DeFi Renaissance Incentive Program (DRIP)

Non-constitutional

Changes on 5/12/25

• Added specification that funds will be sent to a foundation-controlled wallet with DAO-clawback capabilities
• Added a clear responsibility for the program's successes/failures to Entropy, even with the committee structure
• Added additional details surrounding community input, more specification that builders and procurement experts will be called on to give input through Entropy.
• Added flexibility around timeline in place of targeting July 1 start.

This proposal will be going to Snapshot this Thursday, 5/15.

Abstract

Entropy proposes a new type of incentives framework focused on targeting specific assets and activities across Arbitrum rather than specific protocols. Incentives per specific assets/activities will run in 3-month seasons through the DRIP so that the program can be adapted and different assets and activities can be selected as learnings are taken into account. Each season must have a singular, specified goal. For example, Make Arbitrum One the best place to borrow USDT against wstETH or Ensure Arbitrum One Has the deepest liquidity for trading USDT/ETH.

A season selection committee made up of the Arbitrum Foundation, Entropy Advisors, and Offchain Labs will be tasked with creating eligible, viable seasons with ideation input from partner companies and key stakeholders. The committee will maintain the right to modify, extend, or discontinue a season during its lifecycle. The “3-month” timeline is somewhat arbitrary, and is open to change dependent on perceived program success and market conditions.

The DRIP seeks funding of 80M ARB for the first 4 seasons, with a maximum of 20M allocated per season and a portion set aside for operational costs related to vendors utilized by the season selection committee. The season selection committee will procure partners for distribution and evaluation at their discretion, and potentially other partners as it sees fit. For example, the distribution partner will check the chain for wallet eligibility and distribute rewards to the wallets that have met the mandated goals of a season and create a frontend through which all eligible protocols will be shown. The evaluation partner will host open data around the program and recommend optimization improvements to the committee throughout a season’s lifecycle; after a season is complete, the evaluation partner will provide a more holistic analysis to the DAO. The same partners will likely be utilized throughout all 4 seasons. 80M ARB is the maximum amount that can be allocated throughout the 4 initial seasons, but there is no requirement to use all funds. All remaining ARB not used as part of the program will be held for further seasons or returned to the DAO if further seasons are not approved by the end of the 1-year mandate.

Motivation and Rationale

As the Incentives Detox concluded on December 17th, 2024, and with many parties exploring the next phase of incentives, Entropy has decided to take a first-principles approach to redesign the DAO’s incentives framework. After analysis of Chaos’ and Blockworks’ incentives reviews, and in collaboration with Gauntlet and other stakeholders, we have identified that taking the approach of incentivizing specific activities that the DAO would like to increase Arbitrum’s market share in will deliver better results than more generalized programs that are harder to evaluate and adapt. This is especially true for activities where Arbitrum has not yet achieved an established, stable market share or where the underlying vertical will be experiencing a systemic shock.

The DRIP is purposefully simple, targeted, and measurable, and focuses solely on the goal of bringing popular activity taking place on other ecosystems to Arbitrum One in a sustainable manner. In past programs, by lumping together oracles, perps, lending, dex trading, dex liquidity, bridges, and more, evaluation and iteration became an impossible task. One reason for this is the fact that protocols across different verticals and long-tail vs. core assets inherently cannot be judged on an apples-to-apples basis. The DRIP focuses on a controlled experimentation approach.

Looking across the space at activities that real DeFi users are executing in practice where Arbitrum’s market share shows growth potential either through innovation/potential partnerships on the application layer or through changes to the underlying market, a few ideas come to mind. For example, borrowing against yield-generating ETH a.k.a. “Looping,” creating the deepest liquidity on specific high-attention assets (per IOSG), bringing a vibrant wrapped BTC ecosystem to the network, increasing Arbitrum’s RWA utility and dominance, or focusing on attracting liquidity to restaking and LRTs. These are just a few examples of activities through which Arbitrum One has substantial room to grow, but the list goes on. We believe that for an incentives program to succeed, even within these targeted activities, target assets need to be selected in order for the program to proceed smoothly. By limiting programs to category-leading assets, or the category’s highest-growth assets, Arbitrum can take an opinionated stance and bet on what areas of growth it envisions as crypto’s most valuable use-cases into the future. Notably, the DRIP focuses on quality activities and assets that the DAO views as high-growth and -retention, rather than attempting to create a program that treats everything equally. The program focuses solely on using incentives as a tool in more holistic strategies around promising verticals where Arbitrum's penetration has room to grow sustainably in its competitive environment.

Another benefit of the DRIP is its value in business development and growth. Potential Arbitrum partners will see a program that could benefit them if they put a primary focus on Arbitrum. This will allow Arbitrum’s partnership teams, including Entropy Advisors and Offchain Labs, to use the DRIP as an incentive that makes Arbitrum more attractive to protocols exploring alternative/genesis chain deployments. This will create a frictionless path that effectively attracts new Arbitrum entrants while still supporting incumbents.

