Can Arbitrum activate ARB tokens through the initial staking empowerment proposal?

Author: Nan Zhi, Odaily Planet Daily

Ethereum and Ethereum-based Layer 2 solutions have shown a significant decline in both token prices and core projects over the past two years. Among them, ARB has become the worst-performing token in terms of price trends over the past year, while STRK has dropped by 90% just six months after its launch.

The fundamental reasons for this are, on one hand, the limited activity and revenue of the Layer 2 ecosystem, and on the other hand, the tokens of various Layer 2 solutions only serve governance functions, failing to generate revenue, leading to weak demand. In response to the latter, the governance aggregation protocol PlutusDAO on Arbitrum proposed staking ARB for yield last year, which was approved through off-chain voting. Although it ultimately failed in the on-chain voting phase, it did successfully boost the token price for a period of time (with a 30-day increase of about 40%).

On August 16, the Arbitrum community preliminarily approved the proposal to "enable ARB staking to unlock token utility," aiming to empower the ARB token. What are the specific contents of the proposal, and can it reverse the fundamentals of the ARB token? Odaily will interpret this in the following article.

Proposal Interpretation

Governance and Token Pain Points

The proposal was put forward by Frisson, the head of market operations at Tally, who stated that ARB mainly faces the following issues:

• Governance power is the only source of demand for ARB, but there is a large amount of new supply of the token, including unlocks and treasury expenditures;

• The re-staking of ARB or its use in DeFi is incompatible with its governance function. When ARB is deposited into a smart contract, it loses voting rights, with less than 1% of ARB tokens actively used in on-chain governance.

• The number of DAO members participating in governance has been continuously declining since the launch of the Arbitrum token.

Solution

Therefore, the proposal aims to create a mechanism to distribute revenues from Arbitrum to token holders, including sequencer fees, MEV fees, validator fees, token inflation, and treasury, among other sources, though the specific sources of income to be introduced still need to be decided through subsequent governance votes.

Furthermore, the proposal requires token holders to delegate their tokens to "active governors" before they can receive income. At the same time, the proposal introduces ARB liquid staking tokens, stARB, through Tally, allowing holders to retain the ability to combine with DeFi protocols and earn automatic compounding while staking their tokens.

Through the combination of these two modules, ARB holders are expected to earn income from network activities, while the introduction of stARB allows governance of the token to no longer be restricted, and the combination with income can enhance governance activity.

From a fundamental perspective, the approval of this proposal is clearly a positive for ARB, but in practice, one must consider a key question: how much income can be generated from network activities? Even if all network revenues are distributed to token holders, how much benefit can it bring?

Network Activity Revenue

Rising Network Activity

From conventional metrics, Layer 2 solutions still maintain a high market share, with slight increases. The following chart shows the active addresses, daily transaction volume, TVL, and DEX trading volume of several major Layer 2 solutions.

Declining to Negligible Network Revenue

However, data from DefiLlama shows that the Arbitrum network earned only $6,000 in the past 24 hours. Since the Cancun upgrade in March, daily revenue has fluctuated between $10,000 and $40,000, except for a few sporadic spikes. Based on a daily revenue of $30,000, the annual network income would be approximately $10 million, which is a drop in the bucket compared to ARB's circulating market cap of $1.8 billion and the recent monthly token unlocks of $60 million.

The sharp decline in revenue is primarily due to the fact that before the Cancun upgrade, Arbitrum and other Layer 2 networks' income mainly came from the difference between "Gas fees paid by users on Layer 2" and "fees for submitting transactions from Layer 2 to the Ethereum mainnet." For example, each transaction on Starknet costs at least $1-2, but the cost is essentially negligible, with profit margins exceeding 99%. After the Cancun upgrade, this core revenue source is unlikely to return to the same level.

Therefore, the only remaining reasonable source of income is "inflation." Last November, PlutusDAO proposed an inflation of 100 million ARB as staking rewards, which was approved through off-chain voting on Snapshot but failed to pass on Tally's on-chain vote. The reason may be the excessively high inflation rate; 100 million ARB accounted for 7% of the circulating supply and 1% of the total supply in November last year.

Currently, the circulating supply of ARB is 3.26 billion tokens. If 100 million tokens are inflated, the yield would be 3%, which would need to be distributed over a year to reach the minimum level of DeFi returns. If the inflation rate is too high, it will become a significant threat to the token price.

Conclusion

In summary, while this staking empowerment proposal is logically sound and clearly beneficial for ARB, considering the actual profitability of the network, the degree of benefit currently appears to be quite limited. The Tally voting plan is scheduled for October, and it is recommended that relevant holders of ARB tokens pay attention to the specific plans in the next two months.