Authors: Matthis Herbrecht & Achim Struve, Outlier Ventures Token Team; Translation: Jinse Finance xiaozou
1. Recommendations for ecosystem incentive activities
Implement multi-stage airdrop strategies: Follow Optimism's multi-round airdrop model to maintain long-term user stickiness. This approach helps retain users after the initial token issuance and encourages long-term engagement with the ecosystem.
Allocate significant resources to grant programs: Use part of your incentive budget to fund developers and builders. This medium-term approach helps build a strong Dapp ecosystem, which is crucial for user retention and sustainable growth. Then, implement a robust monitoring system to track key metrics and analyze the impact of incentives. This will enable data-driven adjustments and ongoing optimization of the grant program.
Focus on long-term reduction of user per capita costs: The goal after network development matures is to lower the per capita cost of monthly active users (MAU). Optimism's approach of combining recurrent grants with strategic airdrops keeps the cost per MAU relatively low at $304. Set a long-term goal to achieve similar or better efficiency within 12-18 months.
Prioritize ecosystem development before token issuance: Consider Base's approach, which focuses on culture, builder stickiness, and ecosystem development, all without the need for tokens. Allocate resources in the form of targeted small grants to founders and projects aligned with the ecosystem vision, rather than relying solely on token incentives.
Balance short-term and long-term incentives: The goal is to maintain a balance between short-term incentives (like airdrops) and long-term incentives (like grant donations and ecosystem funds). This balance attracts initial users while sustaining long-term growth.
Implement user retention strategies beyond economic incentives: Develop a strong community culture, focus on smoothly attracting and retaining developers, create engaging experiences and activities, and improve user experience similar to Base. This helps maintain user stickiness even in the absence of ongoing economic incentives.
2. Introduction
Layer 2 (L2) networks have become a key solution to the blockchain scalability challenge. As these networks fiercely compete for market share, incentive programs (especially grants and airdrops) have become key factors in the growth strategies of each network. Considering the substantial resources invested, we take a step back and examine their effectiveness through the analysis presented in this article.
(1) Scope of research
Here, we focus on two main incentive mechanisms: grants and airdrops.
The analysis excludes application-level incentives like liquidity mining or yield strategies to maintain a clear focus on L2 blockchains.
The data range for our research is from 2021 to September 2024.
(2) Key performance indicators
We considered two main metrics to assess the performance of incentive programs:
Revenue generation: Ideally, revenue growth should at least offset part of the costs of the incentive programs, demonstrating a positive return on investment and indicating that this is a successful program.
User acquisition + retention: Achieve sustainable short-term/mid-term user growth at the lowest possible cost. Therefore, we will track the evolution of monthly active users (MAU).
Revenue generation and user acquisition are closely linked. More MAUs will increase network activity and transactions, thus boosting sequencer revenue. Higher revenue means this is a valuable network capable of attracting and retaining users, thereby increasing revenue. This positive feedback loop is crucial for long-term success.
By closely tracking these numbers, we can gain a clear understanding of the incentive activities across various chains and their impact on these two metrics.
(3) Understanding relevant background and constraints before delving into analysis
Like any in-depth study of complex data, it is important to note certain constraints:
Layer 2 lacks clear incentive dashboards showing grant details, such as dates and exact token amounts. Different ecosystems have different perceptions of airdrops and grants. For instance, some ecosystems view private investments in tokens or equity as grants. However, we do not classify these as grant programs in our research. The lack of transparency and multiple definitions of grants and airdrops makes collecting this data particularly challenging.
Not considering the Optimism Superchain and ZK stack, focusing solely on the main chain. Base receives grants from Optimism, but this grant is not accounted for.
The definitions of grants and airdrops may overlap, particularly in the context of Optimism.
Incentive mechanisms can also affect other metrics, such as protocol TVL or the number of applications, but we chose to focus on MAU and chain revenue as the primary metrics for evaluating L2 incentive mechanisms. These metrics were chosen due to their quantifiable nature and the ease of obtaining data from public sources. While MAU and chain revenue are related, they also provide valuable insights into the short-term and long-term effects of incentives. Ultimately, it is best to stick to 2 to 3 metrics to keep the analysis understandable.
While MAU and revenue are closely related, other factors also play a crucial role. Community culture, narratives, marketing, technological advancements, and macroeconomic conditions have a significant impact on outcomes. However, the research presented in this article takes a simplified approach to examine the effects of incentives in a more isolated manner.
Incentive costs are calculated based on the dollar value of tokens on the date of issuance.
Data on recent L2s (such as Starknet, Blast, or ZK Sync Era) has only recently emerged, making it difficult to draw conclusions in the short term.
Having understood the relevant context, let's proceed to the in-depth analysis.
3. The impact of incentives on MAU (monthly active users)
Let's start with a simple chart that shows the number of monthly active users for each L2.
The chart shows:
Base is the only chain with an average monthly active user growth of 56%, and its retention rate has not declined significantly, while other chains have seen a decline in users in recent months.
In recent months, all other L2s have experienced a decline in user numbers.
After airdrop events, monthly active users of new chains like ZK Sync Era, Blast, and Starknet have decreased, while L2 solutions like Optimism and Arbitrum have seen slight increases in monthly active users.
We believe there are four main reasons:
Recently, we have seen an increasing number of L2 solutions launched. As a result, user numbers have been diluted among these L2s and their respective airdrop activities. This trend may explain why new L2s struggle to retain users after airdrops.