Upon ARDC analysis of our past incentives programs, a few findings are particularly notable:

[quote="chaoslabs, post:1, topic:25515"]

• Experiment and Iterate: Each of the studied protocols did this successfully in their own way. This was the clearest takeaway from the program and incentive programs should be thought of similarly to paid marketing campaigns in web2. The optimal design is constantly evolving and not always obvious purely to reasoning. There is no substitute for controlled experimentation.

• Keep the Incentive Criteria Clear and Simple: Users need to know what to do to react optimally to incentives. If the criteria are too complex, education becomes an issue, and attention will go to easier-to-earn incentives. All three protocols made the incentivized activity and payoff extremely clear and easy to understand.

• Use Incentives to Amplify New Features and Announcements: This was done by all three protocols studied and significantly impacts bootstrapping new markets, bringing visibility to new features and generally leaning into growth areas.

[/quote]

[quote="chaoslabs, post:1, topic:25515"]

• Do Not Interfere with the Natural Balance between Supply and Demand: Focusing too much on either side of the market can upset the state of equilibrium. This will likely correct once the program ends rendering this allocation of resources sub-optimal. This does not apply when the market under-compensates certain activities and require long-term subsidies.

[/quote]

[quote="BlockworksResearch, post:7, topic:23438"]

To summarize, all of the analyzed protocols saw their top-line metrics increase during the STIP, but in the months following the program’s end, figures trended back toward September 2023 values. There was some variability in how much capital/volume each protocol had managed to capture per ARB spent at the end of the STIP, but in the long term, these multiples tended to converge to a tight range. There are a few exceptions to this—protocols that are on the younger side and generally offer differentiated products. These protocols have successfully reached notably higher “steady states” compared to the beginning of the program, with incentives likely amplifying market penetration deriving from intrinsic drivers and on a few occasions, leading to more robust collaboration between the outperformers and other Arbitrum protocols, creating additional synergies.

[/quote]

[quote="BlockworksResearch, post:14, topic:23438"]

• For the DEX category, protocols that enhance LP experience (i.e. increase LP returns) outperformed.

[/quote]

[quote="BlockworksResearch, post:14, topic:23438"]

• Protocols that formed partnerships during LTIPP generally saw better results.

[/quote]

[quote="BlockworksResearch, post:14, topic:23438"]

TVL is an attractive vanity metric to optimize, the utilization of that capital is what ultimately determines the efficacy and success of lending protocols.

[/quote]

[quote="momir_iosg, post:1, topic:27706"]

established protocols have disproportionate influence

[/quote]

[quote="momir_iosg, post:1, topic:27706"]

The proposed distribution model shifts ARB token incentives from protocols to liquidity providers directly.

[/quote]

Taking these learnings into account, we believe that the DRIP’s ultra-targeted nature (controlled environment experiment), focused on high-value verticals where Arbitrum has high potential to increase its market penetration, is an ideal path forward as we continue to iterate and evolve over time. DRIP will also take advantage of the learnings to prioritize programs that focus on both supply and the efficacy of that supply through demand. Finally, marketing is a missing aspect from every past program, which the DRIP will address by having the foundation included on the committee and requiring eligible protocols to co-market.

Entropy encourages the whole community to participate in proposing new activities and assets for incentives and is happy to be the primary point of contact for community ideation. There will absolutely be opportunities for community input throughout the DRIP process. Entropy will be actively calling on the community to help ideate (and already have been) on the most impactful season goals and service providers with a particular interest in opinions from those with DeFi and procurement experience. That said, the committee will have full discretion over all aspects of season planning and execution with help from the onboarded distribution & evaluation vendors.

Specifications

Rules of a DRIP Season

-The seasons must have a defined, singular goal. Specificity is required. As an example, “Increase trading activity”, is not a specific goal, but “create the deepest aggregate liquidity for the USDT/ETH pair across DEXs on Arbitrum One” would qualify as a specific goal.

-Seasons are intended to be ~3 months, though they can be cut short by the committee or extended at their discretion, with the goal of always tapering rewards instead of arbitrarily cutting incentives at once.

-Overlapping seasons running in tandem that may make evaluation more difficult should be avoided.

-Need to be chain-wide and protocol agnostic (minus security-related whitelisting or a TVL/protocol-maturity requirement). Depending on the vertical and ROI after a program starts, the committee can expand or restrict how broad the program is.

-Actionable and executable, including all details required.

-Target asset/activity should maintain room for Arbitrum to grow its market share with a goal of eventually hitting “critical mass,” where incentives are no longer needed.

-Eligible protocols must include marketing in their frontend and on their socials, coordinating co-marketing with Entropy Advisors and the Arbitrum Foundation.

Distribution Partner

Each incentive “season” is governed by a set of rules specifying which onchain actions or participants qualify for ARB rewards. An independent distribution partner is responsible for:

1. Receiving ARB for the Season
2. Identifying Eligible Wallets: The partner reviews network data to find wallets that meet the season’s eligibility criteria.
3. Distributing ARB Rewards: Once the partner confirms which wallets qualify, it distributes the ARB to each eligible wallet based on the season’s defined, and potentially changing, parameters. No distribution is sent directly to protocols; all ARB flows to qualifying wallets.
4. Frontend Creation: Shows all eligible protocols, effective APRs, and data from the evaluation partner.

