[SOS Submission] Tnorm - Strategic Objectives

DAO Programs & Initiatives Strategic Objective Settings (SOS)
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State of Arbitrum - Q1 2025

L2 dominance is currently a two-horse race between Arbitrum One and Base. Arbitrum’s technical foundation, with upgrades such as Stylus, TimeBoost, and Stage 1 Security, has contributed to its position as the largest L2 by its total-value-secured (TVS). Despite Arbitrum’s technical achievements, the network (and largely the DAO) has failed to attract and retain builders convincingly.

Arbitrum’s DeFi market share (in TVL terms) peaked at around 5% in Q2/Q3 of 2023. Since then, that market share has steadily declined. Today, Arbitrum ranks 8th amongst all chains and second amongst Ethereum L2s, behind Base.

Base directly challenges Arbitrum’s Market Share amongst L2s.

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Source: DeFiLlama

Further, as @momir_iosg shared in their ARB’s Wake-Up Call proposal, Arbitrum’s interest in retail sentiment and mindshare has declined significantly. Arbitrum largely missed the retail fervor spurred in the last 12 months, missing out on major retail narratives (social, AI, pump.fun and memes, etc.) and, more broadly, losing market share to alt-L1s and EVM chains. The DeFi ecosystem has suffered dramatically, positioning it just eighth in terms of TVL and at meaningful risk of dropping out of the 10 largest chains in the face of new incentivized chains (Sonic, Berachain, etc.) and incentivized alt-L1s (Sui, Aptos).

Arbitrum is facing increased competition from altEVMs and side chains.

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Source: DeFiLlama

Fragmentation is partially responsible for stagnation in all L2 DeFi. This is increasingly evident as major chains look to interop to help address fragmentation.

Optimism is moving toward standardized and uniform governance to enable interop. Arbitrum’s vision supports freedom but opts for an intents-driven solution to power cross-chain swaps and transfers. If Interop is the future, Arbitrum One liquidity will serve as a strong moat for not just Arbitrum but also the entire Arbitrum ecosystem and Orbit stack.

ETH activity on Arbitrum has dwindled significantly since early 2024. Although Arbitrum has been the most successful among L2s at attracting liquid staking tokens (LSTs), wstETH reaching approximately 80K, the growth in this area has been modest, signaling a need for renewed focus on revitalizing ETH-based activities on the platform.

In the realm of stablecoins, the picture is mixed. USDC is experiencing growth, yet overall activity remains stagnant. ~$2B USDC is locked in the Hyperliquid bridge, and there is uncertainty about whether Hyperliquid will continue to support Arbitrum’s bridge exclusivity. Moreover, USDT has significantly declined $2.5B since December. In a bright spot, RWAs, thanks to STEP, have a cornerstone on Arbitrum, but lag significantly behind mainnet and L1s. A clear opportunity to take advantage of RWA financial products and services should be a bright spot for Arbitrum to explore further.

For BTC, Arbitrum’s position is also under pressure. The platform currently holds around 8K in WBTC and approximately 60 cbBTC. Although these figures have remained steady, Base’s cbBTC is now at parity with Arbitrum’s and appears poised to overtake it, especially with Coinbase supporting distribution for BTC loans. This further underlines the need to address a rising competitive landscape.

Objective 1: Arbitrum is the Home of Ethereum DeFi

This objective aligns the Arbitrum ecosystem and stakeholder base toward a singular focus on asserting Arbitrum’s dominance in DeFi.

Establishing best-in-class liquidity, yield products, and leverage products to build a strong economic foundation to attract future builders, institutions and Orbit chains, as well as non-financial builders (gaming, dePIN, etc.) who can leverage this liquidity (either on ArbOne or via interop) without worrying about bootstrapping it.

The below provides broad strokes, but to drive adoption, OpCo must lead by establishing clear metric-driven KPIs across these strategies, targeting TVL, slippage, utilization, and market share objectives across each vertical to ensure Arbitrum is on pace for ambitious growth and DeFi dominance.

