Author: Matthis Herbrecht & Achim Struve, Outlier Ventures token team; Translation: Golden Finance xiaozou

1. Suggestions on ecosystem incentive activities

Implement a multi-stage airdrop strategy: follow Optimism’s multi-round airdrops 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: Use part of your incentive budget to fund developers and builders. This mid-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 continuously optimized grant programs.

Focus on long-term reduction of per-user cost: After the network matures, the goal is to reduce the per-capita cost of monthly active users (MAU). Optimism's approach of combining recurring grants with strategic airdrops results 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 issuance: Consider Base’s approach, which focuses on culture, builder stickiness, and ecosystem development, all without requiring a token. Allocate resources in the form of targeted micro-grants to founders and projects whose goals align with the ecosystem vision, rather than relying solely on token incentives.

Balance long- and short-term incentives: The goal is to maintain a balance between short-term incentives (such as airdrops) and long-term incentives (such as donation grants and ecosystem funds). This balance attracts initial users while maintaining long-term growth.

Implement user retention strategies beyond financial incentives: develop a strong community culture, focus on successfully attracting retained developers, create engaging experiences and activities, and improve user experience similar to Base. This helps maintain user stickiness even in the absence of ongoing financial incentives.

2. Introduction

Layer 2 (L2) network has become a key solution to the blockchain expansion challenge. As these networks fiercely compete for market share, incentive programs (especially grants and airdrops) have become a key element of each network's growth strategy. Given the sheer amount of resources invested, let’s take a step back and examine its effectiveness through the analysis of this article.

(1) Research scope

Here we focus on two main incentive mechanisms: grants and airdrops.

The analysis excludes application-level incentives such as liquidity mining or yield strategies to better maintain an explicit focus on L2 blockchains.

The data range used in our research is from 2021 to 2020September 24.

(2) Key Performance Indicators

We consider two main indicators to evaluate the performance of incentive plans:

Revenue Generation: Ideally, revenue growth should Offsetting at least some of the cost of the incentive program shows a positive ROI, indicating it is a successful program.

User acquisition + retention: achieve sustainable short/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 MAUs increase network activity and transactions, thereby increasing sequencer revenue. Higher revenue means this is a valuable network that can attract and retain users, thereby increasing revenue. This positive feedback loop is critical to long-term success.

By closely tracking these numbers, we can get a clear picture of each chain’s incentive activity and its impact on both metrics.

(3) Understand the relevant background and constraints before in-depth research

As with any in-depth study of complex data, it is important to note certain constraints:

Layer 2 lacks a clear incentive dashboard showing grant details such as date and exact token amount. Each ecosystem views airdrops and grants differently. For example, some ecosystems treat private investments in tokens or equity as grants. However, in our study we do not classify these as grant programs. A lack of transparency and multiple definitions of grants and airdrops make collecting this data particularly difficult.

Do not consider Optimism Superchain and ZK stack, only the main chain. Base receives a grant from Optimism, but this grant is not taken into account.

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

The incentive mechanism will also affect other indicators, such as protocol TVL or number of applications, but we chose to use MAU and chain revenue as the main indicators to evaluate the L2 incentive mechanism. These indicators were chosen because they are easy to quantify and the data are readily available from public sources. While MAU and chain returns are related, they also provide valuable insights into the short- and long-term effects of incentives. In the end, it's best to stick to 2 to 3 indicators to keep the analysis easy to understand.

While MAU and revenue are closely related, other factors also play a crucial role. Community culture, narrative, marketing, technological advancements, and macroeconomic conditions all significantly affected the results. However, the study in this article adopts a simplified approach that examines the impact of incentives in a more isolated manner.

Incentive cost is calculated based on the USD value of the token on the date of token issuance.

About recent L2 (such as Starknet, Blast or ZK SyncEra) data are only recent, so it's difficult to draw conclusions in the short term.

After understanding the relevant background, let’s conduct an in-depth analysis.

3. The impact of incentives on MAU (monthly active users)

Let us start with a simple chart that shows the number of monthly active users for each L2.

This figure shows:

Base is the only chain whose monthly active users have continued to grow by an average of 56%, and its retention rate has not dropped significantly, while other The number of users of the chain has been declining in recent months.

Every other L2 has experienced a decline in user numbers in recent months.

After the airdrop event, the latest chains such as ZK Sync Era, Blast and Starknet have experienced a decrease in monthly active users, while L2 solutions such as Optimism and Arbitrum have experienced a slight increase in monthly active users.

We believe the main reasons are as follows:

Recently, we have seen more and more L2 solutions come online. Therefore, user numbers are diluted between these L2s and their respective airdrop campaigns. This trend may explain why the new L2 has difficulty retaining users after the airdrop.

Another explanation could be due to Arbitrum and Optimism’s grant programs, which are effective strategies for long-term user retention. The upward trend after the airdrop shows that these projects have successfully maintained user stickiness, unlike emerging L2 solutions that struggle to maintain a user base. Based on this, we can assume this is due to a lack of grant incentives and/or the ecosystem is too small with only a handful of applications.

