Hello everyone - following my recent election to the OAT, I published a personal vision for Arbitrum as the world’s largest digital sovereign nation on [X ] (https://x.com/ajwarner90/status/1908143389658194094) this morning. Wanted to cross-post here so that we can get this integrated into the broader discussion as well. I haven’t historically been involved in the SOS and looking to change that moving forward.
Introduction
GM. If you scrolled past the headlines and continued to read on, I hope this article piques your interest. There are many things in crypto that I believe have been misunderstood for a long time, but the vision of what I hope Arbitrum can be is at the top of my list.
Before I go any further, a couple of caveats and disclaimers that I would like to state upfront:
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I am writing this post in my personal capacity, and the contents of this article may not represent the opinion of my employer, Offchain Labs, The Arbitrum Foundation, or any other contributors or delegates to the ArbitrumDAO.
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As you can imagine, I love Arbitrum. I firmly believe it is one of the most impactful protocols in our industry and will play a critical role in crypto’s future. I have largely dedicated the last five years of my professional career to its success, and it feels like we are just getting started. To the extent that my vision has blinders on, that’s probably where they come from. I am excited to begin this conversation and adjust or augment my thinking with other, more diverse opinions and perspectives.
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While I hope that you find this post insightful, nothing that I say should be construed as legal or financial advice. My goal is to present a framework and perspective for how I hope Arbitrum continues to evolve.
With that out of the way, let’s get into it.
What is Arbitrum?
When you ask people what Arbitrum is, the most common answer that you receive is a Layer-2 blockchain on top of Ethereum. Others might say, particularly those building out their own blockchains, that it is a blockchain technology stack that they can utilize.
In reality, it is neither and both.
It is both because Arbitrum, as a technology, is a platform that allows builders and developers to launch applications in the manner that best suits their needs. Arbitrum is not Arbitrum One and it is not Arbitrum Orbit. It is the powerful combination of what those two products can offer to builders.
This framing has been critical in designing the vision of what we want Arbitrum to enable and offer. Builders should be able to use Arbitrum, however, and wherever they want. The technology should be sufficiently flexible to match the needs of its stakeholders. Concretely, this is the goal of its two core products:
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Arbitrum One - the most secure, decentralized, credibly neutral and liquid blockchain.
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Arbitrum Orbit - the most flexible, powerful, feature-rich execution environment that can empower applications looking for dedicated blockspace.
While we will delve into the drivers of organic demand for Arbitrum technology in further detail below, understanding the relationship between the product and the bigger story for Arbitrum is critical. Arbitrum is unique because it is the only platform that can credibly argue that it has both (1) a top-five blockchain by economic activity and (2) a top-five blockchain stack utilized to launch chains. This constitutes a mandate to have Arbitrum technology utilized everywhere and by everyone. Arbitrum has the ability to support applications from their inception, when they are looking for shared liquidity and state, and through their journey to launching their own chain should they choose to do so. We want to support projects through that developer cycle because we want to expand Arbitrum’s economic zones of opportunity, a concept we will discuss below, as much as possible.
This vision of creating additional economic zones of opportunity is important precisely because Arbitrum is also neither just a blockchain or a stack. It is so much more. It is a collection of stakeholders who are bound together and empowered by their common interests as participants in the ArbitrumDAO. Collectively, our business opportunity is significantly more ambitious than just generating revenue on transaction and Arbitrum Expansion Program (“AEP”) fees. We should support builders and create business lines that compound demand for Arbitrum technology and capture value from the resources that we contribute and commit. Arbitrum is a collective of builders, users and investors that can form the largest digital sovereign nation.
Arbitrum as a Digital Sovereign Nation
The reason that I like to call Arbitrum its own digital sovereign nation is because of two distinct features that it has been bestowed:
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It has the highest authority over its assets (the DAO Treasury and protocol upgrades).
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Its natural resources and wealth (i.e. blockspace and execution environments) allow it to bootstrap an economy that can support its constituents and stakeholders.
Authority over Assets
For those who don’t recall, when Arbitrum transitioned to a DAO and a decentralized protocol, the power that was transferred to the DAO was literally unprecedented. What made Arbitrum particularly notable was the onchain control of the protocol by tokenholders, and the “full power of the purse”. On a technical level, this meant that the DAO (either directly or through its elected Security Council) had full control over upgrades of the technology and any parameters that it wanted to control, including economic parameters like fee reductions like EIP-4844, and the adoption of MEV internalization structures like Timeboost, which was only
The ArbitrumDAO was also given full control of the Arbitrum treasury and was initially allocated more than 3.5 billion $ARB, in addition to the 750 million $ARB that was provided to The Arbitrum Foundation pursuant to AIP-1. That means in order to withdraw any funds from the treasury, it must be approved by a vote of the tokenholders. In addition to the DAO’s $ARB, all transaction fees earned flow into the onchain treasury as well. To date, more than 20,000 $ETH has been collected by the DAO since the transition.
