How should Arbitrum save itself in the face of the token sell-off wave, from token incentive programs to L3 innovations?

Author: Mia, ChainCatcher

Recently, the on-chain activities of ARB whales selling off have been continuous. Since this Monday, whale addresses, including market maker Wintermute Trading, have successively transferred tens of millions of ARB to Binance. Coupled with the overall market panic caused by "FTX selling digital assets," ARB's price plummeted to a historic low of $0.744 on Monday, with a 12% drop over the past week.

Faced with the price collapse triggered by whale sell-offs, many ARB holders began to voice their complaints. In order to stabilize the price, Arbitrum started self-rescue and announced on the 12th the launch of a 100 million ARB ecosystem funding plan. Currently, ARB has recovered some of its losses, with the price rising to $0.8.

Incentive Plan Turns into "Dumping Plan"

According to CoinGlass data, on September 11, long positions worth $2.2 million were liquidated, the highest level since the ARB crash in August. The bullish signal before the liquidation came from the proposal initiated by Arbitrum's native governance aggregator PlutusDAO in the community this month to "activate ARB staking." The proposal suggested that Arbitrum DAO mint 1.75% inflation of the total ARB supply and distribute it as incentives to ARB token lock-up holders within a year, aiming to boost the ARB market atmosphere, increase the returns for long-term holders, and combat short-term arbitrage behavior. However, this approach has been questioned by some holders, who expressed concerns that it might dilute the value of the tokens. If it relies solely on inflation rather than being tied to actual platform usage and economic activity, it could lead to a loss of information for users. It is reported that PlutusDAO has currently locked 9.5 million ARB, clearly under the guise of benefiting Arbitrum while seeking personal gain.

In fact, there has been ongoing exploration regarding how to stimulate the Arbitrum ecosystem and invigorate the ARB token market. On the 4th of this month, Arbitrum proposed an ARB token incentive plan for the community, aiming to allocate up to 75 million ARB rewards from the DAO treasury to active Arbitrum protocols to meet the community's short-term needs. This proposal has also sparked controversy, mainly due to concerns that the 75 million ARB will be distributed to ecosystem protocols over the next 2-3 months, which could lead to significant selling pressure in the ARB secondary market. Additionally, short-term token incentives have minimal long-term growth impact on the Arbitrum ecosystem, potentially increasing the pressure for sustained ecosystem growth.

According to Token Unlocks, Arbitrum will unlock 1.11 billion ARB tokens worth $1.24 billion at a market price of $1.12 on March 16 next year. The unlocked amount accounts for 87% of the circulating supply of 1.275 billion tokens, while at least 12.75% of the current ARB token supply is already in circulation. The massive unlocking combined with this token incentive plan will undoubtedly bring greater selling pressure in the future.

These factors have led to a wave of sell-offs by whales, with many whale addresses choosing to sell at a loss. According to Lookonchain data, on Monday alone, seven whale addresses sold ARB at a loss, totaling 20.41 million ARB (approximately $16.05 million), incurring a total loss of $8.15 million.

The originally launched ecosystem incentive plan has turned into a whale dumping scheme, which was certainly unexpected for Arbitrum. However, how to address the panic caused by token selling pressure may only be resolved through ecosystem construction, and the Arbitrum ecosystem is also beginning to face difficulties.

"Wealth Effect" Weakens, Arbitrum Ecosystem Growth Hits a Snag

In fact, as the "Year of L2," Ethereum L2 has experienced explosive growth this year. Similar to the previous boom in public chains, many projects have begun to lay out the L2 track, from Arbitrum and Optimistic to the recent Base, with more and more L2 projects emerging like mushrooms after rain. However, as the track becomes increasingly crowded, the Arbitrum ecosystem has also started to encounter growth difficulties.

Like conventional L2 products, Arbitrum focuses on achieving Ethereum scalability while ensuring security and decentralization. It already had a complete fraud proof when the first version was launched. Since then, Arbitrum's development team, Offchain Labs, has made multiple updates to the technology stack, introducing Nitro, Stylus, and Bold. However, compared to zkSync, Starknet, and Base, which still have airdrop expectations, the growth of users and TVL for Arbitrum, which has already conducted an airdrop, has begun to slow down.

Unlike Optimism, which is primarily supported by large VCs, Arbitrum's native applications are mainly community-funded, with profits from the success of individual native projects quickly flowing back to other projects in the ecosystem, forming a self-circulating ecosystem. However, this ecosystem model, which relies purely on internal liquidity, is extremely vulnerable in the current environment of unstable user numbers and insufficient liquidity. The overall lack of liquidity in the Arbitrum ecosystem has compressed its survival environment in L2. As newcomers like zkSync and Base begin to gain traction, competition in the L2 track has intensified, and Arbitrum's market competitiveness has started to decline, leading to a loss of market share.

