Arbitrum (ARB) will unlock the utility of its native token, after accepting a vote on liquid staking. With this move, Arbitrum joins the liquid staking competition, following the model of Ethereum on its layer-2 protocol.
Arbitrum (ARB) is starting the first layer-2 program for liquid staking, modeled after Ethereum protocols like LidoDAO. All ARB holders will be able to stake their assets with active governance participants and, in turn, receive a new asset, stARB.
After the initial vote, ARB liquid staking will not distribute protocol fees to retail holders. The Arbitrum DAO will further vote on the potential to redistribute fees. The new vote was accepted by 91.54% in favor of the stake voting , with a total of 145M ARB used in the voting mechanism.
Arbitrum to rebuild incentives against governance attacks
The recent decision to increase staking and security arrives after the realization that Arbitrum could suffer a 51% attack due to misaligned incentives. The Arbitrum DAO treasury holds $32M worth of ETH, which could be spent on voting. A 51% attack would cost an estimated $31.75M, meaning some entities may have an incentive to attack the protocol.
The Arbitrum DAO currently does not reward voting, although the community is discussing opportunities to distribute some of the reserves and new inflows of fees. The biggest concern is that voters would stand behind a delegate with too much influence, making it possible to vote on proposals to aggressively redistribute the treasury.
The proposal was the most commented on and mostly accepted by the Arbitrum voters. One of the problems would be the incentive to stake with certain delegates based on their karma score on Arbitrum. Too much delegation to one big Arbitrum entity would concentrate voting power, leading to potential governance attacks and aggressive fee redistribution.
Arbitrum is currently aiming to rebuild its incentive mechanism to avoid various attacks on its layer-2 rollups technology. Gamified karma for delegates and dispute attacks are two of the main drains on resources. Currently, the Arbitrum protocol is still building up its fee generation and may have to use its Ethereum treasury to bootstrap validators and align incentives.
Arbitrum expands value locked with lending growth
Arbitrum turned into one of the most widely used layer-2 protocols, mostly because of its ability to consolidate funds. Arbitrum carries $2.65B in total value locked, surpassing other widely used chains like Base but still lagging behind Solana.
Data on Arbitrum’s wallets also reveal that the protocol controls upward of $11B in funds, with more than 2M ETH in its reserves. The known Arbitrum smart contract, as discovered by Arkham, is a hub for multiple DeFi tokens and stablecoins.
Arbitrum receives more than $2.9B from Ethereum inflows, of which 74.2% belongs to ERC-20 wrapped tokens, with 26.7% for stablecoins. The layer-2 platform allows for the fast, relatively cheap usage of decentralized protocols, with growth coming from Aave’s version, as well as the Uniswap V3 DEX. Arbitrum also tries to onboard Web3 games, attempting to repeat the success of Galxe. As of 2024, however, DeFi is the main source of activity and value locked for Arbitrum.
Even at that level of activity, Arbitrum is not printing consistent fees. The protocol manages to bring in fees as high as $1M – $3M daily, though on certain days fees fall to under $50,000.
The recent incentive proposal also notes that Arbitrum needs to orient itself toward generating a predictable income, possibly by raising fees. In that case, ARB holders would be incentivized to vote and support decentralized delegates.
Currently, Arbitrum has fees of $0.00077 even for fast transactions, surpassing even Base in some cases. The fees are still insufficient for redistribution, and the Arbitrum DAO has to rely on its reserves to align incentives.
Arbitrum also needs incentives to absorb the token unlocks, as only 32% of the total tokens are in circulation. Later on August 16, Arbitrum will have another scheduled unlock, adding 2.77% to the circulating supply.
ARB tokens traded near an all-time low during the most recent market correction. ARB sank to $0.54 from a peak of $2.29 during the Q1 bull rally.
Cryptopolitan reporting by Hristina Vasileva
