[RFC]: Fund Completion of CEX-> DEX Incentive Research

Proposals
1

RFC - Fund Completion of CEX->DEX Incentive Research

Abstract

This proposal aims to refine the work of the ARDC’s CEX to DEX incentive research and create a pilot program that focuses on migrating derivative traders from CEX to DEX. This initiative was formerly led by @Immutablelawyer , @Gaboss , and ARDC members and their research focuses on creating incentive campaigns at the network level.

We believe completing this research is the best way to create a targeted incentive program that provides flexibility for protocols while the DAO is still able to maintain oversight. Additionally, protocols and teams have stated the need for more flexibility and long term alignment as recently as last week’s incentive detox public call.

“DAO incentives need to have more flexibility to align long-term goals” ~ Darius from Vertex

Problem:

  1. Rigid Use of Incentives: The current status quo relates to incentives and has been a one size fits all. Resulting in mixed success among protocols that deployed incentives.
  2. Technical barriers: Most products specialize either in CeFi or DeFi and there are few solutions to help link the two ecosystems.This showcases the lack of integrations and standards seen in other industries.
  3. Communication: there has been a lack of mechanisms to target this user base directly to funnel them to Perp DEX Products, with strong and long-term incentive programs, ensuring the retention of this liquidity on the DeFi side.

Goal:

To complete research and create network level incentives focused on migrating traders from centralized exchanges (“CEXs”) to on-chain derivative protocols within the Arbitrum network. The desired outcome being to create a sustainable process that (i) attracts traders from CEXs and (ii) retain traders within the Arbitrum ecosystem (iii) limits dilution of Abritrum.

Moreover, by focusing on migrating more volume and TVL into perpetual exchanges on Arbitrum we have the potential to create a transaction multiplier. Many traders, prop shops and market makers need to hedge, transfer assets from one account to another, utilize lending/borrowing services, etc etc. The increase of these transactions is not linear, it is exponential. This means more volume, more sequencer fees, and more value accrual for the Arbitrum ecosystem. Completion of the research and eventual pilot program aims to quantify this and create a repeatable process.

The working group will conduct work based on three phases: complete ARDC’s research, standards creations, and implementations with DAO support. The research phase will focus on interviews with institutional traders/power users, protocols teams, analysis of similar cold start incentive programs. Based on these finding guidelines and standards will be created for network based incentives for perpetual platforms. The last step is to bring a formal proposal to the DAO, that includes KPIs and a clear path towards growth for Arbitrum perpetual futures.

Motivation

“Show me the incentive, and I will show you the outcome” - Charlie Munger.

In contrast to prior incentive programs that have been conducted such as STIP and LTIPP, the focus will be on network-wide incentives that will be tailored towards aligning the long-term interests of the DAO directly with traders, rather than leaving the responsibility with the protocols themselves. As outlined in this forum post, even though prior approaches resulted in a program with less of an operational load, leaving decision-making in the hands of those with the greatest domain expertise, this also brought about a number of challenges.

This was corroborated by StableLab in their report analyzing STIP and LTIPP whereby they found that these incentive programs “struggled to retain users, with activity levels returning to pre-STIP figures”. Rather than bring about real sustainable growth, such incentives instead attracted mercenary capital, as seen by the significant drop-off in trader volume and activity following the end of the incentive program.

Rationale

The Opportunity

Messari in this report referred to perpetual futures as “arguably crypto’s stickiest innovation, as well as being the most capital-efficient instruments in crypto, generating the most revenue by market cap.” This highlights the value of focusing on derivatives given that they can offer a significant source of volume during adverse market conditions, which in turn help to maintain the value of the ARB token and subsequently the DAO treasury itself.

This report may seem stale as it is nearly a year old but the trend of growth among perpetual futures continues. The Arbitrum ecosystem is currently the second leading derivatives chain. And has done nearly 20% of cumulative volume of all perpetual future platforms.

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Throughout 2024, as of 29-Sep-24, Arbitrums’ daily derivative volume (DefiLlama) has ranged from $605 million up to $4.15 billion. For perspective, even if we take Arbitrum’s daily derivative volume at its peak, it is a fraction of the average daily March derivative volume of $140 billion(~3%) with a vast majority of the total derivative volume currently occuring on centralized exchanges.

