Incentive Budget and Framework for Strategic Growth

[gauntlet.xyz]

Category: Treasury

Abstract

This proposal, written in collaboration with the Jito Foundation, proposes a rest-of-year budget of 7.5m JTO for incentive or liquidity mining purposes to be managed by the Foundation.

About Gauntlet

Gauntlet is a DeFi-native quantitative research firm specializing in risk management, incentive optimization, and mechanism design. Gauntlet uses battle-tested techniques from the algorithmic trading industry to help protocols manage risk, optimize revenue, and design better incentives. Our simulation models inform parameter decisions for protocols of all sizes, covering over 25% of aggregate DeFi TVL. Gauntlet is also one of 17 delegates to receive a cumulative 12 million in JTO token voting power from Jito Foundation wallets.

Motivation

Gauntlet has recently conducted an analysis of Jito’s incentive programs to identify and recommend strategies for long-term growth and efficiency. During the analysis, Gauntlet provided the Jito Foundation with empirical measurement tools, data-driven insights, and actionable strategies to ensure that Jito’s incentive programs will meet the dynamic needs of JitoSOL and the wider Solana ecosystem.

Following extensive research and analysis, we are pleased to present a summary of our findings from two pivotal studies: the Comprehensive Quantitative Evaluation Framework and the User Behavior Study. These studies provide robust historical data on the outcomes of past incentive programs funded by the Foundation and offer a model for assessing future initiatives.

Using these as a backdrop, we propose a strategic framework and budget that will direct Jito’s incentivization efforts towards the most effective liquidity pools and products, optimizing returns and user engagement with JitoSOL.

Context

Currently, Jito’s closest competitors – Marinade’s mSOL and Blaze’s bSOL – have significant incentive spend budgets to promote the adoption of their respective LSTs. Despite Jito DAO boasting a much larger treasury, to date the Jito Foundation has only undertaken a handful of incentive programs – programs which we can now analyze empirically as having been successful.

Since the cessation of a Points incentive program, JitoSOL’s TVL has grown from 6.75m SOL to nearly 10m (nearly quadrupling in dollar terms during that period), with the Foundation funding only a handful of small-scale JTO incentive programs totaling under 1m JTO spend, primarily on the Kamino platform. Our findings suggest a more aggressive incentive program funded by the DAO could amplify this growth.

This budget accounts for .75% of the total JTO supply and 3.1% of the DAO’s JTO supply. Because of Jito DAO’s strong financial position, this budget represents a smaller supply percentage spend relative to competitor programs, but likely a larger spend in dollar terms.

As new competitors begin to emerge, this is an ideal time to utilize a responsible portion of the DAO’s considerable resources to cement JitoSOL’s market-leading status.

Key Terms

• ROI (Return on Investment): A performance measure used to evaluate the efficiency of an incentive program, measured in TVL gains on a dollar-spent basis.
• TVL (Total Value Locked): The total amount of assets staked in a protocol.

Specification

Gauntlet conducted a detailed analysis to enhance the effectiveness of incentive programs for Jito. The main objectives were:

1. Comprehensive Quantitative Evaluation Framework: Develop a quantitative framework specifically designed to base incentive spending on performance and KPIs so that Jito can evaluate the success or failure of any incentive program.
2. User Behavior Study: Analyze staker dynamics and user behavior within the broader Solana ecosystem, focusing on why they stake and their responsiveness to different incentives. This will help future incentive strategies consider the elasticity of user responses to returns and competitive pressures.

Executive Summary of Comprehensive Quantitative Evaluation Framework:

The framework uses a composite Return on Investment (ROI) formula that accounts for changes in Jito’s Total Value Locked (TVL) as well as the recipient pool’s TVL. It adjusts for broader market movements and allows attribution of impact to overlapping incentive programs. Gauntlet’s team applied the formula to the incentive programs that Jito ran from December 2023 to March 2024.

ROI(I,p) - ROI of the incentive program I in a pool p is determined by the following formula:

Definitions:

• I: The specific incentive program.
• A: The total amount of incentives distributed in JTO over the period[t−n,t].
• p: The specific liquidity pool within a DeFi protocol.
• α = 0.6: Weighting factor emphasizing the importance of Jito’s TVL changes relative to pool-specific TVL changes.
• L: The LST market adjustment, defined as the ratio of the TVL (in SOL) of Solana’s non-Jito LST market at the end vs. the beginning of the evaluation window.
• S: Market adjustment for the Solana non-LST market, defined as the ratio of the TVL in USD at the end of the period (t+14) to the beginning (t−n).