Year 1 - Arbitrum’s DeFi Renaissance

Return To DeFi Fundamentals

Earmark 80% of the DAO’s allocated capital toward rebuilding a strong DeFi foundation focusing on:

  • Big 3 Trading Liquidity (ETH, BTC, Stablecoins)
    • Ensure Arbitrum One is Ethereum’s most attractive liquidity venue for these trading these assets.
    • Optimizing for low-slippage and high utilization (both retail and whale users) across the following assets and asset-denominated derivatives:
      • Stablecoins and dollar-denominated derivatives (RWAs, synthetic dollars, etc.)
      • ETH and ETH-denominated derivatives (LST/LRTs, etc.)
      • BTC and BTC-denominated derivatives (Wrapped Bitcoin, Bitcoin LSTs, etc.)
  • Best-in-class Yield Products
    • Arbitrum One is the most utilized liquidity base for stable yield strategies on Ethereum:
      • Eth Staking Products
      • Stablecoin/RWA Yield Vaults
      • Yield aggregators and optimizers (Pendle, vaults, etc.)
  • Best-in-class Leverage Products
    • Establish deep perpetual and derivatives liquidity that supports a diverse ecosystem of perpetual and leverage-based products
      • Looping products
      • Leveraged yield farming (Contango, etc.)
      • Sophisticated trading products (Pair trade, basis trade, etc.)

Operational Alignment

  • Operational Parity
    • Reach operational parity with key Arbitrum-aligned entities (Arbitrum Foundation, Offchain Labs, Entropy, OpCo, etc.) to ensure that grant funding, venture investments, partnership deals, liquidity management, DAO-funded incentives, and protocol integrations are coordinated from initial financing to go-to-market execution.
  • Fund Winners
    • Align liquidity strategies with sustainability by focusing on supporting and bootstrapping winners rather than equality.
  • Product-First Approach to Sustainable Liquidity
    • Explore long-term and sophisticated liquidity strategies, including network-owned liquidity, aggressive and experimental liquidity solutions such as DAO-aligned liquid funds, auction markets (Royco, etc.), and quantitatively robust incentive programs.

Year 2 - Scaling Capital and Distribution

  • Scaling Capital with Organic Growth:
    Build on the foundation from Year 1 by doubling down on organic growth sectors across the ecosystem. This includes:
    • Expanding liquidity pools to reduce slippage and attract retail and institutional participants.
    • Refining yield products based on performance metrics and user feedback to reinforce organic market growth.
    • Deepening leverage product offerings to capture more sophisticated market segments, targeting capital efficiency.
  • Establishing Robust Distribution Channels:
    Create and expand distribution networks for Arbitrum DeFi products by:
    • Target 1-3 strategic distribution partnerships with CEX and/or Wallet integrations to increase product reach and distribution of Arbitrum’s financial ecosystem.
    • Incubate sovereign and DAO-aligned on-chain and off-chain distribution mechanisms that ensure Arbitrum DeFi products are accessible across multiple channels.
    • Implement marketing and incentive programs designed to drive user adoption and sustained retail usage to reinforce Arbitrum’s position as the go-to DeFi hub on Ethereum.

Objective 2: An Accountable Operational Framework

Arbitrum stakeholders are moving the DAO toward an “aligned-entity” roadmap, where Arbitrum-aligned entities are officially recognized to oversee the execution of specific tasks and programs on behalf of the DAO. To date, DAO execution provides scant evidence that this ambitious roadmap can be completed, nor are the established entities taking publicly visible roles to ensure they are aligned under a comprehensive strategy. Both steps must be formalized and operationally executed over the next year.

Year 1 – Establishing an Operational Structure

  • Establish Operational Swim Lanes: Define focused scopes for each Arbitrum-aligned entity under the DAO’s funding purview, including clear assigned responsibilities and direct accountability for every stage in the partnership and investment lifecycle and sales pipeline.
  • Strategic Alignment: Initiate decentralized goal-setting, performance review, and funding frameworks that provide structure for transparency and stakeholder confidence.
  • Empower Lean Entities: Prioritize hiring well-paid executors to support OpCo and establishing new entities with clearly defined goals to ensure that early operational processes are robust, lean, and effective.

Year 2 – Scaling and Institutionalizing Accountability:

  • Refine Operational Processes: Build on the foundational swim lanes by refining and scaling operational structures, ensuring continuous alignment between the DAO, Arbitrum Foundation, Offchain Labs, and other Arbitrum-aligned entities.
  • Enhanced Decentralized Governance: Institutionalize the strategic frameworks established in Year 1, integrating regular performance reviews and decentralized goal-setting to align Arbitrum entities toward common objectives.
  • Transparent Metrics & Reporting: Establish comprehensive metrics and reporting mechanisms to continuously monitor the execution of the aligned entity roadmap, ensuring that accountability and transparency are maintained as the framework scales.

