Authors: Matthis Herbrecht & Achim Struve, Outlier Ventures Token Team; Translation: Jinse Finance Xiaozou
1. Recommendations for ecosystem incentive activities
Implement a multi-phase airdrop strategy: 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 participation in the ecosystem.
Allocate significant resources to grant programs: dedicate 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 continuous optimization of grant programs.
Focus on long-term reductions in user per capita costs: the goal after network maturity is to lower the per capita cost of monthly active users (MAU). Optimism's approach of combining regular 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, which does not require tokens. Allocate resources in the form of targeted small grants to founders and projects that align 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 experiences 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 critical components of each network's growth strategy. Given the vast resources involved, let's take a step back and examine their effectiveness through the analysis in this article.
(1) Scope of the study
Here we focus on two main incentive mechanisms: grants and airdrops.
The analysis excludes application-level incentive measures such as liquidity mining or yield strategies to maintain a clear focus on L2 blockchains.
The data range for our study spans from 2021 to September 2024.
(2) Key Performance Indicators
We considered two main metrics to evaluate the performance of the incentive programs:
Revenue: Ideally, revenue growth should at least offset part of the costs of the incentive program, demonstrating a positive return on investment, indicating that it is a successful program.
User acquisition + retention: Achieving sustainable short-term/mid-term user growth at the lowest possible cost. Therefore, we will track the evolution of monthly active users (MAU).
Revenue and user acquisition are closely linked. More MAUs will increase network activity and transactions, thereby enhancing sequencer revenue. Higher revenue means that this is a valuable network capable of attracting and retaining users, thus increasing revenue. This positive feedback loop is crucial for long-term success.
By closely tracking these numbers, we can clearly understand the incentive activities of each chain and their impact on these two metrics.
(3) Understand the relevant background and constraints before diving into the research.
Like any in-depth study of complex data, it is important to note certain constraints:
Layer 2s lack a clear incentive dashboard showing grant details, such as dates and exact token amounts. Different ecosystems have varying views on airdrops and grants. For example, some ecosystems consider private investments in tokens or equity as grants. However, in our study, we do not classify these as grant programs. The lack of transparency and the multiple definitions of grants and airdrops make data collection particularly challenging.
Excluding Optimism Superchain and ZK stack, focusing only on the main chains. Base receives grants from Optimism, but these grants are not accounted for.
The definitions of grants and airdrops may overlap, especially in the context of Optimism.
Incentive mechanisms also affect other metrics, such as protocol TVL or the number of applications, but we chose to use MAU and chain revenue as the primary metrics for evaluating L2 incentive mechanisms. These metrics were chosen because they are easy to quantify and data is readily available from public sources. While MAU and chain revenue are correlated, they also provide valuable insights into the short-term and long-term impacts of incentives. Ultimately, it's best to stick to 2 to 3 metrics to keep the analysis easy to understand.
Although MAU and revenue are closely related, other factors also play a crucial role. Community culture, narrative, marketing, technological advancements, and macroeconomic conditions all significantly affect outcomes. However, this study adopts a simplified approach to examine the impact of incentives in a more isolated manner.
Incentive costs are calculated based on the dollar value of tokens at the time of token issuance.
Data on recent L2s (like Starknet, Blast, or ZK Sync Era) have only recently emerged, making it difficult to draw conclusions in the short term.
Having understood the relevant background, let’s delve into the 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%, with retention rates not showing a significant decline, while other chains have seen user numbers drop in recent months.
In recent months, all other L2s have experienced a decline in user numbers.
After the airdrop events, monthly active users of newer 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 the main reasons are as follows:
Recently, we have seen an increasing number of L2 solutions going live. As a result, the user base has 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 due to 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 successfully maintain user stickiness, unlike emerging L2 solutions that struggle to sustain a user base. Based on this, we can hypothesize that this is due to a lack of grant incentives and/or a too small ecosystem, with few applications.