Key Findings:

1. The Kamino JitoSOL/JTO pool had the highest daily ROI of 0.15 SOL/JTO, benefiting from well-calibrated incentives and medium-term engagement.
2. Successful programs balanced incentive levels with pool TVL to attract participation without diluting value for existing pools.
3. Program duration flexibility is important to adapt to changing market conditions and user behavior.

The full report includes mathematical derivations, example calculations, and implementation details to support the adoption of this ROI-based evaluation methodology.

Executive Summary of User Behavior Study:

Gauntlet conducted a detailed statistical analysis of user behavior on Jito and compared it with Marinade, BlazeStake, and LST (Marginfi). The study focused on different user groups based on stake size and status to identify trends and gauge the success of Jito’s incentive schemes.

Key findings:

1. The current incentive campaign needed to be more effective in attracting and retaining small-to-large users but effectively generated sustained staking growth among whales.
2. Jito users have a higher average number of withdrawal operations per account than competitors; however, a low 17% withdrawal rate (the percentage of accounts that withdraw at least once) suggests strong holder retention.
3. Jito has the highest wallet net-worth average among competitors but one of the lowest LST DeFi utilization rates, indicating that it has the most risk-averse users overall.
4. Many wallets hold at least two kinds of LSTs, reflecting a tendency for diversification among stakers.

Recommendations include:

1. Redesigning the incentive program to target distinct user cohorts
2. Considering targeted staking yields for medium to large stakers
3. Developing strategies to leverage high net-worth users
4. Exploring cross-platform partnerships or features to cater to users who diversify their holdings.

Program construction:

Based on the results and key findings of these two reports, Gauntlet believes that the following program is optimal:

The Jito DAO allocates 7.5m JTO tokens to a Foundation multisig to spend on a discretionary basis in order to pursue a variety of liquidity mining strategies. The Foundation will have a mandate to pursue pools and strategies, such as the previous Kamino programs, that maximize TVL returns using Gauntlet’s evaluation framework, and will return any unspent JTO at the end of the calendar year.

This allocation is preferable to having the DAO vote on specific programs in that it enables the overall liquidity mining strategy to maintain flexibility and adjust to changes in user behavior and market conditions.

Additionally, as competitor protocols begin to adjust their liquidity mining strategies in response to Jito’s success, a discretionary budget will allow the Foundation to not just move quickly, but maintain competitive advantage relative to the delays and transparency demanded by the nearly 40-day discussion and voting period mandated by the DAO.

Benefits/Risks

Benefits:

• JitoSOL TVL growth

Risks:

• Overspending on inefficient LM programs

Outcomes

The desired outcomes include:

• Sustainable, accelerated growth in TVL
• Clear tracking of the success or failure of specific programs
• Growing JitoSOL dominance measured as a percentage of total Solana LST TVL

Cost Summary

This proposal would cost the DAO 7.5m of its 240m JTO tokens. The Foundation will return any unspent tokens at the end of the year, and if the program is overall deemed to be successful, the Foundation will likely initiate DAO proceedings for a 2025 liquidity mining budget.

Performance Milestones

• Quarterly review of incentive program effectiveness.
• Adjustments based on empirical data and community feedback.

Appendix

Comprehensive Quantitative Evaluation Framework
User Behavior Study

[laine]

Thanks for this very detailed and well researched proposal!

I’d like to clarify Gauntlet’s role here. It was mentioned the proposal was drafted together with the Jito Foundation, was this mandated and paid for by the Foundation, or does Gauntlet have a financial interest in the proposed incentive programme?

Would the Jito Foundation multisig that receives the 7.5m JTO be newly formed or an existing multisig, would the members be part of the Jito core team or include external members and if so in what ratio with which approval threshold?

Overall I support the proposal and think it’s a wise investment towards the growth of jitoSOL, as long as we have full understanding and transparency of the interests and fund flows.

[gauntlet.xyz]

Hi @laine! Thanks for your feedback.

Gauntlet was contracted to analyze the Foundation’s previous LM efforts and devise a future strategy. However, we will receive no DAO funding from this proposal.
The intention is for the funds to be managed by a 3/5 multisig of three Foundation members and two Labs members. While some outside delegation may make sense, there will be significant overhead (an estimate of 1x action per week), so we believe keeping it within Jito Network contributors is ideal.

