fund, that can be voted to compensate for such incidents.

SECTION 3: GRANT INFORMATION

Detail the requested grant size, provide an overview of the budget breakdown, specify the funding and contract addresses, and describe any matching funds if relevant.

Requested Grant Size:

750000 ARB (~1.4m USD). To be matched by LOL

Justification for the size of the grant:

The grant requested will be spread across 3 months for the LTIP program which adds up to about USD $500k for each month of the program. Currently, LOL has been incentivizing various wstETH related pools on Arbitrum with a spend ranging from $30k to $60k through the Arbitrum Operational Multisig in the past couple of months. The requested grant will be used wholly for the growth of wstETH on Arbitrum with the intent of increasing the ratio of wstETH:ETH on Arbitrum to at least 2x of the current ratio. The ratio of wstETH:ETH as it stands on L2 beats’ data is somewhere around 0.06.

The requested grant amount will give a 10x boost on the current incentives that LOL has already been disbursing on a monthly basis. These incentives should expand the usability of wstETH in terms of liquidity, adoption and a push for further integrations into various DEXes and protocols that wstETH isn’t currently on. Attracting existing mainnet wstETH liquidity that can be retained through various means that will be covered later in the proposal.

Given the current state of the market, Ethereum Mainnet is incredibly expensive to use and will likely become more expensive. With Arbitrum’s LTIP program as well as EIP-4844 going live, it is reasonable to believe that a large chunk of mainnet liquidity and activity will be migrated over to Arbitrum. The DAO is intent on working to drive wstETH activity over to L2s - which is in line with its L2 expansion strategy. Mainnet is simply too expensive for new users of stETH to onboard and explore the various ways that they can composably use their stETH. This in itself presents a great opportunity to onboard holders of stETH, both new and existing from mainnet onto the Arbitrum ecosystem.

As mentioned earlier, the LOL has been incentivizing pools on Arbitrum for the past couple of months with both wstETH and ARB. The performance of the incentivized pools, namely the wstETH:ETH pool on Uniswap giving as high as $8000 of TVL for each dollar of incentives spent coupled with the low slippage swaps in size (around 3k ETH with <0.1% slippage) from wstETH <> ETH gives LOL reasons to believe that an additional grant that pretty much boosts the amount that LOL is already incentivizing by about 7x should be able to reasonably bring at least 2x the amount of wstETH currently bridged over given that the rewards are used to bootstrap wstETH related pairs across Arbitrum’s ecosystem as well as use cases like levered staking through liquidity management protocols like Sommelier and Cian.

In addition to that, at the moment LOL feels that there is a genuine opportunity to satiate the demand for real native rewards especially on L2s. Presently, holders of LSTs in general on layer-1s are taking on the risk of illiquidity and untested protocols by depositing into long lock ups in exchange for points. The influx of a reward program could act as a good alternative to compete with these choices while also offering native rewards. The cost of interacting on Mainnet can also act as a huge push factor to why holders of wstETH would rather be active with their wstETH on an L2 as opposed to participating on L1s. With the various protocols on Arbitrum offering users ways to do leveraged LPing, borrowing/lending with wstETH and even using it as collateral on their perpetual positions, LOL feels that wstETH is in the right position to capture high amounts of activity when the grant hits.

The matched incentives will also be spread across 18 months after the LTIP period. The value of the incentives to be matched will be marked to the value received on the day of LTIP disbursement to LOL and will be in a mixture of ARB and wstETH. The duration is to ensure that LOL can continuously grow wstETH’s foothold in Arbitrum’s ecosystem and allow Arbitrum users to flexibly use ETH and wstETH interchangeably on Arbitrum without friction.

Grant Matching:

LOL will incentivize the program jointly with a matched amount based on the value of the grant received on the date of disbursement. The incentives matched will be evenly distributed across the course of 18 months following the end of the LTIPP period. The reason for the extended duration of matched incentives is to ensure that the program is sufficiently sticky.

Grant Breakdown:

The grant will be used to further incentivize the adoption and utility of wstETH in the Arbitrum ecosystem. Incentives are meant to draw existing wstETH holders and encourage ETH holders to participate in the growth of Arbitrum’s DeFi ecosystem. The end goal of the grants will eventually be to maintain stickiness through sustainable incentivization and integrations of wstETH into Arbitrum DeFi.

The grants will be broken down into boosting rewards on existing wstETH/ETH and wstETH/USD pairings and incentivizing new venues for liquidity. Additionally, the grants could be dispersed to one of the main use cases that has seen stickiness for stETH in DeFi, levered staking vaults. The increase in liquidity of wstETH in Arbitrum will allow for risk assessors to then increase the supply caps of wstETH on lending protocols which in turn will lead to more capacity for levered staking vaults. This will translate into long-term sticky liquidity of wstETH on Arbitrum which then opens up possibilities of wstETH in other use cases such as collateralization on derivative protocols.

