Arbitrum (ARB) has recently made headlines with a significant update: it has accepted a proposal to implement liquid staking for its native token. This strategic move aims to address security concerns and enhance the protocol’s utility, mirroring Ethereum’s approach to liquid staking. Let’s dive into the details of this decision and its potential impact on the Arbitrum ecosystem.

Arbitrum’s New Staking Proposal

Arbitrum’s latest development involves a liquid staking program, which will allow ARB holders to stake their tokens with active governance participants. In return, they will receive a new asset, stARB. This approach aligns Arbitrum with other Ethereum-based protocols, such as Lido DAO, which have successfully implemented liquid staking.

However, the initial phase of this liquid staking program will not include the distribution of protocol fees to retail holders. The Arbitrum DAO plans to revisit the possibility of fee redistribution in the future. The proposal was passed with a substantial majority of 91.54% in favor, utilizing a total of 145 million ARB in the voting process.

Addressing Governance Security

The decision to enhance staking mechanisms comes in response to potential security risks, specifically the threat of a 51% attack. Currently, the Arbitrum DAO holds $32 million worth of ETH, which could be utilized in governance voting. A hypothetical attack costing around $31.75 million could pose a significant threat, creating an incentive for malicious entities to target the protocol.

To mitigate this risk, the Arbitrum DAO is exploring ways to redistribute some of its reserves and new fee inflows. There are concerns about the concentration of voting power, which could lead to overly influential delegates with the ability to aggressively alter the protocol’s treasury and incentives.

Incentives and Governance Concerns

The proposal to enhance staking and security reflects a broader strategy to realign incentives and protect against governance attacks. One issue identified is the potential for delegates with high “karma scores” to dominate the staking process, which could centralize voting power and lead to governance issues.

Arbitrum is working to address these concerns by rebuilding its incentive mechanisms to ensure fair and effective governance. The protocol is also exploring gamified karma systems and mechanisms to dispute potential attacks, all while managing its fee generation and aligning incentives with its Ethereum treasury.

Growth and Value Lockup

Arbitrum has emerged as a leading layer-2 protocol, boasting a total value locked (TVL) of $2.65 billion. This places it ahead of some competitors, though it still trails behind others like Solana. The protocol manages around $11 billion in funds and holds more than 2 million ETH in reserves.

Arbitrum’s liquidity is bolstered by inflows from Ethereum, with $2.9 billion received, predominantly in ERC-20 wrapped tokens (74.2%) and stablecoins (26.7%). The platform has experienced growth in decentralized finance (DeFi) activities, particularly through protocols like Aave and Uniswap V3, and is also working to onboard Web3 games.

Despite this growth, Arbitrum faces challenges in generating consistent fees. Daily fees range from $1 million to $3 million, but on some days, they fall below $50,000. The protocol is looking to create a more predictable income stream by potentially raising fees and aligning incentives to support decentralized delegates.

Future Prospects and Token Unlocking

Arbitrum is also dealing with the challenge of token unlocks. Currently, only 32% of the total ARB supply is in circulation. A scheduled unlock later today will add 2.77% to the circulating supply. The ARB token has recently experienced a significant drop, trading near an all-time low of $0.54 compared to its peak of $2.29 earlier this year.

In summary, Arbitrum’s adoption of liquid staking represents a crucial step towards enhancing security and aligning incentives within its ecosystem. By addressing governance concerns and focusing on fee generation, the protocol aims to solidify its position as a leading layer-2 solution while providing ARB holders with new opportunities.