[joebuild]

This looks great. Super well thought out.

Being the first team to implement this type of strategy on Solana will have benefits beyond just the tactical efficiency.

[Hemingway.th]

I appreciate the transparency and inclusion on this matter. This is a solid plan and I Like that, it’s Continually reevaluated.

Thank you for the communication

[Chainflow]

Hello, Chainflow appreciates the thoroughness of both the User behavior study and the Comprehensive Quantitative Evaluation Framework. The framework specifically provides us with clear metrics to assess the progress of the incentive programs that are going to be improved.

The proposal utilizes a sophisticated quantitative framework that bases incentive spending on performance and KPIs. This structured approach ensures that incentives are not just splurged but are directed towards achieving measurable improvements in TVL (Total Value Locked) and user engagement.

The success of the strategies seems to depend heavily on market conditions. 3/6 out of the assessed incentive programs rely greatly on the market conditions and if more are battle tested, will that reduce that risky reliance on the market? Sudden downturns or shifts in the DeFi landscape could undermine the effectiveness of the incentive programs so we’re curious if there are tany mechanisms or plans to reduce the market dependency of the incentive programs? That could just be something we discuss further as a community.

Overall, Chainflow will be in favor of this proposal.

[marky]

Thanks for the detailed proposal and I agree with it. I agree there is a spend needed, and such a proposal is valuable.

jitoSOL is currently the most liqiuid LST on Solana, which is great, but there are still situations as seen recently which show the fragility of xSOL liquidity vs SOL. And continuing to work on this aspect will also continue to enable jitoSOL to be the default and most liquid LST across defi, and to unlock even more opportunities of TVL growth. My broad point being that the ‘liquidity mining’ success is also about liquidity as well as TVL growth, both going hand in hand.

[gauntlet.xyz]

Great feedback! Incentivizing pools with liquid token pairs (e.g., JitoSOL-SOL) and focusing on users with high retention in the targetted incentive program should minimize the effects of market downturns.

[Ian]

Really enjoyed reading through this proposal & the full report as well! Great to see some strategic thinking behind liquidity incentives rather than picking a “nice round number”.

One question I had - does the analysis take into account external pool incentives from other protocols? If not, why so?

I understand adding more variables can impact the model’s stability - but other token incentives + “points” can surly influence users actions.

Overall, I am in favor of this proposal. Thanks to the folks at Gauntlet for putting this excellent proposal together!

[BlockworksResearch]

Thank you Gauntlet for the excellent analysis and taking the lead on this proposal. We support another JTO incentives program along with the proposed size. Before moving onto a formal vote, we would like to surface a few questions and suggestions, and also offer feedback on possible additional analyses that we think would be valuable considerations for the DAO moving forward.

• Targeting user cohorts: The analysis recommends targeting small to large users, since it successfully attracted whales but did not effectively attract other cohorts. While we want to grow the pie and diversify user demographics, we also want to be aware of rewarding potentially misaligned users (i.e. mercenary capital, sybils, etc.). What is the rationale behind targeting users based on size? What are strategies in mind that can target specific cohorts?

  • Alternatively, more education about Jito and Solana more broadly will increase user growth. To this end, we have noticed Jito’s effort toward creating more user friendly content (including via more blog posts, Twitter engagement, and their new podcast). This is a great way to extend JitoSOL to other users.
  • Ultimately, a good incentives program attracts stakers of all sizes, and small users (like whales) in theory should LP wherever there is expected returns. Said differently, successfully attracting whales is a feature that should attract other stakers of all sizes.
  • Our recommendation is to focus on which dapps to integrate and risks play out.

• Cross-platform partnerships: DeFi protocols on Solana that we recommend for round 2 are Sanctum and Drift. A potential second order effect of integrating with these dapps is bringing on more user cohorts.