Illustrative Example

If a season incentivizes borrowing USDT against wstETH, applying to all lending markets with >$X million TVL, the evaluation partner would examine eligible lending protocols on Arbitrum, identify the addresses meeting the criteria (e.g., required collateral ratio, borrowing amounts, etc.), and distribute ARB rewards to those addresses.

Examples of potential partners include RoyCo, Boost, Galxe, Brevis, Merkl, and others. All costs associated with this partner will be taken from the 80M ARB budget, but the season selection committee prioritizes keeping low OpEx, as the point of the program is user rewards. Although, we will note that our opinion is that previous incentive programs run by the DAO could have been notably more effective had more resources been allocated to the programs’ operations.

Selection Process:

The season selection committee will have full discretion on how the procurement is run; public or private application and evaluation, open or invitation only, who is selected, etc. The process will be fully facilitated by the season selection committee, and the decision of the partner will be fully at their discretion.

Evaluation Partner

Each incentive program requires ongoing monitoring and analysis to assess its impact and guide continuous improvements. An independent evaluation partner is responsible for:

1. Providing Continuous Public Data: The partner hosts a publicly accessible data dashboard that tracks relevant metrics throughout the program, such as DEX volumes, total incentives distributed, user participation rates, and more.
2. Program Assessment & Recommendations: The partner periodically reviews program performance, compiling findings into reports, and recommends changes to, e.g., return levels of incentivised actions and eligibility criteria during each season. After each season, they additionally provide recommendations on how the program could be improved. Analysis should include retention metrics in the following 2-3 months as well.

Entropy will take this role into our domain as well, but we believe having an additional outside party will be beneficial.

Illustrative Example If a program incentivizes liquidity provision on DEXs with over $10 million TVL, the evaluation partner would track how many and what types of wallets participated, the total ARB distributed, changes in TVL and capital efficiency, overall volume growth, cost of capital for similar opportunities in other ecosystems, returns to users that are performing the incentivized action, retention after the program’s end, etc. The partner would then share these insights and recommend any adjustments (e.g., refining eligibility criteria, adjusting reward distribution thresholds) to the season selection committee. Holistic recommendations will be given publicly at the end of the program cycle.

The same selection process will take place for the evaluation partner as distribution. The same provider can apply for both evaluation and distribution.

Condensed Example of a Season:

Goal: Make Arbitrum One the best place to borrow USDT, USDC, and ETH against wstETH.

Select Collateral: wstETH

Select Borrowable assets: ETH, USDC, and USDT

Required LTV: 15%

Target yield boost for wstETH: 2% APR (increase over wstETH base yield)

Maximum collateral incentivized: $1B

Protocol Partner RFP: The program will be platform/protocol agnostic and target lending across Arbitrum One. With that said, protocols will be screened for security purposes before being included in the program. The thought process behind this decision surrounds not incentivizing (or appearing to endorse) Arbitrum’s users to deposit assets into protocols that have a higher likelihood of being hacked. The security provider selected in the ARDC will be in charge of whitelisting lending protocols or alternatively the committee enlists a firm that can do this. The lending platform partners must support wstETH as collateral and borrowing of USDC, USDT, or ETH against that collateral in order to be eligible. This creates a fair environment that should not negatively encumber any specific lending market.

In practice, this means that any borrower of USDC, USDT, and/or ETH on a whitelisted Arbitrum One-based lending platform will be eligible to receive 2% APR paid on the total value of their wstETH deposited into the lending protocol. Wallets will only be eligible if they have reached and sustained an LTV of 15%. Rewards will be paid out weekly by a distribution partner.

With a 3-month program, targeting a 2% yield, $5M will cover 3 months of runway on $1B in collateral participating in the program.

Season Selection Committee

1. Arbitrum Foundation
2. Entropy Advisors
3. Offchain Labs

⅔ votes are required for a season to be approved. The first 4 seasons that meet the rule requirements and are deemed valid by the committee will be enacted. We realize that accountability in committees has been a problem in the past and we would like to make clear that Entropy should be held as the part responsible for the successes and failures of the program.

All funds will be sent to an Arbitrum Foundation controlled wallet with DAO-clawback capabilities.

The committee also has the power to:

1. Kill the Program: If the program fails to perform, at the discretion of the committee, it reserves the right to terminate it.
2. Adjust the Program: Reward allocations or program parameters may be modified, guided by insights from the evaluation partner. All adjustments must remain within the scope of the original proposal, balancing agility with accountability to ensure the program continues to serve its intended goals.
3. Widen or constrict the apps eligible in a season
4. Any other changes: The season selection committee will be able to make any changes to the program as they see fit as long as it maintains the spirit of the DRIP proposal

Rough Timeline

Forum: April 16 Snapshot: May 15 Tally: May X (TBD)

Date For First Program Live: Targeting July, but would like to remain nimble given that potential partnerships may impact go-live dates.

DRIP End Date (funds returned if not used or another proposal is not passed): July 1, 2026. An ongoing season may go past this date, but new seasons will not begin after this date