Migration barriers

In attempting to attract traders from CEX we must first understand the appeal of CEXs. These include:

Centralised Exchanges Arbitrum-based DEXs
User Experience CEXs provide a user-friendly interface and seamless trading experience This is an ever-improving component of DEXs of which Arbitrum has already contributed indirectly towards, via the allocation of funds to DEXs in STIP and LTIP.
Liquidity Deep liquidity pools ensure minimal slippage and efficient trade execution. Liquidity incentives have been and will continue to be implemented to ensure substantial liquidity.
Advanced Trading Features Availability of margin trading, futures and other derivative products. An increasing number of DEXs are beginning to offer more complex financial products.
Customer Support Reliable customer support for troubleshooting and assistance. More challenging to compete with CEXs given their centralised nature.
Security & Trust Established reputation and perceived security. To build trust in the Arbitrum ecosystem by whitelisting DEXs and engaging industry leaders to carry out risk management of the incentives being rolled out.

The derivative exchanges currently positioned as market leaders include Binance, Bybit and OKX, who all charge maker fees of 0.02%, while taker fees amount to 0.04%, 0.055% and 0.05% respectively.

In addition to the above, individuals trading on CEXs also face a strong degree of friction to transition over to a DEX. These include:

  1. Inefficient on-ramp solutions: For traders to onboard themselves to a specific chain they must either (i) use a bridge which tends to be slow, has high fas fees, requires assets to already be on-chain (ii) use a FIAT on-ramp which tends to have high fees (2% - 5%), custodial and brings limited liquidity from smaller investors (iii) withdraw from a CEX.
  2. Lack of fluidity between CeFi and DeFi apps: Most products specialize either in CeFi or DeFi and there are few solutions to help link the two ecosystems.

Unequal crypto liquidity distribution: Currently 90% + of crypto liquidity is in CEXs. Given that users already have their liquidity onboarded on a CEX, protocols have limited options to incentivise users to transition to DEXs.

Specifications

Research Phase:

  • Conduct comprehensive interviews with institutional traders and power user of perps platforms
    1. Goal to understand the barriers for CeFi users
  • Conduct interviews with protocols to understand their limitations (resources, UX/UI, tech, etc)
  • Analyze historical data from previous cold start incentive programs to identify successful strategies and areas for improvement.

Standards and Integration Guidelines:

  • Develop targeted protocol standards based on research findings, focusing on the specific needs and preferences of CeFi users.
  • Identify services/tools that can be used to track and facilitate the transition of traders from CEXs to DEXs.
  • Utilize best practices frome research by ARDC and working group to create framework that rewards network wide metric growth

Arbitrum Community:

  • Establish clear Key Performance Indicators (KPIs) and milestones to measure success and guide adjustments.
  • Launch a pilot incentive program with a controlled budget to test the proposed strategies and gather initial performance data
  • Implement bi-weekly and monthly reporting mechanisms to monitor progress and make necessary adjustments in real-time.
  • Tested and adjusted based on performance data and market conditions.
    .

Overall Cost

185,000 ARB

Cost Breakdown

Four working group members paid $7,500 per month.

Three months of work

  • 1.5 months for interviews and ARDCs initial research,
  • 1.5 months for proposal creation and feedback, modification
  • 20-30 hours per week

4 x 3 x $7,500 = $90000 (185,000 ARB at current prices)

Team

We’re inviting skilled individuals to join the working group, particularly those with expertise in on-chain research, data analytics,project management, community management or incentive campaigns. Experience in derivatives trading, both technical and non-technical, is a plus. If there is strong interest in joining, we may introduce a formal application process to ensure a thorough review of all candidates.

Closing Thoughts:

The CEX to DEX initiative has been discussed and researched for nearly a year. ARDC, @Immutablelawyer , @tnorm , multiple delegates and protocols have clearly showcased the need for a network level incentive program like the CEX to DEX incentive program. The program aims to give the DAO the control it needs while creating a fair and efficient distribution of incentives to protocols based on clear objectives.

It will be the job of the CEX to DEX working group to clearly define these objectives to help migrate traders from CEXs to DEX. Using tools like boost, cede.store and others, we can conduct experiments smoothly and enable open access to campaign and incentive objectives. Starting simple at first and growing in complexity over time.