  • Sanctum is a liquidity protocol for Solana LSTs. Rather than having to manage individual pools across various DEXes, stake pool managers can deposit LSTs in the same pool. This unlocks more liquidity for LSTs, which is becoming more important as teams and native node operators grow their LST businesses. For these reasons, Sanctum is an obvious venue to encourage JitoSOL liquidity. Plus, given Sanctum Wonderland, the product’s easy to understand narrative/UX, and the expectation of a governance token, we expect participation from small to medium sized holders to increase with this integration.
  • Drift is the largest perp DEX by TVL on Solana. Given upcoming plans to decentralize the protocol, we think this is an opportune time to work with Drift to bootstrap more JitoSOL TVL and leverage “JitoSOL as collateral.” Plus, we think a perp dex is a better platform to garner market share of more active users, rather than whale yield farmers, which can potentially increase small and medium sized holders.

• Don’t fix what ain’t broke: Re-run JTO/JitoSOL incentives on Kamino. Consider a JitoSOL as collateral program.

• Develop a DeFi Integration Framework for JTO incentives: JitoSOL is a valuable resource for DeFi applications. The DAO should explore developing a formal framework by which DeFi applications request and receive JTO incentives from the DAO.

  • Using Drift as an example: for X amount of JitoSOL TVL (or utilization) by the end of the program, Jito DAO receives Y amount of $DRIFT. Essentially, if we are going to spend JTO to raise JitoSOL TVL on another platform, what does the DAO get in return?
  • This serves two purposes: an additional revenue stream for the DAO and deeper incentive alignment among Jito DAO and other DAOs.
  • Potential downsides: losing TVL to other LSTs who effectively distribute incentives for free, and opening the floodgates for unwanted JTO incentives proposals.
  • Further analysis that proves the value of JitoSOL TVL could justify the cost. Note: this cost would be paid in governance tokens based on JitoSOL TVL at the end of the incentive program–improving long term incentive alignment and diversifying the DAO’s treasury.

In summary, our main pieces of feedback are: (1) targeting users based on size is not as important as other features of the program such as targeting specific DeFi applications and monitoring the risks, (2) Sanctum and Drift are recommendations for deploying JTO incentives, (3) re-activate the successful Kamino pools, and (4) consider developing a framework by which DeFi apps can tap into JTO incentives that fosters incentive alignment and increases the treasury.

Additional considerations:

We also agree with Gauntlet’s recommendation that “flexibility is important to adapt to changing market conditions and user behavior” and want to suggest additional analyses aimed to improve the effectiveness of the program. That said, we acknowledge the precedent to initiate another round of incentives before coming to terms about the following suggestions. They are intended to open discussions about future adaptations to improve the program throughout the year.

1. With respect to the user behavior study, is there insight or analysis on what JTO farmers are doing with their JTO rewards? For example, are they farming and selling? Farming and transferring to Coinbase? Farming and holding?

   • This analysis can help the DAO target desirable user behavior with more precision as well as strive toward JitoSOL growth and JTO alignment.

2. Since the DAO retains a 4% annual management fee (after Jito Labs’ fee and validator commissions) of total JitoSOL rewards, is there a way to target expected returns for the DAO given JitoSOL TVL growth targets? If so, we should add these financials to the model.

   • This analysis could provide additional context for prospective JTO holders to participate in governance in expectation that the DAO’s treasury grows.
   • The challenge would be modeling MEV rewards.

3. Other considerations are modeling JitoSOL utilization rates and risks in DeFi, and exploring incentives based on the underlying dapp i.e. lending vs two-sided pool.

We recognize that some of the recommendations might require additional resources or capacity to execute. If the DAO wants to pursue any of the above, we are happy to connect and work closely with relevant parties. We look forward to hearing others’ thoughts and contributing to an effective round 2 of JTO incentives!

[gauntlet.xyz]

Thanks @BlockworksResearch, we appreciate the thoughtful feedback. We will address some of the other questions later this week.

To answer this question:

@BlockworksResearch

Targeting user cohorts: The analysis recommends targeting small to large users, since it successfully attracted whales but did not effectively attract other cohorts. While we want to grow the pie and diversify user demographics, we also want to be aware of rewarding potentially misaligned users (i.e. mercenary capital, sybils, etc.). What is the rationale behind targeting users based on size? What are strategies in mind that can target specific cohorts?

Gauntlet conducted a study to investigate whether the size of a user’s investment influences their response to incentives. The results showed that users with small to large investments (those who have staked between 0.1 and 100 SOL), have lower retention rates after initially being attracted by the incentives compared to users with the largest investments (whales). This suggests that users with smaller investments are more likely to be seeking short-term opportunity as opposed to long-term investors, indicating that the incentive rewards may not be effectively allocated to these users. Based on these findings, Jito Foundation will be announcing new strategies aimed at encouraging users with small and medium investments to invest for longer periods and incentivizing those with large investments to increase their investment size to reach the whale category. Our goal is to engage users across all investment levels.

