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Unlocking Community Insights with Quadratic Funding: Arbitrum's Journey with Grants Stack

Arbitrum, a leading L2, has used Gitcoin Grants Stack to run several funding allocation and distribution experiments to boost engagement and collect insights from their community. The Domain Round was used to gather feedback on how to allocate a pool of 100K DAI towards 5 different initiatives. Then, the Arbitrum on Gitcoin Grant Funding Fest ran to gather donations and distribute funds to these initiatives based on the results of the Domain Round. In the end, over $15,000 was donated by the Arbitrum community.

I.  Overview

Arbitrum is a leading Layer 2 technology that empowers users to explore and build in the largest Layer 1 ecosystem, Ethereum. The Arbitrum Domain Round, launched in partnership with Gitcoin, marked a pivotal moment in the evolution of web3 grant funding. This initiative was the first phase of a strategic move to harness the collective intelligence of the Arbitrum community, allowing them to allocate $100k DAI towards critical funding pools that aligned with the community's vision for growth. These pools were selected by the Questbook grant program and spanned across gaming, developer tooling, new protocol ideas, education, and community events, with an additional open category to capture emerging interests.

Rooted in the AIP-3 governance proposal, the initiative leveraged Gitcoin Grants Stack to run both the Domain and the Grants Round, signifying a major step towards fostering a sustainable and inclusive ecosystem. The Domain Round functioned as a meta-round for decentralized domain allocation, providing a funding mechanism and a rich dataset for genuine community interests. Led by Plurality Labs, the initiative demonstrated a commitment to a pluralistic and grassroots funding model. An exercise in more than just funding, it was a demonstration of the belief in a community-driven future for the Arbitrum ecosystem, setting the stage for the Gitcoin Grant Funding Fest and future endeavors. This case study reflects the mission to nurture a robust, community-led ecosystem that is built on active participation and continuous innovation.

The Domain Round was used to allocate the $100k DAI pool in funding to four matching pools that became rounds in the Grant Funding Fest, with the donations also going towards the pool. An additional category was added for interests not captured in the four rounds.

  • The four rounds were: 
  • Gaming: to encourage more developers to create innovative gaming experiences and thus onboard new users to its ecosystem
  • Education, Community Growth and Events: to help Arbitrum attract quality builders through community growth activities such as education courses, bootcamps, hackathons and sponsoring events
  • Developer Tooling on Nova: to help Arbitrum build essential infrastructure, tooling for Arbitrum Nova
  • New Protocol Ideas: to encourage more contributors to propose and run experiments for improving the Arbitrum protocol
  • Open Round: for anyone who wanted to see projects in categories not covered by the other 4 rounds

The Gitcoin Grant Funding Fest was the second phase of the Arbitrum and Gitcoin partnership for bottom-up democratic funding, where funders could directly donate to the projects in each of the 4 rounds from the Domain Round.

II. Goals

Arbitrum's decision to use Quadratic Funding for governance through Gitcoin Grant Stack was a strategic move inspired by the success of other community-led rounds using the platform. Given Gitcoin’s history of governance experimentation, the Arbitrum team wanted to use the same framework used in Gitcoin Grants rounds to serve two purposes: governance and fundraising. The decision to implement their grants program on Grants Stack was driven by the platform's ease of use and the minimal development required.

The four objectives of the Arbitrum rounds were:

  • To pilot a governance model that leveraged quadratic funding to enable quadratic voting, thereby creating a more democratic and equitable decision-making process that wasn't limited by token ownership.
  • To harness the existing Gitcoin community's engagement, drawing them into the Arbitrum ecosystem and thereby expanding Arbitrum's reach.
  • To establish a governance framework that empowered the community to directly influence fund allocation, ensuring that the voices of individual contributors were heard and valued.
  • To elevate Arbitrum's profile as a platform committed to public goods and decentralized governance, avoiding the centralization of power and decision-making that often plagues such ecosystems.

These goals were underpinned by the belief that a community-driven approach to funding allocation and governance could significantly enhance the protocol's adoption and development, fostering a more robust and engaged community.

III. Challenge / Problem(s) to Solve

Challenge

Engaging Different Stakeholder Groups

The Arbitrum team needed to create a governance model that was equitable and balanced, giving fair weight to the voices of all stakeholders: the 'minnows' with fewer tokens, the 'whales' with significant holdings, and the passionate members willing to contribute financially.

Solution

Paid Voting Mechanism

Arbitrum's solution was to implement a voting mechanism where anyone could participate in the round, but only wallets containing Arbitrum were counted towards calculating the domain allocation. This approach ensured that those who voted were genuinely invested in the outcome, as they were willing to contribute financially to participate. This system naturally balanced the influence among different stakeholders, as the financial contribution required for voting acted as a filter for engagement levels.

Challenge

Community Engagement and Education

A primary challenge for the organizers was introducing the concept of the Domain Round and educating their community on Quadratic Funding (QF). Many were unfamiliar with Gitcoin and how the round would work, so they needed education in order to make the initiatives successful.

This was compounded by the operational complexity of running the round and the need to clarify that this was an Arbitrum round running on Gitcoin Grants Stack, not a Gitcoin round itself.

