Hey everyone, Jacob from Perennial (derivatives protocol on Arbitrum) here. I also used to do some governance research at Polychain.
Really cool proposal from the Camelot team. It’s very thorough and has kickstarted some really important discussions around how the Arbitrum DAO should think about allocating its treasury to grow the ecosystem.
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Analyzing this from the lens of $ARB holders & governance delegates, here are some thoughts:
1 —
The idea that Arbitrum would use its token to offer a few million $ per month in liquidity incentives is quite reasonable and should probably be done, and Camelot has a strong argument for being a recipient of some cut of those incentives.
However, this is a tough proposal to evaluate in isolation, given the obvious precedent this would set & the broader ecosystem implications. If $12mn (or $10mn) in incentives goes to Camelot, there will inevitably be dozens of follow up props from other potentially-deserving protocols asking for similar amounts, and as others have called out, the incentives to Camelot in isolation may create an unequal playing field.
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A core problem here is a lack of Arbitrum DAO process. This proposal is a binary choice, when it really shouldn’t be. Ideally, we’d see many proposals batched. Changing from one to many alters the evaluation criteria notably:
One proposal: Is this net positive or net negative for the ecosystem? (all or nothing)
Many proposals batched: Is this the best, relative to alternatives, for the ecosystem? (choose one, choose many, or choose none)
Many of the impacts/goals outlined in Camelot’s proposal are awesome and would be positive for the ecosystem… the struggle is the all or nothing nature of the question. While this proposal may be net positive — without exploration of alternatives, it’s tough to tell if this is an efficient use of capital for the DAO. Are there other protocols/teams well positioned to accomplish similar things? Are there other methods of achieving the same goals?
Instead of evaluating proposals on an individual basis, this process should batch many proposals together. In order to ensure a fair & sound distribution, Arbitrum should structure a formal liquidity incentive program where decisions as to which protocols receive incentives (and how much) are established all at once & in accordance with uniform criteria, as was the case with the airdrop.
Polygon, Avalanche, and Celo (and few others) have all gone this route in the past, to the tune of $100mn+ programs. I’m sure there are some good learnings to takeaway from the successes & failures of past attempts at incentivizing ecosystem activity.
Nonetheless, Camelot didn’t have any other choice but to do an individual proposal because no such program/group currently exists to allocate incentives. Their bias toward action is commendable.
Some smaller grant, or perhaps even just the $2mn in $ARB received from the airdrop, is likely a good starting point for a small-scale liquidity program, buying the Arbitrum DAO some time to set up a formal working group.
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A related point, I think it’s pretty clear that the DAO forum is a bad venue for analyzing & debating these types of proposals. Allocating capital effectively is tough work and requires some judgment calls to be made. Attempting to come to community alignment (and then hold projects accountable after the fact) with this many cooks in the kitchen will never work — this process would be far more efficient if delegated to a few leaders within the community.
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Assuming the Arbitrum DAO is going to begin using its treasury to grow the ecosystem, the next question that arises: What types of activity should the DAO be incentivizing? This will inform which protocol/programs tokens should be allocated to.
At a high level, Arbitrum should be intentionally allocating capital to support the long-term growth of the ecosystem, not short-lived activity spikes. Here’s some things this should probably include:
Developer incentives — Novel on-chain products/protocol/experiments have been the core driver of Arbitrum growth. Going directly to the source of the innovation — the researchers & developers themselves — is perhaps the most effective (though least scalable) method of growing Arbitrum long-term. This includes things like hackathons, dev grants, an ecosystem investment fund, bounties, etc.
Direct incentives for experiments — To make Arbitrum the home for innovation, Arbitrum can incentivize activity in exciting, but early stage, areas (think: what’s going to be big in a couple years? Start seeding activity in those protocols today). This might include things like: NFTfi, RWAs, exotic derivatives, etc.