Objective 3: Aligning ARB with Arbitrum IP

ARB’s current role is primarily confined to DAO governance voting, which, while valuable, doesn’t capture the full economic potential of the network. Stakeholders desire ARB to capture and reflect the network’s value. To achieve this, the DAO must execute two interrelated workstreams over the next two years:

Year 1 – Sustainability & Revenue Generation:

  • Framework for Generating DAO Revenue: Conduct a thorough financial audit of existing revenue streams and project future revenue to establish multifaceted and sustainable income.
  • Operational Alignment: Develop a comprehensive strategy to align DAO revenue channels with broader network activities, ensuring that revenue is reinvested to support ongoing operations.
  • Initial Infrastructure Development: Build the technical and financial frameworks needed to support ARB’s utility as the core of the Arbitrum ecosystem.

Year 2 – ARB Staking & Real Yield Projections:

  • Technical Infrastructure for ARB Staking: Continue to refine and deploy the infrastructure necessary for ARB staking, ensuring security and scalability.
  • Real-Yield Framework: Develop and implement a framework for ARB staking that directly links staking returns to DAO revenue performance, ensuring that staking yields are tangible and reflect network performance.
  • On-Chain Alignment: Deploy permissionless contracts with decentralized governance for on-chain revenue-sharing, with mechanisms to ensure ARB staking is activated when sustainable and attractive yield is available to distribute the underlying value generated by the network to ARB token holders.
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This SOS in our opinion, presents a compelling vision for reestablishing Arbitrum as a dominant force in the DeFi landscape. Defi is how we got to know and use Arbitrum, and is something we think the community as a whole has semi diverged away from in recent months. By again focusing on foundational elements such as enhancing liquidity for major assets like ETH, BTC, and stablecoins, the proposal addresses critical areas that are essential for attracting both builders and users. Overall given the recent shifts in market dynamics and the emergence of formidable competitors like Base, this is needed in a timely manner.

The proposal’s acknowledgment of the need to adapt to the evolving DeFi ecosystem demonstrates a proactive approach to governance. Recognizing the challenges posed by fragmentation and the importance of interoperability, particularly in light of other chains’ moves towards standardized governance, is crucial. By aiming to position Arbitrum as a hub for Ethereum DeFi, the proposal not only seeks to reclaim lost ground but also to set the stage for sustainable growth and innovation within the ecosystem.

In addition, clear, metric-driven KPIs to guide these strategies is commendable. Establishing tangible targets for TVL, slippage, utilization, and market share will provide the DAO with measurable indicators of progress, ensuring accountability and facilitating informed decision-making.

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Thank you for posting this.

I generally agree at high level on most if not all goals, and I am not here to go into too much detail.

There is maybe a small addiction to the first point.

It obviously quote depth of liquidity, bluechips, and stablecoins. Specifically on stablecoins, I think in the 1 year objective we could try to expand the amount of stables in Arbitrum.
Everybody and their grandma knows at this point that stables are one of the best use case of crypto: but stables are not only USDC and USDT. We currently have EURC for example which is deployed on Base and Solana, but not in Arbitrum. While for sure Europe is a smaller market, today EURc (alongside EURe but i might be wrong on this so don’t quote me on the latter) is the only mica compliant coin.
We are also starting to see several other stablecoins from other countries.

Finally, we are seeing a push of Base to try an index this market as much as they can, through initiatives like this one: https://stablecoins.earth/

Arbitrum home of DeFi will also mean, in future, trading traditional markets on chain. Forex is a really low hanging fruit in this sense, because even just pooling eurc against usdc in a concentrated range means effectively market making the two currencies (in a way extremely simplicistic and maybe not profitable, but is an example to convey an idea). Having lending platform implementing good stablecoins will also allow for creation of leveraged onchain position on forex as well.

TLDR: arbitrum home of defi, today, also means increasing the amount of different stablecoins in our chain, and we should also put some effort in this sense.

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Thank you for the submission. I think these are great objectives.

I’d like share my thoughts a bit on Objective 3: Aligning ARB with Arbitrum IP. I think this is a super important topic, but it doesn’t get discussed enough.

It’s been hard to track DAO’s finances and treasury and follow what’s happening. The new dashboard by @Entropy is a great improvement: Dune - Arbitrum DAO: Financials. Is clear how much expenses vs income DAO has done so far. It’s clear, that the current DAO is not sustainable.

I’m glad that sustainability is being highlighted here — it’s something we really need to focus on. Starting with a financial audit is a great first step. But after that, we should focus on two things:

  • Strengthening the revenue streams that already work.
  • Encouraging even more experimentation around new ways to make revenue.