Acknowledgment

Huge thank you to the Immutable Lawyer, Tnorm, Alex Lumley, and members of the ARDC for all the previous work, research and feedback.

3 Likes
2

I would support this proposal due to the substantial opportunity it presents in expanding the derivatives market into DeFi. In TradFi, derivatives are a multi-trillion-dollar market. Bringing even a fraction of this volume to DeFi could significantly boost liquidity, usage, and transaction fees within the Arbitrum ecosystem.

As a frequent derivatives user, I favor Deribit on CEXs mainly due to its superior liquidity. While I’ve tried using on-chain dApps offering options, liquidity limitations are often the big problem and I hope proposals like this can help find solutions to overcome this obstacle. Personally, I appreciate the work the team behind Aevo has been doing and would love to see teams like theirs get involved in incentive proposals like this.

I also like that the proposal allows anyone to apply for the four-person working group, but how will these individuals be selected? Will the DAO community vote to choose them?

3 Likes
3

Hi! Thank you very much for the proposal.

I’m supportive of funding research, but I have some questions and concerns regarding the framing and the execution.

I think that CEX to DEX users migration is the goal of every on-chain dapp.

STIP and LTIPP incentive programs allowed applicants to propose their unique strategies to incentivize users to move their activity on chain. It was not the DAO who designed the strategy as you intend to propose with the conclusions of the research, but yes rules on the limits within which that strategy was meant to operate (for example, incentives should go to the end users).

That said, I’m not against a future proposal of this kind and less I am against research. Do you have the link or any document where the research you mentioned about the ARDC is available?

What I don’t understand is the need for a working group to carry out the research. This proposal could go through Questbook or one of the various funding programs of the DAO or the Arbitrum Foundation and could be executed by your team.

On the other hand, if the DAO proceeds with the working group, I still don’t see a strong justification for the cost amount. What are these values based on? Is there any reference? Additionally, 20 or 30 hours is a significant difference (50%). The requested USD amount for 20 hours is quite different from that for 30 hours.

As a reference, @karpatkey, Avant Garde, and @Aera were funded with 10K ARB (around 11–13K USD at the time) to conduct 2 months of research on the DAO’s treasury—research that remains relevant and valuable in its recommendations to this day. And each of them produced a unique report, offering their individual perspectives.

1 Like
4

I like this project; it aims to strike a balance between flexibility and accountability in incentives to get more traders on Arbitrum. Building on previous ARDC research is the way to go, and it will make this pilot even stronger.
For example, past research on STIP ARDC Research Deliverables concluded that incentives without a solid justification don’t always deliver the best results. The working group you mention should create a standard outcome model for each incentive request. This means setting clear expectations from the start, how much user growth we’re expecting and user retention. This brings transparency and also helps make real-time adjustments if something isn’t working.
ARDC’s research takeaway is that one big challenge is keeping users after incentives run out; a lot of past programs saw a massive drop-off in activity when that happened. It might be interesting for the working group to look into incentives that include retention metrics or even ‘milestone incentives’ to reward users who stick around.
I’m always up to support furthering research, so I agree with your proposed method on creating a working group and, as with every project, the more justification on the cost breakdown, the better.

2 Likes
5

Hi @Caesar,

This is a fantastic proposal, and Arb has the potential to become a leader in this space if we focus on research, investment, and continuous innovation. As someone who uses options, futures, and DEXs for swaps, I believe that first understanding the barriers faced by CeFi users will help drive quicker and more robust adoption.

I’m interested in joining this effort if it aligns with the team’s goals. I’m a CFA and have been trading across all asset classes for the past 15 years.

2 Likes
6

We find this research proposal to be well-structured and very well aligned with the ecosystem needs. The initiative builds upon previous ARDC work while meaninfully advancing the understanding of sustainable incentive mechanisms for derivatives trading migration.

The proposal effectively identifies and unpacks the significant market opportunity, evidenced by Arbitrum’s current positioning as the second-leading derivatives chain and the substantial untapped potential given that even Arbitrum’s peak daily derivative volume of $4.15B represents only ~3% of centralized exchange volumes.

