Incentive distribution platforms are at the core of many DeFi protocols and chains, driving user engagement and ensuring the liquidity needed to keep these ecosystems thriving.
But when it comes to how these incentives are managed and distributed, the underlying architecture makes all the difference. While some projects distribute rewards manually or use onchain incentive providers, Merkl delivers a powerful offchain solution.
Let’s take a closer look at why Merkl operates offchain and why that’s an advantage for both users and projects with incentives to distribute.
The Merkl system
Merkl operates with an offchain engine that analyzes both onchain (blockchain transactions, smart contract addresses, etc) and offchain (API, Twitter posts, etc) data to track user activity and allocate rewards based on the rules set by the incentive campaign creator.
The data is turned into a Merkle tree, compressed into a Merkle root, and then pushed onchain. This allows users to claim rewards from their wallet, transparently and efficiently, without the high costs and risks of fully onchain solutions.
Greater flexibility in incentive distribution
One of the key advantages of Merkl’s offchain engine is its unparalleled level of customization.
Onchain incentive mechanisms come with significant limitations and rigid frameworks, making it difficult to adapt to specific user needs. Customizing who receives rewards or creating nuanced distribution models is not easily achievable.
Merkl’s offchain approach, however, allows for far greater flexibility.
With the Merkl engine, campaign creators can whitelist or blacklist addresses, detect Automated Liquidity Managers (ALMs) and forward rewards to users who deposit liquidity through them, add yield boosts, set minimum token holding requirements, and more.
The offchain engine allows Merkl to fine-tune rewards, even targeting highly concentrated liquidity positions without risking exposure to vulnerabilities like Just-in-Time (JIT) attacks, which are a significant threat onchain.
Furthermore, Merkl's offchain architecture opens up the possibility of cross-chain incentives — incentivize assets on one chain by distributing rewards on another (e.g., distributing USDA tokens on Arbitrum as rewards for users providing liquidity in a vault on Ethereum).
This level of adaptability is simply not achievable with onchain systems, which are often constrained by the limitations of the blockchain they operate on.
A more cost-effective solution
Anyone who has done onchain transactions knows how expensive gas fees can be.
Onchain operations require each action to be validated and processed by the network, and that validation comes with a fee. This is especially true for incentive distribution, which often requires numerous small transactions, and smart contract interaction, that quickly add up in terms of fees.
Merkl’s offchain system is much more cost-effective.
By processing reward data offchain and only pushing the finalized Merkle root onchain (with a sync every 4-8 hours to fetch positions on the chain), Merkl significantly reduces gas fees. Users don’t have to deal with sky-high fees when claiming rewards, resulting in a better overall user experience — especially for liquidity providers (LPs) who earn rewards regularly.
No smart contract risks
While onchain incentive systems benefit from the security of blockchain technology on which they are deployed, they are not without their vulnerabilities.
Smart contract attacks are common in DeFi. And while smart contracts are regularly audited, there's no such thing as zero risk, and funds can still be lost in a hack. These threats are particularly concerning in onchain incentive distribution, as attackers could exploit vulnerabilities in the reward mechanisms to their advantage.
Merkl’s offchain approach eliminates these risks.
Since there are no onchain smart contracts involved in the core reward distribution process, Merkl users are protected from the risk of such attacks. The Merkl engine processes and distributes rewards in a secure, offchain environment, ensuring that rewards are safe without the need for complex onchain smart contracts to manage them.
Conclusion
Merkl’s decision to run offchain isn’t just a matter of technical preference — it’s about providing a superior, more customizable, secure, and cost-effective incentive distribution platform.
By choosing to operate offchain, Merkl ensures a better user experience through lower gas fees and by eliminating the risks associated with depositing liquidity into smart contracts.
It’s an approach that benefits everyone, and one that makes Merkl stand out in the evolving world of incentive management platforms.