I’m hoping to start a discussion around creating long term sustainable revenue for the DAO. Right now there is $2M in ETH sitting in a DAO controlled address as a result of sequencer revenue. I’d like to converse about:
Ways to increase this revenue / if we want to.
How these funds might one day be used.
There are two potential methods for the DAO to increase sequencer revenue:
Update the sequencer to a MEV collecting address (many methods this might be implemented to create value for ARB).
Increase the cost of transacting on the L2 in order to increase the delta between L2 fees and cost to post call data to the L1.
The revenue can be used for countless potential ideas: public goods funding, return to token holders, protocol owned liquidity, incentives and so much more.
To point number 1, I don’t think it would be wise to have a centralized sequencer extract MEV for regulatory reasons, and there is no battle tested infra for shared/decentralized sequencers at the moment. I also don’t think optimism extracts MEV yet given their sequencer is also centrally operated, so this could worsen the user experience on Arbitrum. My gut says hold off on MEV extraction for now.
To point number 2, I would support an increase in L2 fees to get a head start on building up a war chest of ETH. If the DAO is likely to support retroactive airdrops with the foundation’s allocated tokens (this is likely, imo), I think this would be an especially great idea as it would put most of the burden on airdrop farmers that are ultimately extracting from our ecosystem.
A unique idea the comes to mind for Arbitrum would be to use the ETH that accrues from the increase in L2 fees to bootstrap an LSD. The Arbitrum DAO would constantly be accruing ETH staking rewards to the treasury. Some other off the cuff ideas to incentivize this LSDs use would be supporting it as a gas token, using ARB as token incentives to mint the LSD, bootstrapping DAO-owned-liquidity on a ETH/[insert LSD] pair to generate more revenue and ensure strong peg strength, etc. This is obviously just an idea and would need a lot more research… but fun to brain storm nonetheless!
Love this topic. Few understand how valuable this continuous source of ETH revenue is to the DAO.
With that said, a few initial thoughts:
Nitro is by far the most efficient tech in the ecosystem. This probably creates some room to theoretically increase fees.
I believe we should be thinking about the future when EIP 4844 has been implemented and design fees for that paradigm (also probably is bullish for our ability to increase fees).
I think we should always aim to be building our ETH stack over time. In my opinion, ETH is the most bullish asset in the world and it’s great for the DAO to have a healthy stack. It also gives the DAO optionality for spending without selling ARB. This would still leave room to spend ETH, because the sequencer is bringing in so much new ETH over time.
We should start looking into opportunities to stake ETH. This could be a bit tricky given that the DAO is on Arbitrum. Maybe we can do some kind of partnership with a group like RocketPool to build out infra with us?
Thank you for adding Rocketpool and Steakhouse by Blockswap, and all others partnerships with other groups could be explored to build the necessary infrastructure. To create long-term sustainable revenue and earnings for the DAO.
One thing to consider with regard to MEV is the effect on user experience. I believe this is why many in the Arbitrum ecosystem see keeping the sequencer FIFO for now, and similarly fair in a decentralized model, as an important component of the chain’s philosophy. So, while MEV can certainly increase revenues in the short term, is it a smart choice in the long run given Arbitrum One’s potential to be the center of DeFi activity on Ethereum?
Am personally a fan of this idea, which should be explored more by those tech savvy enough to be able to figure out the safest method of setting it up.
I am also in support of this, and think that it would be great if we also considered using some of the added fees for supporting projects in the ecosystem. Like a portion could be designated for DAO for any other activities, but a portion would be put into a fund to stimulate innovation on the blockchain.
I hope the arbitrum dao , in the future can make partnership with others dao or related entities after Regenesis of Stark net , zkSync , Base , Boba, Optimism, Polygon Zkevm, Linea, once they are mature battle tested + Layer zero and other layers 1 .
The conversation surrounding MEV (Miner Extractable Value) is undoubtedly crucial in the L2 space. While most of this discussion has occurred on platforms like ethresearch.ch and Flashbots, transitioning this conversation to the governance forum is a step in the right direction.
However, approaching MEV from the perspective of “maximization then utilization” represents just one point in the potential solution space. I believe this approach may not be the optimal solution, as it could create adverse incentives between users and the chain in the long run.
Preliminary revenue estimates place the L2 sequencer at approximately $100 million per year. This substantial sum will likely continue to grow as more users join the network. Consequently, addressing questions like “Should Arbitrum invest in R&D on MEV-minimization technologies?” may become increasingly challenging.
In light of these considerations, I urge caution when examining MEV in the context of an L2 and its sequencer.
I have a lot of thoughts that I hope to flesh out in a future post, but there are plenty of potential avenues to both increase the revenue generated by the sequencer, and ways to distribute that revenue that best supports the users and the long-term value of the network.
Ways of increasing the revenue could consist of
PBS where MEV either flows directly to toke holders, or rather is burned from the total token supply. I prefer the burn as it likely looks better from a regulator standpoint and benefits all holders alike.
Scalar multiple. Applying some multiple to the estimated gas fees paid to the L1. We will likely need to wait until post EIP-4844 before figuring out the specs for this implementation, but as L1 blob fees become 10x cheaper than they currently are, there is plenty of room to use a scalar multiple to generate higher margins per transaction while the user still pays much less than they currently do.
Distributing that revenue
Public goods funding. While Arbitrum is still early stage tech, its imperative that the network fund initiatives that push the network forward. Particularly, this should go towards cases that aren’t particularly easy to monetize from outside sources, but provide outsixed benefit to the network
Return to token holders. Token holders do have distinct power of the wallet address containing sequencer reveneu. As a result, they could vote to return this value to token holders. This could be given out automatically to anyone holding the token, or could be to those who stake their ARB, whether in a PoS type system for a decentralized sequencer, or rather just a lockup.
Liquidity incentives. Depending on Arbitrum’s goals from a liquidity and adoption standpoint, it could be a good idea to use ARB as incentives for particular network behavior. Whether that’s providing liquidity on DEXs, trading volume on perps, or other particular metrics, using revenue to facilitate desired activities could be beneficial for the network.
I’m glad you’re getting this discussion started, and I hope to play a key role in facilitating how cash flow is managed for the Arbitrum DAO.
With FIFO ordering MEV is still extracted from users, it’s just a latency and colocation game. Likely, users would benefit more from a MEVA type mechanism where proceeds were returned to them. In other words if your main goal is to create the best UX possible, we’d probably be better off selling the rights to ordering and returning as much of the MEV to the user as we can.
@kydo - I believe this approach may not be the optimal solution, as it could create adverse incentives between users and the chain in the long run. what if maximized sequencer revenue and retuned its proceeds to users? Not out of the question imo. In light of these considerations, I urge caution when examining MEV in the context of an L2 and its sequencer. I think it’s very important to examine it and have a conversation. Particularly, given the risk that the centralized sequencer poses to the liveness of the L2, it would be really smart to have a backup plan.
