ARB: A Timeboost Turnaround?

We think now is the time for the ARB token as a compelling risk/reward trade in ETH terms. 

ETH Is Extended Relative To L2s

First, the Ethereum ecosystem is over-allocated to ETH and under-allocated to L2 tokens. As Ethereum continues to eschew onchain activity and push that activity to L2s, those L2s’ governance tokens should become relatively more valuable, as they directly benefit from base fee and priority fee/MEV-generating activity. We’ve seen this relationship hold over time, but have watched it break down recently as 1) L2 tokens suffered from low float/high FDV exhaust, 2) ETH-holders got overly bullish about the ETH ETF approval and July ETH ETF launch, and 3) ETH holders ignored the token’s secularly declining cash flows. Given the strength of this historical relationship, and the market’s growing acceptance of the fact that cash flows matter, we think this relationship is primed for a reset. 

Timeboost Projection

A catalyst for this relative valuation reset is Timeboost, as it is likely that the introduction of Arbitrum’s express lane will lead to a substantial increase in value captured by the ARB token.

Below we estimate the revenue potential of Timeboost to the Arbitrum DAO. We take historical priority fees for select EVM L2s and calculate a time series of priority fees as a percentage of spot DEX volume. We then take the 30-day rolling average of these time series and apply them to Arbitrum DEX volumes over the trailing 12 months. We then apply a 50% discount to that number given the inherent uncertainty in this new mechanism. The result serves as a conservative estimate.