Arbitrum Goes Into Arbitration

Key Insights

• Despite concerns about ARB's governance power, the tokenholders' rejection of AIP-1 led to improvements in transparency and clarity in protocol design, demonstrating their influence over the protocol.
• ARB's tokenomics give the DAO control over significant aspects of the Arbitrum One and Nova networks, such as upgradeability, the DAO treasury, and token inflation.
• The protocol generates free cash flows for the treasury through sequencer profits and maximal extractable value which generate value for the token, even if they're not distributed to the tokenholders.
• Among the two major Layer-2 (L2) solutions, Arbitrum dominates Optimism across all key metrics. At current market prices, ARB trades at a discount to OP across all valuation multiples.

Arbitrum launched the ARB token with an airdrop in March to much fanfare from its users and supporters. The launch of the token decentralized control of the protocol to ArbitrumDAO, which is governed by tokenholders.

Since the token launch, things have taken a turn for the dramatic. The first improvement proposal, setting up the Arbitrum Foundation and allocating funds to it, was rejected by the tokenholders over concerns about transparency and unclear communication. The proposal was, however, only a ratification of actions already undertaken, and as such, the tokenholders’ dissent could not be honored. Concerned tokenholders and community members raised questions about the utility of the token and why it deserves a multibillion-dollar valuation considering that it: