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No, your eyes are not deceiving you. This is not a drill.
Finally, ARB is here. As one of the most anticipated token launches in cryptocurrency history, ARB will be used to govern the Arbitrum ecosystem and, yes, will be airdropped to early adopters.
But that wasn’t the only big news today. Arbitrum also announced Arbitrum Orbit, a framework for creating L3s that can settle onto Arbitrum-based rollups. This article will break down everything you need to know about ARB and Orbit, their impact on the Arbitrum ecosystem, and how these launches will shake up the increasingly intense “L2 wars.”
What is ARB used for? Let’s break down what we know about ARB so far. ARB will be used to participate in the Arbitrum DAO, which will govern the Arbitrum ecosystem, including Arbitrum One (the “main” L2, which most people call Arbitrum), and Arbitrum Nova. Notably, Arbitrum will be the first L2 to have “self-enforcing governance,” meaning that governance will occur entirely on-chain and proposals will not need to be manually executed by the core team.
Arbitrum is also creating the so-called "Arbitrum Security Council," a 9/12 multisig that will have the authority to make changes to the scrolls in case of security emergencies. The composition of the Security Council will be determined by the DAO.
It appears that token holders will also control the rights to the Arbitrum IP, as DAO governance has the ability to approve the creation of other L2s settled to Ethereum that are built using Arbitrum’s technology.
These L2s can be governed by ARB holders (a governed chain), or have their own independent governance system (an ungoverned chain). DAO governance is not required to approve the creation of L3s that settle to Arbitrum itself (more on this later).
There will be an ARB airdrop to early adopters within the ecosystem, and the token will go live on March 23. You can check your eligibility here.
How are airdrops distributed?
11.62% of the total supply of 10 billion tokens will be airdropped to individual user wallets. The majority will go to the DAO treasury (43%), 27% will be reserved for the team, and 17.5% will be reserved for investors in the project. The remaining 1% will be used for DAOs in the Arbitrum ecosystem. What is Arbitrum Orbit Let’s take a look at Arbitrum’s second major announcement today…Orbit!
As mentioned above, Arbitrum Orbit is a development framework for L3. L3s still retain the security guarantees of L2, but have the potential to provide massive scalability because there is throughput at every layer of the stack.
For example, let's say L3 has a 10x increase in throughput relative to L2, and L2 has a 10x increase in throughput relative to L1. This means that L3 has a 100x increase in throughput over L1. This massive increase in scalability means that L3 is well suited for high-throughput use cases like order exchanges, gaming, or other high-throughput use cases that require incredibly fast and cheap transactions.
Orbit is permissionless because developers can use the technology to create an L3 that settles to the Arbitrum chain without the need for permission from the DAO. Orbit will also be compatible with Arbitrum Stylus, and future upgrades will enable developers to build dapps in traditional programming languages including C, C++, and Rust. Impact on Arbitrum’s economic model Now that we have information on ARB and Orbit, let’s talk about how they will affect the Arbitrum economy. Arbi Szn (V3) The ARB airdrop should serve as a stimulus to the Arbitrum economic model, generating a wealth effect among early adopters by providing them with capital they can emulate.
This shouldn’t come as a surprise to all DeFi players, but Arbitrum-based governance tokens will be one of the main beneficiaries of this airdrop. Firstly, they will be the recipients of the airdrop stimulus, but will also benefit from the capital that will flow into the ecosystem as a result of the incentive program (more on this below).
Broadly speaking, Arbitrum has had two periods of outperformance over the past year. The summer of 2022 and the first six weeks of 2023, coinciding with broader market rallies during these times. Arbitrum Tokens 1YR Chart - Source: TradingView While some of the recent rally may be due to anticipation of the airdrop, given the greedy appetite for speculation among on-chain Defi players armed with new ammunition, we are likely to still see V3 of “Arbi Szn.” Beyond structural flows, there are some fundamental reasons to be bullish on Arbitrum-based tokens in the coming weeks and months. Driven by ARB incentives, projects on L2 should see increases in revenue, users, and other core KPIs as users flock to and capital flows into L2.
Additionally, these tokens should also benefit from the broader “L2 trade” as excitement builds among traders around Arbitrum’s individual growth story and further validation of L2 as crypto’s preeminent scaling solution. Mining frenzy and liquidity influx Arbitrum already has a thriving DeFi ecosystem, ranking first in L2 and fourth among all networks with $1.6 billion in DeFi TVL. L2 is already a paradise for Defi players, with many spot and perpetual contracts, options agreements, and lending markets. Miners are already well fed, but in the post-ARB era, they will reap even greater rewards.
