Research on the Effects of Ethereum's Six L2 Incentives Why the New L2 Airdrop Can't Retain Users

Author: Matthis Herbrecht & Achim Struve, Outlier Ventures Token Team; Translator: Jinse Finance xiaozou

1, Suggestions on Ecosystem Incentive Activities

• Implement a Multi-Stage Airdrop Strategy: Follow the multi-round airdrop model of Optimism to maintain long-term user stickiness. This approach helps retain users after the initial token release and encourages long-term participation in the ecosystem.

• Allocate Significant Resources to Grant Programs: Allocate a portion 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 incentive measures. This will enable data-driven adjustments and a continuous optimization of the grant program.

• Focus on Long-Term Reduction of User Cost per MAU: The goal for a mature network is to reduce the cost per monthly active user (MAU). Optimism's approach of combining recurring grants with strategic airdrops has resulted in a relatively low cost per MAU of $304. Set a long-term goal to achieve similar or better efficiency within 12-18 months.

• Prioritize Ecosystem Development Before Token Release: Consider Base's approach, which focuses on culture, builder stickiness, and ecosystem development, all without the need for a token. 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 strike a balance between short-term incentives (such as airdrops) and long-term incentives (such as grant programs and ecosystem funds). This balance can attract initial users while maintaining long-term growth.

• Implement User Retention Strategies Beyond Economic Incentives: Develop a strong community culture, focus on smoothly onboarding developers, create engaging experiences and events, 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 (particularly grants and airdrops) have become a crucial factor in their growth strategies. Given the significant resources invested, we step back to examine their effectiveness through this analysis.

(1) Scope of Research

The focus here is 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 clearer focus on L2 blockchains.

Our research covers the data range from 2021 to September 2024.

(2) Key Performance Indicators

We consider two main metrics to evaluate the performance of incentive programs:

• Revenue Generation: Ideally, revenue growth should at least offset a portion of the incentive program costs, indicating a positive return on investment and a successful program.

• User Acquisition + Retention: Achieving sustainable short-term/medium-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 MAU will increase network activity and transactions, thereby boosting sequencer revenues. Higher revenues mean the network is valuable and can attract and retain users, further increasing revenues. This positive feedback loop is crucial for long-term success.

By closely monitoring these numbers, we can clearly understand the incentive activities of each chain and their impact on these two metrics.

(3) Understanding Relevant Background and Constraints Before Diving In

As with any deep dive into complex data, it is important to note certain constraints:

• Layer 2 lacks clear incentive dashboards displaying grant details, such as dates and exact token amounts. Ecosystems also have different views on airdrops and grants. For example, some ecosystems consider private investments in tokens or equity as grants. However, in our research, 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.

• We do not consider the Optimism Superchain and ZK stacks, only the mainnet. Base receives grants from Optimism, but these are not accounted for.

• The definitions of grants and airdrops may overlap, particularly in the context of Optimism.

• Incentive mechanisms also impact other metrics, such as protocol TVL or application count, but we have chosen to focus on MAU and chain revenue as the primary metrics for evaluating L2 incentive mechanisms. These metrics were selected because they are easily quantifiable, and the data is readily available from public sources. While MAU and chain revenue are related, they also provide valuable insights into the short-term and long-term impacts of incentives. Ultimately, it is best to stick to 2-3 key metrics to keep the analysis concise and understandable.

• Although MAU and revenue are closely related, other factors also play a crucial role. Community culture, narratives, marketing, technological advancements, and macroeconomic conditions all have a significant impact on the results. However, this research adopts a simplified approach to examine the impact of incentive measures in a more isolated manner.

• Incentive costs are calculated based on the token USD value at the time of token issuance.

• Data on more recent L2s (such as Starknet, Blast, or ZK Sync Era) is just emerging, making it difficult to draw conclusions in the short term.

With the relevant background in mind, let's dive into the analysis.

3, Impact of Incentives on MAU (Monthly Active Users)

Let's start with a simple chart showing the monthly active user numbers for various L2s.

The chart shows:

• Base is the only chain with an average sustained MAU growth of 56%, and its retention rate has not shown a clear decline, while other chains have experienced user declines in recent months.

• All other L2s have experienced user declines in recent months.

• After airdrop events, the monthly active users of the newest chains, such as ZK Sync Era, Blast, and Starknet, have decreased, while the MAU of L2 solutions like Optimism and Arbitrum have seen slight increases.

We believe the main reasons are:

• Recently, we have seen an increasing number of L2 solutions launching. As a result, user numbers have been diluted across these L2s and their respective airdrop activities. This trend may explain why new L2s struggle to retain users after airdrops.

