Overview

Chaos Labs will conduct a rigorous analysis of the impact of the Arbitrum STIP program. The analysis will focus on three case studies that comprehensively assess the efficiency and risk impact of the STIP program on three major protocols.

Program Efficiency

The efficiency of the program will be thoroughly assessed for each case study. Data will be analyzed and structured to gain specific intelligence across the following dimensions:

• Unit Economics
  • Protocol revenue per dollar of incentive cost trends.
  • Estimate the long-term value of either a dollar of capital acquired or a user acquired depending on the context.
• Growth Trends
  • User breakdown by New, Retained, and Returning.
  • Volume breakdown by acquisition vs expansion.
• Sustainability
  • User and capital retention.
• Benchmarking
  • Compare results to the appropriate control sample.

Program Risk

Program risk will focus broadly on the primary and second-order effects of the incentive program on specific risks to the Arbitrum ecosystem. This will cover the topics below and more:

• Incentive yields do not bootstrap into native, sustainable yields.
  • Incentives bias one side of a marketplace leading to unsustainable outcomes.
  • Short-term incentive yields attract TVL away from sustainable yield sources.
  • Incentives create second-order effects, limiting the growth of fresh TVL/users. An example could be increased borrow rates on lending platforms due to looping, which causes users to look for leverage to use other ecosystems.
• Incentives introduce risks to DeFi stability
  • Incentives introduce excessively risky behavior, destabilising DeFi on Arbitrum and harming regular users.
  • Incentives cause an oversupply of liquidity, allowing excessively large positions to build up.
  • Yields elsewhere crowd out DEX liquidity, increasing the risk involved in all leverage strategies.
• Incentives conflict with certain Arbitrum objectives such as the migration from bridged to native USDC.

Case Studies

The case studies focus on providing a deep analysis of the incentive program's impact on broader Arbitrum risk. All DeFi protocols in the Arbitrum ecosystem affect each other in complex, non-deterministic ways.

In addition to the efficiency and risk aspects mentioned above, the case studies will provide the following intelligence to the community:

• Thorough analysis into how the incentives balanced demand for and supply of liquidity. The focus is on the likelihood of sustainability and potential risks introduced, such as too much demand for supply to cover safely, etc.
• How did this affect trader behavior from a risk perspective, particularly in terms of leverage and position sizing?
• How were existing users affected? Did the incentives have negative effects on them, such as crowding out?
• Do these perpetual incentive programs negatively impact the broader Arbitrum ecosystem?