This is because, as mentioned earlier, ARB will likely be used by many projects for incentive programs. This will increase the benefits to miners, who will now be able to earn these ARB rewards on top of existing lending interest, transaction fees, and/or existing liquidity mining rewards.
If history is our guide, these bounty programs should catalyze a massive influx of liquidity into the Arbitrum ecosystem, and therefore a massive increase in TVL, in the coming months. Optimism TVL For example, Optimism saw its TVL increase by 232% from $269 million to $894 million in the three months after OP was released. Given its already existing liquidity, ecosystem of dapps, and increased security relative to Optimism (in its current state), Arbitrum seems likely to attract billions in inflows and grow at a much faster rate. Impact on the current L2 war The launch of ARB, Arbitrum DAO, and Orbit will greatly shake up the L2 competition landscape.
Let us highlight the areas in which it will do this. Strengthening Arbitrum ’s position in the DeFi space
As mentioned above, Arbitrum currently has $1.6 billion in DeFi TVL, a 62.8% share in L2 and 3.5% of the TVL across all networks.
The billions of liquidity inflows following ARB should not only lead to a significant increase in both categories, but also help Arbitrum solidify its leading position as the preferred L2 for DeFi, further strengthening its network effect in the current dapps ecosystem.
Where users and developers go for liquidity and other applications.
The release of ARB and the subsequent incentive program should spur significant growth in both areas and should help Arbitrum further distance itself from competitors like Optimism.
In the long run, Arbitrum has a high chance of overturning Tron and BNB chains and becoming the second largest L1 or L2 in terms of TVL. The (potential) new value proposition of secondary tokens
ARB will also shake up the L2 landscape by giving its holders the right to license Arbitrum’s intellectual property.
L2s already control their IP to varying degrees. For example, Optimism’s OP Stack can be used without permission, and anyone can fork the Optimism mainnet or create their own L2 without approval from the governance department. Other L2s act as service providers, but their development companies typically internalize all profits.
The debate over the use of intellectual property within cryptocurrencies is beyond the scope of this article. But with this model, Arbitrum DAO will now become the first major L2 to open source this process.
This greatly increases the value proposition of ARB, as not only will it have the potential to be used in a decentralized collator in the future, but holders will also control the rights to incredibly valuable intellectual property.
We’ve already seen some early signs of this model being used in crypto, one example being Uniswap, whose DAO controls the business license for Uniswap V3.
Several projects have already reached out to UNI holders seeking permission to fork V3, such as Voltz, an interest rate swap protocol, which allocated 1% of its token supply to the Uniswap DAO after being allowed to do so.
However, likely due to the general inactivity of Uniswap governance, we haven’t seen many other examples. This means we are likely seeing this model being utilized at scale for the first time by Arbitrum, and if it proves successful, it is likely to put pressure on other L2 providers to follow suit.
From little to more
Prior to the announcement of Orbit, Arbitrum’s ecosystem seemed to be primarily focused on Arbitrum One and Arbitrum Nova.
This runs counter to the approach of other L2s such as Optimism, which is developing an emerging ecosystem of networks built on the OP Stack, including Coinbase’s Base, Ribbon’s Aevo exchange, and Lattice’s on-chain game OPCraft.
Other L2s, such as zkSync, are planning to build a broad L3 ecosystem, while StarkWare also provides technology to establish application-specific verification through StarkEx.
In a growing L2 landscape, especially after the Base announcement, Arbitrum seemed to have fallen behind in this regard, but Orbit changes that.
Orbit could potentially turn Arbitrum One into a settlement layer (similar to ETH), which would allow the broader Arbitrum ecosystem to scale in the long term. Orbit should also build traction for a custom L2 within the Arbitrum ecosystem, as not only will applications benefit from the value provided by L3, such as the increased throughput and secure bridging mentioned earlier, but also from the interoperability and network effects of the existing Arbitrum ecosystem.
It remains to be seen which L2 stack developers ultimately prefer - but Orbit has certainly leveled the playing field relative to the OP stack.
It’s a big week. With TradFi burning, Arbitrum is set to shake up L2 with the launch of ARB and Orbit.
While the token is not live yet, ARB has already begun to impact the market and the broader L2 landscape.
The battle for the secondary market is far from over. But for now, Arbitrum appears to be back in the driving seat. |
