[Proposal] Developing an objective-based incentive engine and systems analytics dashboard for growing volume

Proposals
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Our Proposal

As a member of the Lido DAO and co-founder of OpenBlock Labs, I am submitting a proposal to build an objective-based framework for incentivizing organic trading volume, starting with DEXs on Arbitrum, Optimism, and Mainnet. OpenBlock Labs looks to craft a robust, tailor-made incentive engine and systems analytics dashboard that is founded upon data–driven research and a first principles analysis. This proposal stems from the research motivated by the Steakhouse Financial team (outlined in their most recent post), as well as a number of discussions with the analytics + reWARDS committee over the past 1-2 months.

Key Objectives

OpenBlock Labs aims to accomplish the following objectives:

  1. Create a robust systems analytics dashboard to monitor the gamut of relevant pools and venues with real-time volume data. Breakdown the source of current trading volume in stETH and ETH pools, and identify specific pools + venues where organic volume can be obtained. This data will inform the Lido DAO with actionable insights on business development regarding new pools and venues as well as the Lido reWARDS committee with actionable insights on pin-pointing where to incentivize growth. Improving stETH velocity is a critical piece in making Lido the optimal venue for liquid staking.
  2. Transition towards a data-driven model for incentive budget quantification on new venues, in contrast to subjective decision making. Extend existing models to take volume data into account when quantifying the amount of liquidity needed in a given pool, and continue R&D on the PID controller. The key metric is improving the volume per dollar in incentives across relevant pools.

A Novel Incentive Engine for Growing Volume

The April rewards budget outlines an allocation of ~700k LDO, which is a substantial expenditure for the DAO. We are glad to see the reductions in expenditure across the past few months, but there is still significant room for growth on optimizing the incentive process. Specifically, the current reward system has achieved its goals in renting liquidity reserves, but the focus should be shifted towards rewarding organic trading volume. Reports from the analytics team show that current reserves are multiples higher than what is needed to support potential liquidations at risk.

Rewards should be carefully used to bootstrap a network, but the underlying success of stETH should be measured by its velocity within the ecosystem; this velocity should make trading fees high enough for LPs to be profitable without additional rewards. One of the primary goals of this research is to identify the levers to improve organic volume and adjust incentives accordingly.

The reWARDS committee has been granted a large quantity of rewards from Arbitrum and Optimism. These two chains are showing a strong upward trend in TVL and volume during this market, which presents a unique opportunity for stETH. If managed incorrectly, the Arbitrum and Optimism deployment can become an expensive liability, as mercenary liquidity providers will abandon the network when rewards dry up––the new pools may never reach escape velocity, and future LPs will pay the price.

OpenBlock Labs will conduct a deep-dive analysis on the current set of both market makers (LPs) and takers (volume) on stETH and ETH pools. The research and analysis (Phase 1) will motivate a variety of ways for the reWARDS committee to consume these actionable analytics, which we outline in Phase 2. We believe a tailor-made incentive engine and systems analytics dashboard can significantly cut costs by rewarding participants through well-structured principles, rather than supporting ephemeral yield farmers.

While the community has built an impressive set of liquidity analytics compared to most DAOs, we believe mandating an external team such as ourselves can offer a novel perspective on a well-trodden problem. OpenBlock Labs is committed to working with the pre-existing data frameworks, and iterating with the analytics committee to leverage insights from previous experiments.

Specification

Phase 1: Liquidity and volume assessment + systems analytics dashboard

  • OpenBlock Labs prepares a dynamic and robust report with the following information
    • Liquidity provider and trader (volume) distribution of every stETH pool across top venues, and a competitive analysis focused on ETH-based stablecoin pools.
    • Number of total LPs and traders per stETH pool, and compare to ETH pools.
    • Pool-level data
      • Breakdown of liquidity reserve and volume source (automated strategies, arbitrage, liquidations, retail, institutional)
      • Current and historical buy/sell trading volume
      • Current and historical add/remove liquidity reserve volume
      • Price impact compared to competitive pairs (i.e. stETH-USDC vs ETH-USDC) along with real-time reward recommendations for closing the spread
      • Comparative trading volume analysis of stETH-stable and ETH-stable pools, with quantitative incentive recommendations to minimize the discrepancy.
    • Trader and LP-level data
      • List of top traders by volume traded
      • Current and historical holding of other liquid staking tokens
      • Current and historical holding of LDO token
      • Historical performance of stETH LP position
      • Liquidity depth of position
      • Price range supported
      • Historical LP positions to detect volatility (i.e. JIT liquidity)
      • Selling of ARB, OP, and LDO rewards received from incentives
    • Analyze which venues are dominating in volume, where the volume originates, and form recommendations on how stETH can increase its share of trading activity. These recommendations will inform trader + LP incentive budgets, broken down by how much each pool across various venues should be rewarded.
    • Portal for existing traders and LPs to receive rewards for answering survey questions about their position

Phase 2: Execute recommendations

  • OpenBlock Labs creates a set of actionable strategies, and works with the reWARDS committee to safely and seamlessly execute the recommendations
    • Based on the analytics from Phase 1, OpenBlock Labs will propose a governance vote to distribute rewards in an innovative fashion, rather than using the AMM’s generic staking mechanism.

Phase 3: Continuous optimizations

  • OpenBlock Labs provides continuous incentive management support to maximize growth in a capital-efficient manner to create long-term, sustainable growth across new venues. The key metric of growth is organic trading volume, with an emphasis on stETH-stablecoin pairs.
  • Regular monitoring based on KPIs and market conditions, with consistently updated recommendations.