To further breakdown the grant into granular detail here is how LOL is tentatively viewing the distribution of the grants in the 3 months of incentivization :

70% - DEXes (525000 ARB / 175000 ARB per month)

DEXes contribute largely to the growth and attracting wstETH TVL on Arbitrum. Based on the current rewards that LOL has been disbursing, LOL has been able to achieve these milestones:

  • $8,000 of TVL per every dollar of incentives disbursed in the Uniswap wstETH/ETH pool which currently sits at approximately $5m in TVL
  • over 6k wstETH locked across all wstETH liquidity pools on Arbitrum DEXes that the analytics team has tracked

In line with LOL’s commitment to finding sticky liquidity, past incentive programs has shown that the best type of DEXes that are able to do this and eventually sustain itself with reasonable APRs through actual volume that gets routed from swaps and this is usually through concentrated liquidity pools.

Arbitrum’s mature Defi ecosystem would mean an array of different concentrated liquidity DEXes that LOL can use to bootstrap and further thicken the liquidity of wstETH on with the grant.

DEXes like:
Camelot
TraderJoe
Pancakeswap
Ramses
Solidly v2

Would be good liquidity venues to further wstETH’s presence on Arbitrum.

LOL are targeting at least 20% APY for all wstETH/ETH pools. This should in turn attract users to bridge from mainnet to LP with wstETH on Arbitrum given that it is significantly higher than the 5-6% APY on Mainnet.

Additionally to drive volume for wstETH, LOL will also target Arbitrum native governance token pairs to pair with wstETH. This should get more trades routed through wstETH and result in a better user experience when using wstETH on chain.

Potential Governance Token Pairs:

GMX/wstETH
PENDLE/wstETH
SILO/wstETH
RDNT/wstETH
GRAIL/wstETH
VRTX/wstETH

The governance token pairs should also help drive volume from trade routing which results in more long term stickiness for wstETH on Arbitrum.

The TVL goal will look something like this:

525000 * 1.7 / (0.2 * 12/52) = 19337500

Which is an almost 3-4x increase in TVL on DEXes for wstETH denominated pairs. Therefore we are targeting $19.1m in wstETH denominated pairs across the Arbitrum ecosystem by the end of the campaign.

30% - Vaults / Leveraged Staking ALMs (225000 ARB / 75000 ARB per month)

The use of levered staking vaults or leveraged LP is a great use case for wstETH. Vaults like Cian and Sommelier are seeing 8-9% APYs simply through leveraged positions with wstETH. The injection of 50k ARB per month into protocols like these would mean a surge in APYs of up to 10-20%. This should be attractive enough to bring in stETH holders looking to maximize their native rewards on holding stETH. We expect to at least 2x the TVL in protocols like these. In addition to that, these vaults typically will borrow ETH from lending protocols to lever up the positions which could in turn lead to more utilization for ETH on lending platforms - an overall net positive for Arbitrum’s ecosystem in general.

For vaults on Arbitrum with the target of 15% APY we can expect the TVL to look something like:
2250001.7 / (0.1512/52) = 11050000

The expected TVL across vaults to maintain the targeted APY will be around $11m.

Omission of lending markets incentives

With over 229m USD worth of TVL across Arbitrum in lending markets, lending markets have proven to be the stickiest use case for users of wstETH on Arbitrum, however the amount of grants that LOL is requesting for simply isn’t enough in terms of boosting APRs meaningfully. Therefore in terms of driving usage of lending/borrowing protocols, we would opt instead to incentivise vaults that build upon them such as Cian and Sommelier instead.

After LTIPP:

The rewards to be matched by the DAO will be then disbursed monthly for 18 months. LOL will shift the incentives accordingly based on the performance of the rewards during LTIPP.

Funding Address:

Lido DAO Liquidity Observation Labs Operational Multisig Arbitrum:

Funding Address Characteristics:

The multisig is a 4/6 multisig.

Treasury Address:

Lido DAO Treasury Address: https://etherscan.io/address/0x3e40d73eb977dc6a537af587d48316fee66e9c8c

There are also multiple multisig addresses that holds the DAO funds for Operational Purposes below shows the list of multisig addresses from the DAO across the multiple networks:

Contract Address:

SECTION 4: GRANT OBJECTIVES, EXECUTION AND MILESTONES

Clearly outline the primary objectives of the program and the Key Performance Indicators (KPIs), execution strategy, and milestones used to measure success. This helps reviewers understand what the program aims to achieve and how progress will be assessed.

