In the past two years, both Ethereum and Ethereum-based Layer 2 solutions have shown a marked decline in token prices and core projects. Among these, ARB has been the worst performer in terms of price over the past year, and STRK has fallen by 90% within just six months of its launch.

The fundamental reasons are twofold: first, the limited activity and revenue in the Layer 2 ecosystem; and second, Layer 2 tokens generally only have governance functions and do not generate revenue, leading to weak demand. To address the latter, the governance aggregation protocol PlutusDAO on Arbitrum proposed staking ARB tokens to earn rewards last year, which was approved in an off-chain vote. Although it ultimately failed in the on-chain voting phase, it did temporarily boost the token price (with a 30% increase over 30 days).

On August 16, the Arbitrum community preliminarily approved a proposal to “Enable ARB Staking to Unlock Token Utility,” aimed at empowering the ARB token. What are the specifics of this proposal, and can it reverse the fundamental issues with the ARB token? Odaily will analyze this in the following article.

Proposal interpretation

Governance and token pain points

The proposal, introduced by Frisson, the market operations head at Tally, identifies the following issues with the ARB token:

1. Governance power is the only source of demand for ARB, but the token faces a large amount of new supply, including unlocks, treasury expenditures, and so on.
2. Re-staking ARB or using it in DeFi is incompatible with its governance function. When ARB is deposited into a smart contract, it loses voting rights, and less than 1% of ARB tokens are actively used in on-chain governance.
3. 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 for distributing revenues from Arbitrum to token holders, including sources such as sequencer fees, MEV fees, validator fees, token inflation, and the treasury. The specific revenues to be included will be decided by future governance votes.

Furthermore, the proposal requires token holders to delegate their tokens to “active governors” before receiving rewards. Additionally, the proposal introduces the ARB liquidity staking token stARB through Tally, which allows holders to stake their tokens while retaining the ability to integrate with DeFi protocols and benefit from automatic compounding.

Through the combination of these two modules, ARB holders are expected to earn rewards from network activity, while the introduction of stARB ensures that governance is no longer limited, potentially enhancing governance activity through its integration with revenues.

From a fundamental perspective, the approval of this proposal is clearly beneficial for ARB. However, a practical consideration remains: how much revenue is generated from network activity? Even if all network revenues were distributed to token holders, how much benefit could it actually provide?

Internet activity income

Rising online activity

From conventional metrics, Layer 2 solutions actually maintain a high market share, with some even experiencing slight increases. The following charts show the active addresses, daily transaction volume, TVL, and DEX trading volume for several major Layer 2 solutions.

Internet revenue dropped to negligible

However, data from DefiLlama shows that the Arbitrum network’s revenue over the past 24 hours was only $6,000. Since the Cancun upgrade in March, daily revenue has fluctuated between $10,000 and $40,000, with occasional spikes. At a daily revenue of $30,000, the annual network income amounts to approximately $10 million, which is negligible compared to ARB’s $1.8 billion circulating market cap and the recent monthly token unlocks of $60 million.

The sharp decline in revenue primarily stems from the fact that before the Cancun upgrade, Arbitrum and other Layer 2 networks earned revenue mainly 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 instance, each transaction on Starknet costs at least $1-$2, but the cost is minimal, with profit margins exceeding 99%. Since the Cancun upgrade, this core revenue stream is unlikely to return to its previous scale.

Therefore, the only remaining viable option for providing reasonable returns is “issuance expansion.” In November last year, PlutusDAO proposed issuing 100 million ARB as staking rewards. Although this proposal passed the Snapshot off-chain vote, it did not succeed in the Tally on-chain vote. The reason might be the high inflation rate, as 100 million ARB represented 7% of the circulating supply and 1% of the total supply in November.

Currently, with an ARB circulating supply of 3.26 billion, issuing 100 million ARB would result in a 3% yield. This issuance would need to be completed over a year to reach the minimum level of DeFi returns. However, if the inflation rate becomes too high, it could pose a significant threat to the token’s price.

Conclusion

In summary, while the staking empowerment proposal is logically sound and clearly beneficial for ARB, the extent of its benefits appears to be limited given the network’s actual profitability. The Tally vote is scheduled for October, so ARB token holders are advised to pay attention to the specific plans over the next two months.

Disclaimer：

1. This article is reprinted from [Nan Zhi]. All copyrights belong to the original author [Nan Zhi]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.