Maybe you could even add a point under this Objective about how to encourage more experimentation? Like hosting hackathons or running competitions for the best new ideas to grow revenue for the DAO?

I could really get behind the Objective by Max, who called it: Give premium to ARB:

Since this part is a bit more general, I think it would be great to add a few concrete ideas about what this objective should deliver.

Here are some ideas for ARB staking and real yield that I think this objective addresses:

  1. Use ARB for DeFi and governance at the same time:
  • Could we allow staked ARB to still retain its delegate voting power and generate yield at the same time?
  • Could ARB be used as collateral to borrow funds, but still be counted toward governance voting?
  1. Tie spending proposals to staking incentives:
  • Any proposal that asks for a significant amount of funds (especially ARB tokens) should also offer a way to generate that funding.
  • For example, if a project needs $10k a month, how much ARB would need to be locked/staked to generate that yield instead of just spending ARB directly?

@tnorm Here are a few ideas that came to mind while reading the Real-Yield Framework section. Are these the kinds of examples you were thinking of? Curious to hear what else you had in mind.

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Objective 1

We strongly agree with @tnorm’s points regarding Arbitrum’s significant decline in its DeFi ecosystem. Notably, its positioning is eighth in terms of TVL and the meaningful risk of further decline due to intensified competition from incentivized chains. Reclaiming Arbitrum’s prominence in DeFi should indeed be a top priority.

Additionally, we fully support the stance on interoperability. While Optimism adopts standardized governance models, Arbitrum’s emphasis on an intents-driven solution uniquely positions it to maintain strong liquidity for Arbitrum One. This liquidity could act as a substantial competitive moat, benefiting the entire Arbitrum ecosystem and Orbit stack.

Based on this, Arbitrum must allocate more effort and resources to rebuilding its DeFi ecosystem. Historically, DeFi has demonstrated its capability to attract significant liquidity and user engagement. Arbitrum initially established itself as a hub for DeFi activity, a position it must reclaim to remain competitive amidst aggressive initiatives by other chains. Therefore, reinforcing dominance in DeFi aligns perfectly with Arbitrum’s long-term strategic goals.

A few comments on the specific suggestions:

Regarding this, could you please clarify what “allocated capital” specifically refers to? Is this the capital intended for any DAO-approved initiative broadly, or is it referring to capital dedicated solely to specific initiatives such as the Arbitrum DAO grant program?

We strongly agree with your recommendation to achieve operational parity among key Arbitrum-aligned entities. Coordination across these entities is critical to effective and successful execution.
In particular, we propose creating or reorienting an existing AAE specifically toward DeFi, similar to the Gaming Catalyst Program, to ensure that the DeFi vertical is adequately represented and prioritized.

Objective 3

Finally, we concur wholeheartedly with the need for robust financial sustainability frameworks. Conducting comprehensive financial planning, aligning DAO revenue streams with network activities, careful tracking of DAO expenditures, disciplined budgeting, strategic revenue generation, and treasury diversification into stablecoin reserves to ensure financial runway should remain top priorities for the DAO.

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Making the assumption that this is 80% of incentives earmarked towards growth-incentives of any sort, being directed towards the programs described in this submission, that feels like too much to the point that it will hamstring the budget available to any other potential ideas. This comes from me being increasingly disillusioned with the long-term sustainability of renting-liquidity.

There are other suggestions included under this rubric, granted, but the inclusion of this specifically makes me worried that the lions-share would be going into this and things of this nature, which I worry may not be productive.

I find this very welcome, as in my opinion The Vision was very heavy on “all these powers will be granted and delegated to AAE’s” while providing no expectation of oversight or accountability. AAE’s are useful and sure to serve an as important role going forward as they are now, if not moreso, but it has to be under a system of reasonable checks and balances on their activities.

So far the creation and evolution of The Vision happened, as far as I can tell, entirely behind closed doors with only the end-product dropped in our lap, without dialogue or even responses to comments in The Vision-thread that now exists.

Past behavior is the best predictor of future behavior, and past behavior of AAE’s working in concert have resulted in secrecy, non-transparent collaboration and one-way-communication without questions or concerns addressed. We have no reason to expect different from them going forward, so we need to require a reasonable level transparency and dialogue as one of the conditions of collaboration.

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Clarifying the phrasing as capital allocation simply refers to anything not operational. Grants, partnerships, liquidity incentives, POL, investments in infrastructure, etc. being targeted towards supporting DeFi as a vertical versus other verticals.

Incentives are a small portion of this bucket.