According to L2BEAT data, the current TVL of the Arbitrum network has fallen from a peak of $7 billion in April this year to $5.1 billion, with its market share dropping from 67% to 54.15%.

Looking at the development of the Arbitrum ecosystem, to better serve Web 3 developers, Arbitrum has been focusing on the development of new technology stacks from Nitro to the recent Stylus. Additionally, the Arbitrum ecosystem has seen hot projects such as the DeFi ecosystem GMX and the gaming sector's Treasure, which have attracted a large number of ecosystem builders to tap into the user base of the Arbitrum ecosystem, leading to a small explosion in the Arbitrum ecosystem earlier this year. However, with the market downturn and sector rotation, the wealth effect of Arbitrum ecosystem projects has weakened, and previously high-quality projects have gradually begun to exhibit a "tiger head, snake tail" phenomenon.

In fact, the majority of users that the Arbitrum ecosystem caters to are those with a preference for leverage and a high risk tolerance. Since the small peak of the Arbitrum ecosystem has passed, apart from the newly released development environment Stylus, there have been no new ecosystem projects that can stimulate investor enthusiasm and bring wealth appreciation. In other words, aside from developers who truly benefit from the convenience brought by technological development, most ecosystem users can be said to be "working for love," which is why the recent exposure of the incentive plan led to "whale sell-offs."

How Useful is the Exploration of L3?

As the L2 track becomes increasingly competitive, the market competition is intensifying. Beyond adhering to the "low cost, high efficiency" advantages of L2, the L2 industry has begun to explore modularization, increasing scalability, and building new trends in L3: Optimism has shifted to Op Stack multi-chain infrastructure, developing towards superchains; zkSync has proposed customizable trustless linked blockchains called Hyperchain for better super-scalability and improved composability; StarkWare has begun developing a multi-layer solution, exploring L3 for customized scaling. Arbitrum is no exception, launching vertical exploration of L3 networks through Arbitrum Orbit and introducing a new development environment, Stylus, for developers.

Stylus is an open-source SDK developed by Arbitrum that supports multi-language application building, allowing developers to use traditional EVM tools on Arbitrum while also using WASM-compatible languages such as Rust, C, and C++ to build applications. Compared to using traditional Solidity, WASM makes Dapps' execution more efficient and significantly reduces gas costs. L3 XAI benefits from Arbitrum's technology stack Nitro + BOLD + Stylus and can natively integrate BOLD and Stylus.

While Op Stack profits from access to its shared sequencer infrastructure, Arbitrum attempts to profit from its proprietary development environment codebase. L3 XAI is defined as a smart contract on Arbitrum's L2, with its transactions settled through Arbitrum L2 (Arbitrum One or Nova). Additionally, XAI, as a game-specific L3, can achieve higher performance with dedicated computing and storage resources, making resource-intensive use cases on-chain possible. The emergence of XAI will help improve the scalability of the Arbitrum ecosystem while diversifying its execution environment and security model.

With the launch of L3 XAI and the update of the development environment Stylus, new possibilities are being created for the Arbitrum ecosystem: Stylus expands the categories of supported languages, while L3 creates a more diverse execution environment. In the future, the Arbitrum ecosystem will attract developers who seek more control and customization, allowing them to fork and freely adjust the Arbitrum source code according to specific needs to form so-called "custom chains."

Conclusion

The Arbitrum team has been trying to initiate self-rescue.

To save the token price, Offchain Labs has repeatedly repurchased ARB from an address starting with 0xb41. Just this week, as the token price fell, Offchain Labs intervened again, urgently repurchasing 1.799 million ARB (approximately $1.4 million) from Binance at an average price of $0.78. According to Spot On Chain data, since August 23, Offchain Labs has repurchased a total of 7.166 million ARB from Binance at an average price of $0.9. Additionally, Arbitrum has launched an ecosystem funding plan, providing over 100 million ARB in funding support for four tracks: gaming, developer tools, new protocol concepts, education, community development, and events.

After a series of "emergency rescues," ARB has now risen above $0.8. However, overall, the ARB price remains at the bottom, with no significant signs of a rebound.

Looking back, the previous rise in ARB prices was likely due to the explosion of the Arbitrum ecosystem, and saving ARB fundamentally relies on activating the Arbitrum ecosystem. Regarding the expansion of Arbitrum ecosystem development mentioned above, the recently launched Odyssey event for XAI will provide developers with substantial rewards, but the overall operation is still in its early stages and requires long-term validation over time. In the future, will L3 XAI usher in large-scale applications? Will Stylus encourage more dApp developers to settle in the Arbitrum ecosystem to develop projects with greater wealth effects to regain users? All of this remains uncertain.

Faced with severe "involution" in the L2 track and the vigorous pursuit of newcomers, Arbitrum may have no choice but to accelerate its pace and fight back.