Solution

Community-Driven Design

Firstly, there was a significant marketing outreach to inform the community about the initiative. Despite the initial confusion, the community's interest in collective decision-making was evident, with many new individuals participating who were not previously familiar with Gitcoin before. Secondly, the team learned the importance of community support as a marketing tool. By the second round, they had created a Telegram group with over 200 individuals, which helped propel awareness and participation. This community group became a platform for participants to support each other, clarify the process, and collectively market the program, leading to increased engagement and a successful round of funding.

Challenge

Mitigating the Impact of Grant Farmers

Grant farmers posed a challenge as they could potentially skew the voting process. These are participants who might vote with the primary aim of receiving airdrops or other benefits, rather than a genuine interest in the governance decisions.

Solution

Monetizing or Disincentivizing Participation

The interesting solution to this was working to utilize airdrop farmers. By requiring wallets to hold ARB to vote, the farmers' votes would convert into value for the ecosystem or disincentivize them from participating if their only motivation was to receive free rewards. This approach ensured that those who participated in the voting process were genuinely invested in the governance decisions, thereby enhancing the quality of the voting outcomes. The assumption was that the participation of farmers would decrease, as the cost of voting on mainnet would outweigh the potential rewards for those who weren't genuinely engaged in the process.

Challenge

Protecting Against Sybil Attacks

A separate challenge was ensuring the integrity of the voting process against Sybil attacks, where individuals could create multiple false identities to manipulate the outcome of the round.

Solution

Snapshot Date and Whitelisting

The grants team tackled this by adding sybil checks with two different entities, and setting a specific snapshot date for ARB token holders, for them to be eligible to vote. This acted as an informal whitelist, limiting the voting to a pre-identified group of stakeholders and reducing the risk of Sybil attacks. This method ensured that the decision-making was confined to genuinely invested community members. They didn’t want to use Gitcoin Passport for protection against sybil attacks, because their community was already new to Gitcoin and had a learning curve using it, and so adding another new platform to use, would’ve been a challenge for the community. Overall, the sybil activity had no significant impact on funding allocation during the domain round since they removed all donations from the sybil accounts from the matching calculations.

Their analysis discovered 42 confirmed Sybil entities that were strategically distributed across out of the 832 voters, equating to 5.04% of all votes. An interesting point about their sybil protection strategy is they extensively shared details around the Sybil analysis in their governance posts.

V. Results

Here are the results of both the Domain Round and the Arbitrum on Gitcoin Grant Funding Fest.

  • $100k DAI allocated to 4 (+1) future funding pools
  • Domain Round Results

In the Domain Round, the Arbitrum and web3 community helped allocate 100k DAI to five matching pools representing five strategic grant domains within the Arbitrum ecosystem via Quadratic Funding (QF)*. Over 800 people donated, of which 420 were $ARB holders.


The Arbitrum on Gitcoin Grant Funding Fest achieved significantly more community engagement, with over 2,500 participants contributing to more than 6,000 donations, demonstrating the ecosystem's strong support for the initiative. The program attracted over 140 applications, with 51 projects qualifying. 

Contributions from $ARB holders were substantial across the rounds, with the Gaming round, which initially received only 12% of Domain Round votes, attracting donations that were 2.5 times higher than those for the Developer Tooling round, despite the latter receiving over 20% of the initial votes. This discrepancy between expected and actual funding patterns underscores the importance of targeted community engagement and the potential for strategic outreach to significantly influence project support within the Arbitrum ecosystem.

VI. Conclusion

The Arbitrum rounds serve as an excellent example of how to keep the community engaged from the start. Despite initial concerns about the participation of 'farmers' and potential distortion of voting outcomes, the results were overwhelmingly positive. The community's willingness to pay to vote on mainnet was higher than anticipated, indicating a strong commitment to governance and decision-making processes.

Moreover, the validation of the four domains, based on their first grant program, and the addition of a fifth 'everything else' category, provided a comprehensive view of community interests. The fact that a significant portion of the community—between 10 to 15%—voted for categories outside the proposed four, demonstrates an openness to exploring new areas and an appetite for innovation within the community. 

A crucial insight from the round was the mismatch between the allocation of matching pools in the Domain Round and the actual donation patterns observed. Rounds with fewer votes in the Domain Round surprisingly drew more donors during the Grants Fest. Notably, the Gaming Round, despite securing only 12% of the Domain Round votes, attracted about 2.5 times more in donations, totaling $4,000. This was in stark contrast to the Developer Tooling Round that, having over 20% of the votes, garnered less in donations. This variation highlights the success of certain rounds in promoting their grants and engaging communities within the Arbitrum ecosystem.

Arbitrum’s overall approach to community-driven decision-making can serve as a model for other communities. The success of the two rounds, as evidenced by the increased participation and funds raised, underscores the effectiveness of these solutions and the community's enthusiasm for participatory decision-making processes.

By allowing community members to have a say in fund allocation and project selection, organizations can gain valuable insights into the priorities and preferences of their community stakeholders. This method also serves as a governance experiment, offering a way to validate the community's support for various initiatives and work streams without direct financial outlay. Such governance experiments are not only about fund allocation but also about engaging the community in a meaningful way. This engagement provides a signal of the community's values and priorities, which can guide future decisions and strategies.

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