As chains become more mature, culture is a key differentiator for L2. Optimism, Arbitrum, and Base may have an advantage here because they have been around longer. The same goes for the security/decentralization feature phase, with two of the chains (Arbitrum and Optimism) still in their first phase according to “L2beat”.

Base has no tokens. People look forward to the airdrop and do not leave Base because it is the last large L2 without tokens; people enjoy Base's culture and activities; and trust Base because it is Coinbase that supports it behind the scenes.

However, MAU is not the only metric to consider. Let’s take a look at the impact of incentive activities on revenue.

4. The impact of incentives on income

Now, let us look at the second indicator to be discussed in this article - income. To analyze the second metric, we looked back at the total incentive distribution (in USD) and compared it to the total revenue generated by the chain (in USD).

Since chains usually start incentive activities immediately after being launched on the mainnet, it is impossible to compare the presence or absence of these activities. We decide to divide the cumulative return of each L2 byUse it as a cumulative incentive to obtain more comprehensive data.

The following can be drawn from this analysis:

There are two chains that earn more than their incentive spend: Base performs very well , low incentives and high activity lead to high revenue. Every dollar spent on incentives generates approximately $50 in revenue. Optimism also maintained net positive returns ahead of its first airdrop through the grant program.

For chains that conduct airdrops, the income generated by the chain is lower than the incentive expenditure: for every $100 invested in incentives, Blast, Arbitrum, zkSync and Optimism generate income of $5, $8, $11 and $27 respectively. It is worth noting that over time, among the chains offering the most grants, Optimism and Arbitrum have seen an increasing number of monthly active users. In comparison, the number of monthly active users is flat for other chains, which have barely any grant activity.

We can draw the following two conclusions:

In the short term, airdrops hinder the net income of each L2 (the income in US dollars is higher than the incentive cost).

According to existing data, older chains that actively and frequently provide grants to builders tend to reduce per-user incentive costs over time.

5. Incentive cost per user

The following figure shows the total cost per user of each L2 chain, and shows three main modes.

For the first L2s like Arbitrum and Optimism, the cost per user will rise significantly due to airdrops. As time goes by and incentives such as airdrops or grants are reduced, this cost decreases significantly, but the impact of these incentives does not disappear and more users join the network. Arbitrum and Optimism have effectively managed their cost-per-user to remain stable, with Arbitrum at $560 and Optimism at $304 (latest values). Their strategy includes recurring grants and multiple rounds of airdrops (in the case of Optimism) to maximize user retention and maintain a stable user base after the airdrop ends. This success is also due to a strong ecosystem and numerous dApps (such as Gmx, Aave, Velodrome, etc.) that maintain user stickiness in the long term.

The second pattern is that the incentive cost initially spikes due to airdrops, and then the incentive cost continues to grow, not because there are more incentive activities, but because monthly active users rapidly decrease. The reason why this happens is that users have been conducting "farming" activities before the airdrop distribution and then abandoned the chain, resulting in a reduced number of users and a higher cost per user, as shown in Figure 3. Due to high Token Generation Event (TGE) valuations and rapid user exits after airdrops, ZK Sync, Starknet, and Blast each costUsers $1102, $11486 and $2000.

At the same time, the cost of Base is very low, less than 10 cents per user. This efficiency stems from two key factors: Base does not issue its own tokens, and the chain attracts a large number of users.

Base has not officially announced any airdrops. They do have incentives, such as $1 million+ in grants to builders using ETH or stablecoins, but this is minuscule compared to other chains. This is 362 times less than the total incentives distributed by Blast and 633 times less than the ZK Sync Era. Even if you don’t take airdrops into account and just focus on the grant program, it’s still 100 times less than Optimism’s grant amount.

Across the 6 analyzed chains, the cost is approximately $2,577 per MAU.

6. Key insights

Airdrops mainly reward users who interact with the platform before the airdrop, stress test the network, and generate revenue. In contrast, grant programs are designed to bootstrap a protocol, retain users long-term, create a culture, and build a flywheel ecosystem (token gravity).

Of all incentives, more than 90% are airdrops, while the rest are long-term grant campaigns for developers and builders.

Most Layer 2s do not have net positive returns because their expenses outweigh their returns, mainly due to the large number of airdrops allocated at high token issuance valuations.

- The motivational goal is not to generate profits above costs.

- Base is the only L2 whose revenue generation exceeds incentive expenses due to many factors: smooth developer onboarding, culture, airdrop speculation, Coinbase reputation, competitive transaction fees.

- Older L2s have lower cost per user due to: Historical security (time-tested and multi-audited...); Network effects: Recurring grant programs facilitate the network of these L2s effect. Over time, they attract builders and applications, cultivating a unique community around L2, creating a self-sustaining cycle of innovative growth.

Base is a unique and isolated case. They focus on providing traceable, relatively small grants to founders, prioritizing culture over incentive campaigns.

Except for Base, Optimism is currently the chain with the lowest monthly active user cost, at $304. This can be explained by multiple rounds of airdrops and builder grants, helping user retention and bootstrapping on-chain use cases.