To cover all 3 phases, OpenBlock Labs requests 25k LDO, 50k OP, and 50k ARB for a duration of 3 months. These funds will be used to finance the cost of 2-3 data scientists, 1 frontend engineer, 1 designer, 1-2 quantitative analysts, and 1 project manager. Wallet address: 0x12ec61a0ca037A810424F00C9E70F77d6d9FF4a8

About OpenBlock Labs

OpenBlock Labs is an R&D firm that empowers decentralized organizations with on-chain data insights for incentive optimization. OpenBlock is backed by notable figures in the crypto space, including Foundation Capital, Electric Capital, Circle Ventures, AlleyCorp, and others.
The team has backgrounds from Stanford University, a16z, Carnegie Mellon University, Meta, Palantir, and other top-tier institutions; the highly technical background of our team makes us confident that OpenBlock is uniquely positioned to tackle a problem of this nature.

Final Thoughts

OpenBlock Labs looks forward to assisting in the design of a sustainable incentive model to grow stETH volume across Ethereum, Arbitrum, and Optimism. This grant will be a great first step towards solidifying a productive relationship for both communities. We look forward to hearing the community’s thoughts, and answering any questions. Thank you for your consideration.

Update
The proposal is updated to avoid confusion - Delta One mentions are replaced with OpenBlock Labs - a primary legal entity of the team working on this proposal. Please also note that this is a second version of proposal with reworked goals after receiving a feedback from LEGO committee (the original version of the post is unlisted from the forum to not make duplicates and extra confusion).

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Thank you for putting this ,together @paulsengh and taking a lot of time to speak with members of the DAO.

As the DAO continues to be ‘better’ about process and reporting, I look forward to personally being involved in the outcomes from this and sharing outcomes with the community.

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Hi @paulsengh thank you for this initiative!

LEGO council by the internal vote decided to support it and disbursed 25k LDO to the mentioned wallet.
We’re looking forward to get valuable insights, please also stay in touch with @jbeezy and reWARDS committee to plan further moves.

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Progress Update Report - OpenBlock Labs

OpenBlock Labs is pleased to provide you with a progress update on our collaboration with the analytics and reWARDs committees. In the last two months, we have made substantial progress in creating a curated data intelligence platform for the DAO; this platform aims to establish an objective-based framework for identifying liquidity targets and enhancing organic volume growth. Our latest work is available here, and we are excited to continue expanding our scope to enhance growth within the Lido DAO. We have outlined below the details regarding OpenBlock’s current progress and future work.

Working with the Analytics and reWARDs Committees:

  • We have actively engaged with the analytics and reWARDs committees to gain a comprehensive understanding of their KPIs and the various levers within their control. Through extensive discussions and evolving protocol needs, new metrics have been identified with the insights required to drive volume growth effectively. The current live dashboard presents the most recent analytics considered valuable from these discussions, and additional metrics will be incorporated in the upcoming month.

V1 Incentive Budget Data Analysis:

  • Leveraging the data available, we analyzed and evaluated the effectiveness of incentivizing various venues to promote trading volume growth. By utilizing data-driven insights, guidelines were identified for June and July, outlining the pools most likely to yield the desired outcomes around liquidity and volume targets.

Data Integrations:

  • To enable a wide range of queries and facilitate comprehensive analysis, we have indexed the blockchain and created a robust data architecture that supports extensibility. Some examples include: real-time monitoring of volume per venue, DEX-specific breakdowns, current and historical pool-specific breakdowns, trading volume breakdown, and lending pool analytics. The indexed data serves as a solid foundation for further analysis and decision-making.

Development of Forecasting Models:

  • Our data science team has focused on developing robust forecasting models to predict Total Value Locked (TVL), volume, and LP revenue in response to incentives. These models utilize historical data and relevant market factors to provide accurate forecasts. By leveraging econometric techniques, we aim to provide valuable insights into future performance and trends for upcoming resource allocation.

Building an Intuitive Dashboard:

  • Our team has designed and implemented an easy-to-use and intuitive dashboard that presents data in a comprehensive and accessible manner. We have integrated feedback received from multiple contributors who intend to utilize the dashboard regularly. We encourage community members to contribute additional design feedback and propose relevant analytics for consideration within the DAO.

Tangential Data and Liquidity Needs:

  • Collaborating closely with the general Business Development (BD) team, we also provided tangential data and analytics on liquidity, such as lending pool supply caps. Our work here demonstrates how a solid data foundation can easily extend to other needs of the protocol in effort to provide a more holistic and comprehensive analytics platform.

Looking ahead to the next month, our key priorities are as follows:

Incorporation of Lending Risk Frameworks and Centralized Data:

  • As per requests with various committees, we will work with relevant parties to incorporate lending risk frameworks and centralized exchange data into the dashboard. OpenBlock will leverage this data to help maximize the growth potential of various money market venues, by recommending opportunities for development. OpenBlock will collaborate with Aave risk stewards to discern specific liquidity, volume, and supply benchmarks. These guidelines will facilitate an improvement from the current supply caps, and provide a general-purpose framework that will extend to other money markets across various ecosystems.

Money Market Liquidity Dynamics, Modeling, and Recommendations:

  • With the inclusion of new data sources, we will develop analytics and econometric models to provide recommendations to optimally leverage the lending and centralized data. These queries and models will provide valuable insights into liquidity dynamics and enable better decision-making.

Data Quality Assurance and User Feedback:

  • Throughout the development process, we continue to bolster our rigorous data quality assurance test suite to ensure our data and analytics are error-free. Additionally, we actively seek user and community feedback to identify areas of improvement.

We are excited about the progress made thus far and confident that the upcoming milestones will contribute to the growth of key metrics within the Lido DAO ecosystem. We are committed to providing a powerful, data-driven intelligence platform that facilitates informed decision-making for core contributors and the broader DAO community.

We appreciate the opportunity to work with this community and look forward to our continued collaboration.

Best regards,

Paul Sengh
OpenBlock Labs

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