The proposed research methodology demonstrates a pragmatic approach by combining qualitative insights from institutional traders and protocol teams with quantitative analysis of historical incentive programs. This should enable the development of more nuanced and effective incentive mechanisms that avoid the retention challenges seen in previous programs.

What makes this proposal particularly compelling is its focus on network-level incentives rather than protocol-specific allocations. This approach, combined with the emphasis on establishing clear KPIs and reporting mechanisms, provides a framework for more strategic and measurable ecosystem development.

The working group’s budget of 185,000 ARB for three months is beyond warranted given the scope of work and potential impact. Furthermore, the proposal’s recognition of the transaction multiplier effect from derivatives trading - encompassing hedging, asset transfers, and auxiliary services - demonstrates an understanding of the broader ecosystem value this research could unlock.

We would be happy to support and aid in the execution of this initative either through the means of our direct contribution or by facilitating connections with relevant institutional partners and industry participants that could enhance the research outcomes and eventual implementation.

Overall, we support this initiative as it represents a really thoughtful evolution in Arbitrum’s approach to incentive design and ecosystem growth, with clear potential to enhance the network’s competitive position in the derivatives market.

1 Like
7

Thanks for your thoughtful response. Aevo, GMX, Vertex, and many others have done a lot to push the derivatives space forward. Please correct me if I’m wrong, but I don’t believe Aevo’s L2 is part of the orbit chain network, so it may be challenging to work with them.

As for your second point, the process to join the team is still in the works. The key thing that needs to happen is to determine which service providers (e.g., cede.store, Boost, ARDC members) will be involved in this proposal. Then, we can determine how many researchers/analysts we may need to assist with data collection and analysis.

2 Likes
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Let’s start with the easy stuff first.

  1. I’m more than happy to share ARDC’s drafted proposal for CEX-to-DEX migration privately.

  2. I’m actually not very familiar with how the Questbook funding system works. Were there other funding sources you were considering? A quick TLDR would be great, along with guidance on where I can learn more about the funding sources you have in mind.

  3. I based the cost on previous RFCs for similar working groups. My main concern is ensuring we can compensate top delegates and service providers like Chaos Labs, Cede.Store, Boost, etc., for their time and support. That said, I see the value in small grants for a lean team that can move quickly to push the proposal forward to a pilot program.

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A concern I have is this will turn into basically another STIP/LTIP but targeted specifically for DEXs (DEXes?). As in we just going to continually shoot liquidity incentives at a bunch of DEXs expecting a different result? I see that is addressed in the motivation, as well as acknowledgement of other issues facing DEXs that aren’t liquidity specific. Which is good to see. So hopefully if this passes a group that gets picked is aligned with that ideology.

Probably putting the cart before the horse here, but if the net result of this three month project is just to give out liquidity / fee incentives I’m not sure if I can fully support a full program. Directly funding infrastructure building that resolves the issues listed feels like things that would work long-term, well beyond the moment ARB token boosts dry up. For example, user experience. How do we allow DEXs to build better products that are easier to use… can we build a psuedo ‘customer support’ network thru community members and information pieces… can we partner with a CEX so their users can user their front-end to add liquidity to DEXs on the back end while still feeling the security of the CEX (aiming high, I know…). stuff like that

1 Like
10

Agreeing with the direction of this proposal, the move from CEX to DEX is a long term trend and in the interest of the Arbitrum DAO, especially to drive more volume and TVL to the chain. The proposal is divided into three phases: research, standardization and pilot, with clear logic and a certain degree of operability.

Questions and suggestions:
1. the research phase will take 1.5 months, but will interviews with CeFi senior users and the protocol team lead to comprehensive conclusions in such a short period of time?
- It is recommended to prioritize and focus on the key needs of CEX head users and the shortcomings of the existing DEX, and to clarify which needs can be solved in the short term and which need to be iterated in the long term.
2. Incentives
- The proposal does not identify specific forms of incentives, such as direct subsidies? Rebates on transactions? Or other forms of incentives?
- It is recommended that the pilot phase prioritize the introduction of some low-cost, simple and effective incentives, such as cashback or fee discounts for transaction volume.
3. The proposal mentions the need to set KPIs, but does not specify specific targets, such as how many transactions are expected to be attracted, how many users are expected to be migrated, or how much serial fee growth is expected to be achieved during the pilot phase? These refined metrics will help the DAO see the impact of the proposal more clearly.
4. Is the budget of $185,000 ARB too high? In particular, could the $7,500 per month salary of the task force members be modeled after other DAOs’ salary scales?
- It is recommended that a portion of the budget be retained for the pilot phase, and subsequent inputs be adjusted based on pilot data.
5. Even if the incentive program attracts a group of traders, will these users be lost after the incentive ends? It is recommended that the proposal specify strategies for long-term user retention, such as optimizing the user experience and in-depth liquidity support.