Direct incentives aimed at overcome bootstrapping problems — For high conviction subcategories of crypto with active user demand that are merely hindered by liquidity constraints or user onboarding friction (or something else solvable with the right resources), direct incentives could be quite valuable as a short-term boost to get the protocol to a sustainable state. This is particularly important when the hindrance is holding back the broader ecosystems — Ex. devs can’t build the products users are demanding because there isn’t enough liquidity or value to capture in the building blocks. This might include incentivizing long-tail options, delta-neutral vaults, rate/yield swaps, etc.
Incentives that reduce user/developer friction — Arbitrum can use incentives to bolster invaluable ecosystem resources (things many protocols rely on). One recent example that’s close to home: deep (and cheap) liquidity for USDC → USDC.e and/or tooling to support the transition. Others might include deep liquidity for other stables and/or core spot/perp trading pairs.
Broad liquidity incentives — A few of the sections above include narrow/targeted liquidity incentives, while this section contemplates less targeted incentives. While broad liquidity incentives have shown to generate less bang for your buck, there may still some good outcomes. Generally this is akin to large-scale marketing or paid user-acquisition scheme. Many more users & devs will be exposed to Arbitrum, some of which will stick around longer term.
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On the discussion of who (which protocols) should receive incentives, a balancing act exists between these two: 1) Broad distribution enhances competition, and keeps the ecosystem open & accessible, and 2) The highest quality teams/protocol/communities will deliver significantly outsized ROI for Arbitrum ecosystem (following a power law distribution). So an uneven distribution that is careful to not over allocate to top protocols is likely optimal. Again, not terribly far off from the logic of the Arbitrum airdrop.
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Within this lens, here’s how I’d review Camelot’s token plans:
Ecosystem builders — This primary involves providing liquidity for Arbitrum ecosystem governance tokens & other long-tail pairs. Cool to see that many of these pairs are almost exclusively on Camelot. There is some value in incentivizing this as part of a plan to broadly jumpstart DeFi activity on Arbitrum, but I’d put this on the lower end of Arbitrum ecosystem priorities. My sense is that DEX liquidity is usually not what’s holding Arbitrum ecosystem projects back and/or predominantly contributes to short-term growth.
The updated proposal strongly emphasizes pools with ARB as a base asset. I’d defer to L1/L2 token economics experts on this one, but I wonder if this will really drive that much value back to ARB? Or will this just create more friction for users? Seems like most ETH-L2 activity has made ETH/USDC part of the base pair, and I’m not sure that this is necessarily a problem.
Integration Partners — This section has some high potential, though it looks like this was trimmed down in the revised version of the proposal. Using incentives to drive growth of the developer ecosystem building on top of Camelot feels quite valuable. It’s a win-win for the ecosystem & Camelot, as the infrastructure built & incentivized here (liquidity managers on V3) has application across multiple protocols & is targeted toward supporting a specific user set. Short-term incentives here may help drive longer-term fundamental usage of protocols building on top of DEXs.
Core Pairs — In principle, I think there is some value here. However, it appears that Uniswap (and Trader Joe) have significantly more liquidity & trading volume relative to Camelot on these pairs, so while I think this is a strong approach/goal, it’s an open question for voters of how much priority should be placed on Camelot vs. other spot DEXs.
LSDs — This is a compelling strategy to help migrate LSD liquidity from ETH to Arbitrum with the help of liquidity incentives. This seems mutually beneficial for Camelot and the broader Arbitrum ecosystem. And there may be other additional methods of facilitating this liquidity migration that this section could be coupled with.
General thought: despite some questions I have around whether certain parts of this proposal are the most effective use of $ARB incentives, I’m generally pro experimentation with DAO incentives, and think this proposal outlines objectives well and outlines some accountability measures, which is great to see.
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All in all, quite excited to continue the discussions Camelot has started with this proposal. Properly structured ecosystem incentives have the potential to significantly enhance Arbitrum’s growth — benefiting users, builders/projects, and the Arbitrum DAO, alike.