Objectives:

The primary objective of the LTIP will be for the LOL to continue the growth of wstETH on Arbitrum in terms of liquidity, integrations and volume. The measurable key metric that could be used to assess the performance of this objective would be through the wstETH:ETH bridged ratio. Presently, it is sitting at around 0.07, LOL is intent at pushing this ratio to at least 2x of what it is now and eventually 0.2. The rationale behind using this as a key measure of success is because LOL’s goal is to enable the further enhance the usage of wstETH within Arbitrum’s ecosystem to allow for the seamless experience of using wstETH interchangeably with ETH.

wstETH has been widely recognised as the most battletested and trusted liquid staked token of Ether in all of crypto which can be seen from its marketcap of USD $28b, sitting right above USDC. Pushing the narrative on usability of wstETH in Arbitrum should eventually sway users to prefer interacting with the blockchain using an asset that continuously earns rewards for validating Ethereum on mainnet. This is a crucial narrative at this juncture as Layer-2s like Blast and Manta are adopting the “real-yields” L2 narrative. One way to deliver this to users of the blockchain would also be to deeply entrench wstETH in the ecosystem.

The growth can be measured through the below metrics:

  1. TVL of wstETH bridged over to Arbitrum
  2. Daily Average Volume on wstETH denominated pools
  3. +2 -2% depth when swapping in and out of wstETH

The first 2 metrics are easily tracked on the LSTs bridged to L2 and wstETH on L2s dashboard that have already been built here:

https://dune.com/pipistrella/lst-bridged-to-l2

https://dune.com/pipistrella/wsteth-on-ethereum-l2

These measures are the most important to track in measuring the success of the grant as it covers the usability of wstETH in Arbitrum’s ecosystem.

Execution Strategy:

The tokens received from the LTIP grants program will be used mainly to:

  1. Incentivise wstETH denominated liquidity pools on the various DEX avenues
  2. Create stickiness of wstETH in the Arbitrum ecosystem through integrations and incentives to protocols that have proven to have “sticky” liquidity.

The strategy here is to continually build liquidity depth on the multiple DEX avenues, including ones that will be bootstrapped with incentives such as Trader Joe, Camelot, Pancakeswap and Ramses. In addition to that, LOL will be looking to bootstrap governance token pairs from the Arbitrum ecosystem such as PENDLE, GMX and RDNT with the incentives.

When more depth in liquidity gets built, LOL will also be incentivizing vaults like Cian and Sommelier who already have levered ETH staking strategies available on Arbitrum. These will effectively increase the utilization of ETH on lending markets like Aave as these vaults are integrated to utilize them and also drive more supply of wstETH on the lending markets. Lending markets have proven to be the most sticky utility of wstETH on Arbitrum, given that almost 70% of the wstETH on Arbitrum resides in a money market. The increase in liquidity will altogether boost Arbitrum’s DeFi ecosystem, increasing capital efficiency of its participants.

As mentioned above in Section 3, the grant constituent buckets were broken down into incentives for DEXes and vaults / ALMs. These buckets have different purposes in helping us to achieve the above mentioned objectives that will get us to the desired ratio of wstETH:ETH.

The current state in terms of DEX TVL on Arbitrum is relatively low compared to mainnet. With roughly 6k wstETH out of the 91k wstETH bridged which is about 6% of the bridged wstETH on Arbitrum, there is potential for growth of wstETH activity from new pairs on other liquidity venues as well as volume as a result of new wstETH denominated pairs. LOL intends to use the grant to drive up APYs, targeting at least 12% APY for wstETH/ETH pairs. This should result in being able to attract more TVL from not just the wstETH lying dormant on Arbitrum but also a new inflow of wstETH.

The wstETH that will be used to denominate against governance token pairs is also in line with the idea of increasing wstETH volume and usability. At the moment, there’s barely any wstETH denominated gov token pairs on Arbitrum. With the incentives, LOL should be able to drive a fair amount of liquidity migration from the existing ETH denominated pairs. We aim to at least target 30-40% APYs on such pairings.

The use of vaults and ALMs will be another gateway for users on Mainnet who would otherwise not be inclined to use them given the rising gas fees, allowing them to lever up on their wstETH positions and get higher rewards.

The price impact of wstETH thus far (aggregated by trade size) on Arbitrum is healthy at the moment, the grant would be used to not only maintain that but to potentially bring it as close as possible to 0 allowing users to better interchangeably use wstETH with ETH, which will align with the goal of increasing the wstETH:ETH ratio.

The DAO contributors will also push for integrations into other verticals such as derivatives with the grants.