11

Thank you for this proposal. It’s certainly been a topic of discussion for some time. In terms of its goals, I do support it. However, have you guys considered that every project building on Arbitrum is, broadly speaking, already working toward this same goal?

What I mean is, if the Arbitrum ecosystem becomes robust enough with strong profit potential, funds from CEXs would naturally flow in, along with capital from other L1s and L2s, without needing specific incentives.

On the other hand, if we rely on temporary incentives to attract arbitrage capital rather than creating truly essential applications to drive mass adoption, it could be a short-lived success, a false prosperity. Ultimately, ARB holders could be the ones most affected.

Happy to discuss more!

2 Likes
12

We like this proposal and align with the idea of funding research whenever we see potential impact and benefits for the DAO. That said our questions and doubts are the following:

From the very beginning of this RFC (even in the tittle) you mention the “completion” of this research and then later you added that this research took nearly a year, so considering these comments we would like to get more context on why this research was not fully completed at one go, which ones were the issues that did not allow the investigation to be 100% completed and now you request for fund to continue this job. We believe that placing this necessary context would be helpful for the community to get deeper knowledge as to approve the spend of funds or not beyond everything already said in the proposal.

We believe that if it’s already possible to share the draft, perhaps you could do so publicly to gather more feedback from the community. However, we also understand if you prefer to have it ready before presenting. What do you think?

We’re not convinced about the budget amounts. For more clarity, which RFCs did you base this budget on?

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I think it’s a great idea to focus on addressing a critical shift in the derivatives market: from CEX to DEX. I appreciate that the proposal not only includes specific challenges facing this transition, such as rigidity in incentives and a lack of integration between CeFi and DeFi, but also presents a detailed structure to develop network-level incentives.

1 Like
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1. Long-term user retention:
- The incentive program will attract a group of users, but how do we ensure that these users do not return to CEX after the incentive ends?Is there a targeted long-term mechanism, such as an ongoing activity incentive or a lock-in incentive?
2. Incentive allocation criteria:
- How will the incentive be specifically allocated? How will the incentives be allocated? Will they be based on trading volume, activity, or other metrics? How to balance the ratio of incentives for small users and large users to avoid concentrating resources on a few head users? 
Is the salary of $7,500 per month per working group member based on industry standards? At the same time, the cost of the research phase is relatively high, but the budget for the implementation phase is not detailed, should the cost be split more clearly?

The proposal is very clear in terms of direction and goal, but there is still room for optimization in terms of long-term retention mechanism and specific incentive distribution details. At the same time, strengthening user experience optimization and technical support, combined with the incentive program, will more effectively promote the conversion rate and retention rate of CEX users to DEX. It is hoped that subsequent studies and pilots will further validate the feasibility of the program.

15

We would support this proposal and would do our best to be included in any program that resulted from this. Aside from the obvious benefits to us as a perp protocol, we think this kind of program can really drive the ecosystem forward in terms of user growth. The users that are targeted here are not simply mercenary capital that will bridge between chains to take yield from the latest incentive program. They’re users who found a (centralized) platform and decided to stick to it for the sake of convenience and familiarity. This behavior doesn’t change if the platform is onchain, as long as the experience is good enough and the transition is facilitated smoothly. By bringing these users onto Arbitrum through a focused program, we can introduce them to a relatively small ecosystem of projects that can all provide high quality experiences to new users. Of course, designing a program to be good enough to bring users onchain and keep them there will take research, and we think funding a group to figure out the best way to do this is appropriate.

16

Below are the opinions of the UADP:

The general principle behind this idea seems sound. As representatives of Uniswap, we’ve been monitoring the general trend of CEX → DEX liquidity transfer. The ratio recently hit an all time high, creeping towards 15%.