Another explanation may be the grant programs of Arbitrum and Optimism, which are effective strategies for long-term user retention. The upward trend after airdrops indicates that these projects have successfully maintained user stickiness, unlike emerging L2 solutions that find it challenging to sustain their user base. Based on this, we can hypothesize that this is due to a lack of grant incentives and/or a small ecosystem with few applications.
As chains mature, culture becomes a key differentiating factor for L2s. Optimism, Arbitrum, and Base may have an advantage in this area as they have been around longer. The phase of security/decentralization characteristics is also relevant, according to 'L2beat', where two of these chains (Arbitrum and Optimism) are still in the first phase.
Base has no tokens. People are anticipating an airdrop and have not left Base because it is the last large L2 without a token; they enjoy Base's culture and activities; and they trust Base because it is backed by Coinbase.
However, MAU is not the only metric to consider. Let's take another look at the impact of incentive activities on revenue.
4. The impact of incentives on revenue
Now, let's turn to the second metric discussed in this article—revenue. To analyze the second metric, we reviewed total incentive distribution (in dollars) and compared it with the total revenue generated by the chain (in dollars).
Since chains typically launch incentive activities immediately after going live on the mainnet, it is impossible to compare the existence of these activities. We decided to divide each L2's cumulative revenue by its cumulative incentives to obtain more comprehensive data.
From this analysis, we can conclude the following points:
There are two chains with revenues exceeding their incentive expenditures: Base performs very well, with low incentives and high activity leading to high revenue. For every dollar spent on incentives, approximately $50 in revenue is generated. Before the first round of airdrops through grant programs, Optimism also maintained net positive revenue.
Chains that conduct airdrops have revenue lower than their incentive expenditures: For every $100 invested in incentives, Blast, Arbitrum, zkSync, and Optimism generated $5, $8, $11, and $27 respectively. Notably, over time, the monthly active user count for Optimism and Arbitrum, which provide the most grants, has increased. In contrast, the monthly active user count for other chains has remained flat, with virtually no grant activity.
We can draw the following conclusions:
In the short term, airdrops hinder the net revenue of various L2s (the revenue in dollars exceeds the incentive costs).
According to existing data, older chains that provide frequent grants to builders tend to reduce user per capita incentive costs over time.
5. Incentive cost per user
The chart below shows the total user cost per capita across various L2 chains and displays three main patterns.
For early L2s like Arbitrum and Optimism, the cost per user significantly rises due to airdrops. Over time, as incentives like airdrops or grants decrease, this cost drops substantially, but the impacts of these incentives do not disappear, and more users join the network. Arbitrum and Optimism have effectively managed their per-user costs, keeping them at stable levels, with Arbitrum at $560 and Optimism at $304 (latest values). Their strategies include recurrent grants and multiple rounds of airdrops (using Optimism as an example) to maximize user retention and maintain a stable user base after the airdrops end. This success is also attributed to a strong ecosystem and numerous dApps (like Gmx, Aave, Velodrome, etc.) that can sustain user stickiness over the long term.
The second model is that incentives costs initially soared due to airdrops, and then incentive costs continued to grow, not because of more incentive activities, but because monthly active users rapidly decreased. This occurs because users were engaged in 'farming' activities before the airdrop distribution and then abandoned the chain, leading to a decrease in user numbers and higher per-user costs, as shown in Figure 3. Due to the high valuations of token generation events (TGE) and rapid user exits after airdrops, the costs for ZK Sync, Starknet, and Blast are $1102, $11486, and $2000 per user respectively.
Meanwhile, Base's costs are very low, at less than 10 cents per user. This high efficiency stems from two key factors: Base has not issued its own tokens, and the chain has attracted a large number of users.
Base has not officially announced any airdrops. They do have incentives, such as over one million dollars in grants for builders using ETH or stablecoins, but this is insignificant compared to other chains. This is 362 times less than the total incentives distributed by Blast and 633 times less than ZK Sync Era. Even without considering airdrops and focusing solely on the grant program, it is still 100 times less than Optimism's grant amount.
Among the six chains analyzed, the cost is approximately $2577 per MAU.
6. Key Insights
Airdrops primarily reward users who interacted with the platform before the airdrop, stress-testing the network and generating revenue. In contrast, grant programs aim to guide a protocol, retain users over the long term, create a culture, and build a flywheel ecosystem (token gravity).
Among all incentives, over 90% are airdrops, while the remainder consists of long-term grant activities targeted at developers and builders.
Most Layer 2s do not have net positive revenue because their expenditures exceed revenues, primarily due to a large number of airdrops allocated at high token issuance valuations.
- The incentive goal is not to generate profits above costs.
- Influenced by various factors, Base is the only L2 whose revenue exceeds incentive expenditures: smooth onboarding of developers, culture, airdrop speculation, Coinbase reputation, competitive transaction fees.
- The lower cost per user for older L2s is due to the following reasons: historical security (time-tested and multiple audits...); network effects: recurrent grant programs have facilitated network effects for these L2s. Over time, they have attracted builders and applications, fostering a unique community around L2 and creating a self-sustaining cycle of innovative growth.
Base is a unique isolated case. They focus on providing relatively few traceable grants to founders, prioritizing culture over incentive activities.
Aside from Base, Optimism currently has the lowest cost per monthly active user, at $304. This can be explained by multiple rounds of airdrops and builder grants, which help user retention and guide on-chain use cases.
