Arbitrum Staking and the Search for Token Utility

The introduction of a staking mechanism for ARB is exciting. It aims to create future utility for ARB – as mentioned in the proposal. In simple terms, the proposal frames the staking feature as a test/building block for potential future revenue-sharing initiatives. Following more regulatory clarity, the staking/locking mechanism will be beneficial as staking contracts and reward distribution mechanisms will have been battle-tested and in place. 

In addition, the staking mechanism gives utility to the ARB token, and acts as a supply sink. While the Arbitrum STIP is expected to incentivize the use and activity of Arbitrum, it will also result in substantial emission of ARB tokens to users (50M ARB represents approximately 4% of the current circulating supply). The introduction of a staking mechanism could offset this emission, at least during the months in which ARB rewards have to be distributed by protocols (until January 31, 2024)..

Unfortunately, following the initial months, the staking mechanism will likely lead to further emissions. A one-year lockup period is relatively short, the ARB yield to users is unlocked, and the proposed emission amount (while reasonable, in my opinion) still contributes to additional token emissions, as it potentially reaches up to 7% of the DAO treasury. This is a lot, and comes at no additional benefit to the network - the ARB isn’t used to provide additional security or services. 

In my view, the emissions will likely act as a short-term catalyst for the ARB token and the overall activity on the Arbitrum network. In the long term, it’s a significant step towards transforming the ARB token from merely a governance token into a token with broader utility and functionality, at the cost of some extra inflation.