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However, the UX/UI difference between spot onchain vs spot on a CEX is far more similar than derivatives onchain vs on a CEX. The incentive amount also may not be compelling enough for more TradFi consumers to come onchain. Their main concern is the infra and UX itself. Some users may just never have used onchain products, so this could be a neat way of introducing them to it—some may be pleasantly surprised.

There should be clear cognizance around who the target audience is for this program as well. It’s very different targeting an individual CeFi user versus funds and institutions. Interviews with power users in both categories would make sense. CeFi users also need to become aware of the incentives when they launch. There are A TON of perps platforms across numerous chains. Everyone is competing in this sector to draw users. Teams like Hyperliquid are launching their own EVM environment, which will likely be cheaper and more efficient than perp DEXs on Arbitrum. Solana’s Jupiter has seen a massive rise in volume due to the ability to lever up to 100x on large caps, with simultaneous proximity to Solana assets, which see more momentum than those on Arbitrum. CEXs are looking to get more involved in onchain-based products. Teams like CoinList just announced a perps product today…

Relative to STIP/LTIPP, a more data-driven and focused approach may result in robust KPI results, like stickier TVL and persistent volume. Interviews would also be a nice qualitative touch to understand CEX user perspectives rather than speculating on why they resist onchain products (beyond potential obvious reasons). Perhaps the most compelling part, however, is the swath of other products that users can leverage when coming to an L2 like Arb. The third-order effects of attracting CEX users to Arb is an increase in usage of other applications. But…this also remains an assumption. A key part of the interviews should be assessing how deep these CEX users are willing to go with onchain products, even beyond perps.

As for the budget, it seems slightly steep, but we are open to seeing what others think.

1 Like
17

Hi @Caesar,

Thank you for the proposal. We’ve gone through it and would like to share our thoughts.

Concerning the ARDC’s drafted proposal, we are not aware of the draft proposal mentioned, taking into account that you’ve highlighted it was done by ARDC and considering that your proposal hinges on the foundation it sets, we would appreciate it if you could provide a link so all delegates can view it.

While we support furthering research that may benefit the Arbitrum ecosystem, we find the asked amount to be quite high, as @pedro also highlighted.

Considering that the drafted proposal was from the outgoing ARDC committee, we feel that the incoming ARDC committee should have oversight and determine more holistically whether this is a worthwhile focus at the moment. Considering that the incoming ARDC committee will be established within the next 2 months, we feel that waiting would be more prudent now.

18

The following reflects the views of the Lampros DAO (formerly ‘Lampros Labs DAO’) governance team, composed of Chain_L (@Blueweb), @Euphoria, and Hirangi Pandya (@Nyx), based on our combined research, analysis, and ideation.

Thank you for the proposal. We believe it is well thought out and aligns strongly with our ecosystem’s needs, particularly in how it builds on ARDC’s previous work to understand sustainable incentive mechanisms for derivatives trading migration.

We appreciate your transparency about past retention challenges. However, seeing the specific retention KPIs you’re targeting with this program would be helpful. This would help the DAO better evaluate the long-term value this initiative could bring.

The proposal outlines the research phase as lasting 1.5 months. Given the scope of interviews planned with institutional traders and protocols, will you be able to complete the interviews within such a short timeframe?

The fee comparison with CEXs provides valuable context for understanding the competitive landscape we’re operating in.

Looking forward to seeing how this initiative develops and contributes to Arbitrum’s growth in the derivatives space.

1 Like
19

Hello. Thanks for your proposal!

I have a few questions (echoing previous comments):

You open your proposal saying that the objective is to refine a research that is not public available. Can we have access to this research to better understand and evaluate the proposal itself?

The DAO just approved ARDC v2. Why not having this research into ARDC itself? One of the main issues with the previous iteration was not having demand coming from the DAO itself. This topic/research seems to fit exactly on this category.

20

Hey, thanks for sharing the proposal. While I appreciate the goal and find it intriguing, I agree with @Larva 's point. I believe funds will flow in naturally as a result of the initiative, without the need for a designated budget. Additionally, although this has already been mentioned, I feel the budget being requested is too high given the scope, timeline, and tasks involved.

Of course I’m always opened to further discussions and if you provide more details about it, I’m be happy to read it.