Arbitrum’s $85 million growth plan

Author: Kerman Kohli Source: kermankohli Translation: Shan Ouba, Golden Finance

Imagine that a business is running a promotion where you can get $3 worth of value for every $1 spent. Oh, and there are no conditions as to who can claim this offer. Your grandmother, the homeless person on the street, a high-paid executive, or an average middle-class person can all qualify for this offer.

What do you think will happen? Well, the people who need the money most and are least likely to be repeat customers will come in droves to sweep up your money until you run out of money or inventory to maintain this offer.

The good news is that the real world doesn't work that way, because the free market ensures that such a business will quickly die out.

The bad news is that cryptocurrency businesses do work that way, and the free market continues to facilitate their money.

Introduction

The above scenario is exactly what Arbitrum did, except that it involved $85 million and ended up losing $60 million. Let's take a deeper look at what this scam was all about, how it was constructed, and what we can learn from it.

The Arbitrum DAO was structured in such a way that certain verticals and their respective applications would receive ARB tokens to incentivize the use of their platforms. The ultimate idea was that by incentivizing the use of these platforms, Arbitrum as a network would receive more fees and ultimately the protocol would benefit as well. As a result one party won here, while the other won less (I'm sure you already know who the loser is).

Methodology

At a high level, you can break this activity down into two high-level components:

1. Creating a baseline to understand what percentage of incentives can be attributed to spending compared to a baseline. They call this the “synthetic control” methodology, and it involves some complex math. It doesn’t really matter, but whatever our final numbers are, we need to adjust them downward because not everything can be attributed to this single effort. You can read more about this in the original forum post.

2. Incentivizing end users of applications in different verticals on Arbitrum by giving them ARB tokens to improve their metrics. Three verticals were chosen (perps, DEXs, liquidity aggregators). Each application was told how to best use the incentives.

I did find a few interesting excerpts that I wanted to include here for you to judge for yourself:

• "Many protocols missed several bi-weekly reports, or didn't publish them at all. About 35% of STIP recipients did not publish a final report."

• "It is rare for a protocol to strictly explain why a certain amount of incentive should be allocated when applying for a STIP. Instead, the final allocation is usually the result of a back-and-forth discussion between the protocol and the community, often resulting in an allocation based on something like "we feel this is too big/too small to ask for."

Anyway, let's move on. I've provided screenshots of the different categories, including how much money was spent and the mechanism (no screenshots of the DEX's method, but basically they just incentivize liquidity). The key thing to remember here is that 1 ARB is equivalent to more or less 1 $. So yes, these are millions of dollars in allocations.