LOL will be dealing with the distribution of the grants, incentivizing the pools that are able to efficiently capture volume for wstETH and thereby increasing the depth of wstETH against the multiple token pairs.

Grant Timeline:

The grants disbursed to us from ArbitrumDAO will be fully utilized within the 12 week incentive window. The matched grants from LOL will then be used across a span of a year.

Grant Timeline and Milestones:

LOL is intent on spreading the grants linearly across the incentive period of 12 weeks. Milestones to check on the progress will be put in place at the end of every 4 weeks.

The milestones are as such:

Week 4 - wstETH:ETH bridged over on Arbitrum to be at 0.09, TVL on DEXes and Vaults to be at 18m

Week 8 - wstETH:ETH bridged over on Arbitrum to be at 0.11, TVL on DEXes and Vaults to be at 24m

Week 12 - Ratio of wstETH:ETH bridged over on Arbitrum to be at 0.13, TVL on DEXes and Vaults to be at 30m

These milestones should sufficiently track the amount of wstETH that gets bridged canonically over time to Arbitrum as the incentives get disbursed to the various liquidity venues.

How will receiving a grant enable you to foster growth or innovation within the Arbitrum ecosystem?

According to the dashboard for tracking the current incentives disbursed on Arbitrum, LOL is able to bring in approximately $8000 in TVL per dollar spend on incentives on LPs. Additional incentives should allow LOL to push the TVL much higher in terms of wstETH denominated pools and further expand the availability of wstETH on other liquidity venues. The matched incentives will then further solidify the DAO’s case of pushing for wstETH stickiness and long term preference of wstETH within Arbitrum’s ecosystem as it would mean a longer term incentive program with the output of a seamless use of wstETH, just like how they would use ETH.

Given how the narrative of “native yields” and capital efficiency has picked up as seen from the success of Blast and LRTs building on Eigenlayer’s ability to attract TVL, it is safe to say that there is a great demand for users of a blockchain to be able to use liquid staked tokens as seamlessly as they do with Ether. The closest way to get rewards on an L2 would be to use wstETH on them and it is the DAO’s intent to make Arbitrum a great ecosystem for wstETH usage.

For further reference on the use of grants and its effectiveness please refer to the dashboard below:

https://dune.com/lido/incentives-monitor

Do you accept the funding of your grant streamed linearly for the duration of your grant proposal, and that the multisig holds the power to halt your stream? [Yes/No]

Yes

SECTION 5: Data and Reporting

OpenBlock Labs has developed a comprehensive data and reporting checklist for tracking essential metrics across participating protocols. Teams must adhere to the specifications outlined in the provided link here: Onboarding Checklist from OBL 4. Along with this list, please answer the following:

Is your team prepared to comply with OBL’s data requirements for the entire life of the program and three months following and then handoff to the Arbitrum DAO? Are there any special requests/considerations that should be considered?

Yes. There is already a Dune dashboard that we use to track adoption and growth of wstETH on Layer 2s which can be filtered for Arbitrum

Does your team agree to provide bi-weekly program updates on the Arbitrum Forum thread that reference your OBL dashboard? [Please describe your strategy and capabilities for data/reporting]

Yes

Does your team agree to provide a final closeout report not later than two weeks from the ending date of your program? This report should include summaries of work completed, final cost structure, whether any funds were returned, and any lessons the grantee feels came out of this grant. Where applicable, be sure to include final estimates of acquisition costs of any users, developers, or assets onboarded to Arbitrum chains. (NOTE: No future grants from this program can be given until a closeout report is provided.)

Yes

Does your team acknowledge that failure to comply with any of the above requests can result in the halting of the program’s funding stream?: [Y/N]

Yes

3 Likes

Additional References and Links

Lido Incentives Monitor - https://dune.com/lido/incentives-monitor

Forum Posts:

Proposal for L2 Expansion to Scroll: wstETH Deployment on Scroll - Proposals - Lido Governance

Proposal for Expansion to BNBChain: Wormhole x Axelar | Lido Bridge: Implementation for wstETH on BNB Chain - Proposals - Lido Governance

Proposal for Expansion to Starknet: wstETH deployment on Starknet - Proposals - Lido Governance

Simple DVT Module: Staking Router Module Proposal: Simple DVT - Proposals - Lido Governance

Hello @kenx3495 ,

Thank you for your application! Your advisor will be Castle Capital @Atomist.

Please join the LTIPP discord and ping your advisor in the general chat so they can create a new channel and start communicating with you.

Lido has been incentivizing liquidity on Arbitrum for a long time. I think they are deserving of a grant to accelrate stETH adoption!