As chains become increasingly mature, culture is a key differentiator for L2s. Optimism, Arbitrum, and Base may have an advantage in this regard, as they have been around longer. The security/decentralization phase is similar, according to 'L2beat', where two of the 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 major 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 look at how incentive activities impact revenue.
4. The impact of incentives on revenue
Now, let’s look at the second metric this article will discuss—revenue. To analyze the second metric, we reviewed the total incentive distribution (in dollars) and compared it with the total revenue generated by the chain (in dollars).
Since chains typically start incentive activities immediately after launching the mainnet, it is impossible to compare the presence or absence of these activities. We decided to divide the accumulated revenue of each L2 by its accumulated incentives to obtain more comprehensive data.
From this analysis, we can derive the following points:
There are two chains where revenue exceeds their incentive spending: 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 the grant program, Optimism also maintained net positive revenue.
Chains that conduct airdrops have revenue below their incentive expenditures: for every $100 invested in incentives, Blast, Arbitrum, zkSync, and Optimism generate $5, $8, $11, and $27, respectively. Notably, over time, the monthly active user count increases for chains that provide the most grants, while the monthly active user count remains flat for other chains with little grant activity.
We can draw the following conclusions:
In the short term, airdrops hinder the net revenue of each L2 (where revenue in dollars exceeds incentive costs).
According to existing data, older chains that actively and frequently provide grants to builders tend to reduce user per capita incentive costs over time.
5. Per user incentive costs
The following graph shows the total cost per user for each L2 chain and demonstrates three main patterns.
For the first L2s like Arbitrum and Optimism, the cost per user significantly increases due to airdrops. Over time, as incentives like airdrops or grants decrease, this cost declines sharply, but the impact of these incentives does not disappear, with more users joining the network. Arbitrum and Optimism effectively managed their cost per user, keeping it at stable levels, with Arbitrum at $560 and Optimism at $304 (latest value). Their strategy includes regular grants and multiple rounds of airdrops (for example, Optimism), maximizing user retention and maintaining a stable user base after the airdrop ends. This success is also attributed to a strong ecosystem and numerous dApps (such as Gmx, Aave, Velodrome, etc.) that can retain user stickiness over the long term.
The second pattern is that the initial spike in incentive costs due to airdrops is followed by a continuous increase in incentive costs, not because of more incentive activities, but because of a rapid decrease in monthly active users. This happens because users were engaged in 'farming' activities before the airdrop distribution, then abandoned the chain, leading to a decrease in user numbers and higher costs per user, as shown in Figure 3. Due to the overvaluation of token generation events (TGE) and rapid user exit after airdrops, the costs for ZK Sync, Starknet, and Blast are $1102, $11486, and $2000 per user, respectively.
Meanwhile, Base's cost is very low, at less than 10 cents per user. This high efficiency stems from two key factors: Base has not issued its own token, and the chain has attracted a large number of users.
Base has also not officially announced any airdrops. They do have incentives, such as over a million dollars in grants to 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 only focusing on the grant programs, the amount is still 100 times less than Optimism's grants.
Among the six analyzed chains, 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 income. In contrast, grant programs are designed to guide a protocol, retaining users over the long term, creating a culture, and establishing a flywheel ecosystem (token gravity).
Among all incentives, over 90% are airdrops, with the remainder being long-term grant activities targeted at developers and builders.
Most Layer 2s do not have net positive revenue, as their expenditures exceed their income, mainly due to a large number of airdrops distributed at high token issuance valuations.
- The incentive goal is not to generate profits above costs.
- Influenced by various factors, Base is the only L2 that generates revenue exceeding its incentive expenditures: smooth onboarding of developers, culture, airdrop speculation, Coinbase's reputation, and competitive transaction fees.
- Older L2s have lower costs per user due to the following reasons: historical security (time-tested and multiple audits...); network effects: regular grant programs promote the network effects of these L2s. Over time, they attracted builders and applications, cultivating a unique community around the L2, 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.
Apart 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 with user retention and guide on-chain use cases.