• Another explanation could be the grant programs of Arbitrum and Optimism, which are an effective strategy for long-term user retention. The upward trend after airdrops suggests these projects have successfully maintained user stickiness, unlike the emerging L2 solutions. 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 regard, as they have been around for longer. The security/decentralization stage is also relevant, with two of the chains (Arbitrum and Optimism) still in the first phase according to "L2beat".

• Base does not have a token. People are staying with Base despite expecting an airdrop because it is the last major L2 without a token; they are enjoying Base's culture and activities; and they trust Base, as it is backed by Coinbase.

Here is the English translation of the text, with the specified terms retained and not translated: However, MAU is not the only metric to consider. Let's also look at the impact of incentive activities on revenue. 4. Impact of Incentives on Revenue Now, let's look at the second metric we'll discuss in this article - revenue. To analyze the second metric, we reviewed the total incentive allocation (in US dollars) and compared it to the total revenue generated by the chain (in US dollars). Since chains typically launch incentive activities immediately after launching their mainnet, it is not possible to make a comparison on the presence or absence of these activities. We decided to divide each L2's cumulative revenue by its cumulative incentives to get a more comprehensive data set. From this analysis, we can draw the following conclusions: - Two chains have revenue higher than their incentive spend: Base has performed very well, with low incentives and high activity leading to high revenue. For every $1 spent on incentives, it generates around $50 in revenue. Optimism also maintained net positive revenue before its first airdrop distribution program. - Chains that have conducted airdrops have lower chain revenue than incentive spend: For every $100 spent on incentives, Blast, Arbitrum, zkSync, and Optimism generated $5, $8, $11, and $27 in revenue, respectively. Notably, the monthly active user counts of Optimism and Arbitrum, which provided the most grants, have grown over time, while other chains' monthly active user counts have remained flat, with little to no grant activity. We can draw two conclusions: - In the short term, airdrops have hindered the net revenue (revenue in dollars exceeding incentive cost) of various L2s. - Based on the available data, mature chains that actively and frequently provide grants to builders tend to lower the per-user incentive cost over time. 5. Per-User Incentive Cost The following chart shows the total per-user cost for each L2 chain, revealing three main patterns: - For early L2s like Arbitrum and Optimism, per-user cost has risen significantly due to airdrops. Over time, as airdrop or grant incentives have decreased, this cost has dropped substantially, but the impact of these incentives has not disappeared, with more users joining the network. Arbitrum and Optimism have effectively managed their per-user cost, keeping it at a stable level of $560 and $304 (latest value), respectively. Their strategies include recurring grants and multiple airdrops (in the case of Optimism) to maximize user retention and maintain a stable user base even after the airdrops end. This success is also attributed to a strong ecosystem and numerous dApps (such as Gmx, Aave, Velodrome, etc.) that can maintain long-term user stickiness. - The second pattern is that initial incentive costs have spiked due to airdrops, followed by a continuous increase in incentive costs, not due to more incentive activities, but because of a rapid decline in monthly active users. This happens when users were engaged in "farming" activities before the token generation event (TGE) and then abandoned the chain, leading to a reduction in user numbers and higher per-user costs, as shown in Figure 3. Due to the high TGE valuations and rapid user exodus post-airdrop, ZK Sync, Starknet, and Blast have costs of $1,102, $11,486, and $2,000 per user, respectively. - Meanwhile, Base has an extremely low cost of less than $0.10 per user. This high efficiency is due to two key factors: Base has not issued its own token, and the chain has attracted a large user base. - Base has not yet formally announced any airdrops. They do have incentive measures, such as over $1 million in grants to builders using ETH or stablecoins, but this is negligible 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 only on the grant program, it is still 100 times less than Optimism's grant volume. Among the 6 analyzed chains, the cost is around $2,577 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 long-term, cultivate a culture, and build a flywheel ecosystem (token gravity). - Over 90% of all incentives are airdrops, with the remaining being long-term grant activities for developers and builders. - Most Layer 2s do not have net positive revenue, as their spending exceeds their revenue, primarily due to the large amount of airdrops distributed at high token issuance valuations. - The incentive goal is not to generate profit above cost. - Influenced by various factors, Base is the only L2 that has revenue exceeding its incentive spend: successful developer onboarding, culture, airdrop speculation, Coinbase reputation, competitive transaction fees. - Older L2s have lower per-user costs due to historical security (time-tested and multi-audited...) and network effects: recurring grant programs have fostered network effects for these L2s. Over time, they have 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 small, traceable grants to founders, prioritizing culture over incentive activities. - Aside from Base, Optimism currently has the lowest per-monthly active user cost at $304. This can be attributed to multiple airdrops and builder grants, which have helped with user retention and guiding on-chain use cases.