[Chainflow]

+1 on the education initiative mentioned, it’s important to increase user growth and diversity! We prefer to support solutions that will encourage smaller stakers to participate more.

[gauntlet.xyz]

Hi @Ian, great question!

Our quantitative evaluation framework focused on analyzing TVL changes in pools and Jito, prioritizing the actual impacts over APY and yield factors, which are less reliable indicators due to their volatility and issues like impermanent loss.
Despite this, we agree that the success of incentive programs is linked to the airdrop/token strategy employed by the DeFi protocol where the pool is deployed, as noted in our reports. This approach can create a perception of increased APY among users, which is why we recommended prioritizing Kamino and Meteora pools. However, quantifying this metric is challenging. We need to delve deeper into the specific airdrop mechanics of each protocol and estimate token values, which is often difficult since the rules for new token allocations frequently change and protocols may not disclose them.

[gauntlet.xyz]

Hey @BlockworksResearch, first of all, thank you for the call we had earlier today where we clarified some of the questions. We answered the first question on targeting users here. We agree on user education and podcasts - Twitter threads highlighting DeFi opportunities are also important. We believe that attracting stakers of all sizes is beneficial, and educating users will contribute to that.

Regarding cross-platform partnerships, we are in favor of partnering with Drift. If we can incentivize users to deploy more JitoSOL as collateral, this will increase the range of use cases for JitoSOL. However, need to make sure DAO is not overspending JTO tokens on these initiatives and focuses mainly on posting liquidity. As @marky mentioned in the recent AMA, if liquidity becomes deeper, JitoSOL’s loan-to-value ratio (LTV) will be higher on lending/borrowing platforms. If the LTV is higher, users can borrow against JitoSOL more on Kamino or have higher collateral for perpetual trading on Drift, increasing its utility. That’s why we proposed maximizing the objective function of liquidity + JitoSOL TVL, as this will subsequently lead to other utilities.

The suggestion below makes sense if we want to ensure partner protocols are open to mutual cooperation. Increasing Drift’s TVL by offering JTO rewards is a great help to Drift, so they might want to match this reward with their tokens and double it, for example. We think it would be more effective, but we are unsure about creating a detailed framework, as too many edge cases may not be covered.

@BlockworksResearch

Develop a DeFi Integration Framework for JTO incentives: JitoSOL is a valuable resource for DeFi applications. The DAO should explore developing a formal framework by which DeFi applications request and receive JTO incentives from the DAO.

Regarding Sancum, as mentioned on the call, Gauntlet thinks there might be some competitive considerations, and JitoSOL can successfully bootstrap its liquidity without their pool.

Additional recommendations were out of the scope of our initial research and analysis; however, if the DAO wants this, we are happy to assist with JTO farmers’ analysis, financial analysis, and defi utilization rate modeling.

[Ian]

Thanks for the thorough response!

Again, excellent work

[gauntlet.xyz]

In addition to the proposal, one of the most important goals of the program is boosting jitoSOL-SOL liquidity.

Boosting liquidity reduces the price impact of large transactions and may increase JitoSOL’s loan-to-value ratio on platforms like Kamino. This allows for greater borrowing power and the use of JitoSOL as collateral on platforms such as Drift, thereby increasing JitoSOL’s overall utility and broadening its applications.

Currently, JitoSOL has the deepest liquidity compared to other LSTs. The DAO should focus on further improving this and ensuring that at some point JitoSOL and SOL have almost the same risk parameters in DeFi.

LST Liquidity Comparison:

When selling approximately $10 million worth of LST on jup.ag, jitoSOL has the lowest price impact at less than 0.1% among all its competitors. The second-best liquidity is bSOL, with a price impact of about 0.137%. INF by Sanctum (47.36%) and mSOL (11.77%) have the highest price impact.

When selling approximately $20 million worth of LST, jitoSOL again has the lowest price impact at less than 0.1%. The second-best liquidity is bSOL, with a price impact of approximately 0.26%. INF by Sanctum (72.80%) and mSOL (49.52%) have the highest price impact.

Please note that Sanctum’s Infinity Pool was not included in these estimations.