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I’m a bit split on this one. Lido does not need incentives to attract users and has a deep treasury to invest into Arbitrum growth.

The size of the ask is reasonable though given the overall value Lido presents.

How will you prioritize Arbitrum growth vs other ecosystems?

I appreciate your comment and question.
Lido LOL has been continuosly allocating rewards to protocols on Arbitrum from the day 1 of wstETH deployment and it will continue to do so, irrelevant of this grant. Though I do agree that stETH is seeing a good organic growth for the most part, some initiatives like pairing wstETH with governance tokens, bootstrapping flywheels for recursive staking just need that extra kick that comes with marketing and incentive support. Ultimately the goal is to reduce the general emission of incentives, but the space (not the prices) is still so volatile and rapidly moving that “settling with what we have” just means a potential loss of opportunity that could be captured by the competition.
Arbitrum is the most mature L2 ecosystem, and in my opinion it will be probably the first one to fully abstract and replace Ethereum mainnet for Lido users.
That being said, Lido LOL has the limited budget and is mostly using it for supporting the core defi needs which is ETH liquidity and supply of wstETH to lending markets. This grant would be a good help for bootstrapping wstETH/governance token pairs with popular protocols. The goal being making wstETH a connector token and a default pairing for new projects. It just objectively makes more sense for LPs to LP wstETH pairing compared to ETH.
Aside of it, additional budget for liquidity allows to minimize risk of having liquidity too concentrated on 1 or 2 dexes.

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One addition to above statement, its important to mention that this grant was provided by Optimism Partner fund, their proposal to DAO was not approved. I would leave the community member and delegate to judge the potential good/bad impact of giving Lido more market dominance.

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We support this proposal. wstETH is ubiquitous in DeFi with broad and significant demand that benefits Arbitrum. Supporting established and well resourced teams that want to deepen their investment in the ecosystem by attracting long-term participants who are comfortable with their track record strikes a needed balance with supporting newer projects at the edge of innovation, bootstrapping from Zero to build an audience. The LIDO team has been a professional and consistent partner to Ramses and is a net contributor to our ecosystem.

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Lido is a core part of the LSD and LRT landscape - the proposal essentially seeks to match the incentives they have already long been distributing to a wide variety of DEXs. It only makes sense for the DAO to support this given that the incentives will ultimately end up going to arbitrum native projects. From Silo’s part, the Lido team has been excellent to work with and we appreciate the support they show wherever possible.

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Lido is a core piece of DeFi infrastructure that brings composable capital efficiency to any chain that supports it. In a game of so-called “inches”, bringing more $wstETH to Arbitrum benefits all protocols on the chain.

From Silo’s perspective, the Lido team has been super responsive and supportive with integrations. This includes our recent incentivized SILO/wstETH which is a multi-layered integration with several core Arbitrum protocols including Camelot, Defiedge, and ourselves. Extending this to our lovely little Arbitrum peers would be excellent in driving activity to The Great Blue Chain.

Their small grant request is quite conservative given their size and proverbial ‘mind share’ - combined with their willingness to provide incentives, mayhaps this is how we run it back.

Warm regards,

Nutoro D. Chutoro

WstETH was the first collateral type we onboarded on Arbitrum, working with the team has always been extremely pleasant

Lido has demonstrated previous success with similar strategies regarding wstETH on Optimism and setting clear objectives for growth on Arbitrum.

The detailed breakdown of the incentivization strategy, including the commitment to match the grant funding, demonstrates a well-thought-out and equitable approach.

Moreover, the clear metrics for measuring success, such as the targeted increase in the ratio of wstETH:ETH on Arbitrum, provide a solid evaluation criterion if approved.

This level of detail and planning sets a high standard-- with accountability for results.

Nice one Ken!

Thanks Lido for submitting the proposal.
We need to cement Arbitrum as the place to hold and trade LSTs and LRTs, and this goes in the right direction.

What I like:

  • Grant will be matched by Lido incentives. Although the match will be diluted across 18 months, it will still be an increase vs their current efforts (+50% if I calculated it properly)
  • Grant will be further distributed across the ecosystem of Arbitrum DEXs

What needs to be checked:

  • DEXs/other protocols receiving incentives might also receive direct grants from Arbitrum. We need to check for a fair allocation .

Firstly, we would like to thank you for your detailed proposal for Lido’s application. We appreciate their thoughts and implementation plans for matching the grant to their own incentives. Additionally, their willingness to collaborate with other DeFi protocols is an important step for the expansion of the ecosystem. However, we must also consider some concerns about the fair distribution of incentives among DEXs and protocols. With these statements as ITU Blockchain, we will vote in favor of this proposal.