With BTC on a run, users, volume, and TVL are beginning to flow back into DeFi. As a result, a growing number of new networks and projects are popping up and the competition to attract users is getting fierce. Any network one looks at either has a grant incentive program set up or is scrambling to set one up, just to achieve competitive parity and have a fighting chance.
Setting up a grant program is among the most common paths to bootstrap network activity, secure TVL, drive volume, and attract users. At a high level, the race to bring in TVL is inevitable, since TVL is the best barometer of a network’s capacity to attract users and volume. The question is, how does one know if the grant program actually retains TVL in the long term when the grant is fully dispersed?
To make understanding these concepts easier, Serious People has analysed several grant programs that have been run in order to extract the similarities and differences between them. Using this data SP has drawn conclusions on how to execute a successful program and retain TVL.
Grant programs are expensive and resource heavy. First, a network needs to be set up with the infrastructure (DEXes, Subgraphs, tooling, etc.) to offer basic support to projects on their chain. Next, the network needs a business development team to identify and bring in candidates, a due-diligence team to protect the network from exploits or nefarious actors, financial experts to ensure incentives are being allocated responsibly and an operations team to support deployment. Additionally a network would need to set up KPIs to test and refine the success of the program. Last but not least, most grant incentives are given out in the native tokens of the network running the grant program, which eats away at treasury reserves, inflates circulating supply and puts sell pressure on the network’s core assets. If this supply is mismanaged the whole program will crumble due to not having funds to continue.
We have seen many networks go through all of these steps, only to see a temporary positive effect on their chain. Once the incentives are used up, TVL does not stick around. With other networks offering new incentive programs, users take their funds elsewhere leaving the original network with depleted reserves, a depreciating token, lower TVL, and lost momentum.
While a plethora of grant programs have been run, like everything in DeFi, many of them have been a fork of another. A typical program, as exemplified by Arbitrum’s recent STIP program, focuses on liquidity mining in the form of staking or farming rewards and runs as follows:
Arbitrum’s Short Term Incentive Program (STIP) is an ideal candidate for study, due to:
The STIP was designed to bring more usage to Arbitrum, using 72,000,000 $ARB for incentives to over 70 projects. A typical concern that one runs into when making a crypto case study is that the market changes so quickly that it is difficult to make valuable comparisons. Arbitrum’s STIP program avoids this concern. With so many projects using the same token on a similar timeline, there was a sufficient variety of projects as well as constants on the market for this study.