Can the initial stake proposal for Arbitrum activate the ARBToken?

Original | Odaily Star Daily (@OdailyChina)

Author|南枳(@Assassin_Malvo)

In the past two years, both Ethereum and Ethereum-based Layer 2 solutions have shown a decline in token prices and core projects. Among them, ARB has been the worst-performing token in the past year, while STRK has dropped by 90% within only six months since its launch.

At the root of it, on the one hand, the limited activity and income of the Layer 2 ecosystem, and on the other hand, the governance-only function of Tokens on each Layer 2, resulting in weaker demand. In response to the latter, PlutusDAO, a governance aggregation protocol on Arbitrum, initiated a proposal to stake ARB for interest through off-chain voting last year, although it ultimately failed in the on-chain voting phase, but did indeed successfully boost the token price for a period of time (approximately 40% increase over 30 days).

On August 16, the Arbitrum community initially passed a proposal to ‘enable ARB stake to unlock Token utility’, aiming to empower the ARB Token. What is the specific content of the proposal, and can it reverse the fundamentals of the ARB Token? Odaily will interpret in this article.

Proposal Interpretation

Governance and Token Pain Points

The proposal was put forward by Frisson, the head of Tally Market Operations, who said that ARB primarily has the following issues:

• Governance power is the sole source of demand for ARB, but there is a significant increase in the supply of Token, including unlocking, treasury spending, etc;
• The re-stake of ARB or its use in Decentralized Finance is not compatible with governance functions. When ARB is deposited into a Smart Contract, it will lose its voting rights, and less than 1% of ARB Tokens are actively used in on-chain governance.
• The number of DAO members participating in governance has continued to decline since the launch of Arbitrum Token.

Solution

Therefore, the proposal aims to create a mechanism to distribute profits from Arbitrum to Tokenholders, including sequencer fees, MEV fees, validators fees, Token inflation, and treasury, among other sources. However, the specific introduction of which revenues will be adopted still needs to be decided through subsequent governance voting.

Furthermore, the proposal requires Tokenholders to delegate their Tokens to “active governors” before they can earn profits. At the same time, the proposal introduces the ARB liquidity stakeToken stARB through Tally, allowing holders to retain the ability to combine with Decentralized Finance protocols and automatically compound interest while staking their Tokens.

By combining the above two modules, ARB holders are expected to obtain benefits through network activities, while the introduction of stARB removes the limitations on Token governance, and the combination with income can enhance the activity of governance.

From a fundamental logic perspective, the approval of this proposal is obviously Favourable Information for ARB, but there is still a question that needs to be considered in practice, how much profit can be generated from network activities? Even if all network profits are distributed to Token holders, how much benefit can it bring to them?

Network Activity Revenue

Network Activity of rise

From a conventional perspective, Layer 2 still holds a high market share, even slightly rising. The following figures show the active Addresses, daily volume, TVL, and DEX volume of several major Layer 2 solutions.

Decreased to negligible network revenue

However, according to DefiLlama data, the revenue of the Arbitrum network in the past 24 hours is only $6,000. Since the Cancun upgrade in March, except for a few occasional outbreaks, the daily revenue has fluctuated between $10,000 and $40,000. Calculated at $30,000 per day, the annual network revenue is only about $10 million, which is insignificant compared to ARB’s circulating market cap of $1.8 billion and the recent monthly token unlocking of $60 million.

The main reason for the sharp decline in revenue comes from before the Cancun upgrade, where the revenue of Arbitrum and other Layer 2 networks mainly comes from the difference between ‘Gas fees paid by users on Layer 2’ and ‘Fees for Layer 2 to submit transactions to the ETH mainnet’. For example, Starknet requires at least $1-2 per transaction, but the cost is negligible, with a profit margin of over 99%. After the Cancun upgrade, this core revenue is unlikely to return to the same level.

Therefore, the only way to provide a reasonable income is ‘issuance.’ In November last year, PlutusDAO proposed to issue 1 billion ARB as a stake reward, although it passed the Snapshot off-chain vote, it did not pass the Tally on-chain vote. The reason may be that the inflation rate is too high. The 1 billion ARB in November last year accounted for 7% of the Circulating Supply and 1% of the total supply.

The current ARB Circulating Supply is 3.26 billion. The yield is 3% if 100 million ARB is increased. It needs to be distributed over 1 year to achieve the minimum level of Decentralized Finance income. Once the inflation rate is too high, it will become an important threat to token prices.

Conclusion

In conclusion, although the logic of this staking endowment proposal can be established, and it is obviously Favourable Information for ARB, considering the actual profit-making ability of the network, the degree of Favourable Information seems to be limited at present. The Tally voting plan will be carried out in October, and it is recommended that holders of ARB Token follow the specific plan for the next two months.