The unfortunate reality is that this structure is seldom utilized among blockchains. Most L1 and L2 token allocations are given to foundations instead of being properly controlled by tokenholders. There are a number of issues with this industry standard, including principal-agent problems and the challenges around transparency, but most relevant to this article, is that it is not the bedrock upon which an economy can flourish. Without ownership and control of assets and income streams, the building blocks are simply not there. Arbitrum’s governance structure provides an alternative. We can bootstrap business lines that are owned by the DAO and its stakeholders.
Bootstrapping an Economy
The mechanism that allows the ArbitrumDAO to build business lines on top of demand for its natural resources is largely a function of the economics around L2 architecture. Over the last few years, there has been a ton of discussion surrounding the differences between L1 and L2 economics. One of the biggest distinctions relates to the distribution of transaction fees that are collected.
To the best of my knowledge, all major L1 blockchains distribute the majority of transaction fees that they collect to the validators of the network, with the rest frequently burned. The reason for this is because the yield returned to validators is necessary for them to be incentivized to secure the network. In fact, nearly all major blockchains add inflationary rewards to validators on top of the distributed transaction fees to sufficiently incentivize them to continue to secure the network. As of this writing, most L1s are offering validators between 5% - 10% (e.g. Solana = 8.1%; Aptos = 7%; Avalanche = 7.6%); to stake assets and secure the network.
This is the major economic superpower of being an L2 compared to an L1. You don’t need to pass through transaction fees or issue inflationary rewards in order to achieve security. You can outsource validation security to Ethereum itself by paying Ethereum a small fee for settlement. This creates a significant tailwind on the business models of an L2 versus an L1.
While a decentralized protocol obviously has many differentiating features from securities and equities, the business model of an L1 is in many ways analogous to a Real Estate Investment Trust (a REIT) in the sense that it must pass through its income to its stakers but with the caveat that L1s frequently artificially augment its “dividend” to satisfy market demand with additional token issuance.
Arbitrum and other L2s do not need to do that, and a better analogy to their business is economies with high margin commodity resources, like an oil-rich country. What I mean by that is the average gross profit margin on a typical Arbitrum One transaction is more than 90%, with the margins likely even higher on fees generated by Timeboost and the AEP. None of these fees must be returned to validators or stakers for security purposes and can be internalized into the Treasury of the protocol. Today, L1s cannot do this.
This does not mean that Arbitrum or any other L2 token should not consider or contemplate returning capital to its holders through staking or some other mechanism, but rather the decision should be a function of whether or not there are worthwhile reinvestment opportunities for this capital. In Arbitrum’s case, I believe the answer to that is a resounding yes. There is so much that we can do to fulfill a dual mandate of increasing demand for our platform and building business lines that can capture value that is created within the ecosystem. Before exploring that further, let’s take a quick detour to understand why there is a natural demand for Arbitrum, and some case studies highlighting its historical track record.
Organic Demand for the Arbitrum Platform
As we have seen a proliferation of chains and rollups launching over the last few years, we must validate and feel confident that we are seeing demand for Arbitrum blockspace and customized execution environments. This is important for two reasons. First, if we aren’t seeing that organic demand, we should prioritize assessing what can be improved to ensure increased demand for the product. Second, much of the thesis surrounding building out business lines, instead of solely focusing on reinvesting into product demand or returning capital, is a function of our ability to compound demand for our natural resources with additional business ventures. Without natural demand, it may be harder to justify certain investments and expenditures.
Fortunately, despite significantly increased competition, we continue to see significant organic demand for Arbitrum blockspace. The word organic is extremely important in this analysis. In the face of constant user and developer incentive programs, it is impossible for any blockchain to try and keep up with each of its competitors. We need to play the long game and ensure that we can continue to build out a sustainable business while running growth and incentive programs strategically as well.
Drivers of Demand for Arbitrum Technology
I referenced above that we are seeing healthy organic demand for Arbitrum, and it is coming from all sectors and verticals. Where Arbitrum has historically been viewed as a DeFi chain, our ecosystem has blossomed far beyond that. It has been incredible to see. Arbitrum remains a leader in DeFi, has cemented itself as a leader in gaming and has made considerable progress in the payments and RWA categories. Our inbound demand has been both cross-vertical and also global in nature. I would like to spend some time discussing some key drivers that I have identified as the reasons for this wave of interest.
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Builder Mentality: Arbitrum has always been viewed as an ecosystem of builders that prioritize building things that solve real problems and are at the cutting edge of innovation, particularly in DeFi. Newcomers are attracted and curious to learn more about that. We consistently hear about ecosystem innovation and builder embrace as key drivers for choosing Arbitrum.
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Security and Decentralization: Arbitrum has always been at the forefront of building well-engineered systems and designing the protocols with decentralization as a priority. Arbitrum was the first smart contract enabled L2 with a working proof system (which it had since the day it launched) and was the first L2 to reach Stage 1. As much as there has been a recent movement to prioritize user experience over decentralization, many people rightfully still care about protocol decentralization.
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Product Innovation: The Arbitrum tech stack has pioneered many innovations that are either now considered standard among rollups, or remain features that our competitors are striving to match. Arbitrum was the first rollup that had full EVM compatibility, it introduced 250ms block times, was the first technology with mutliVM support in production (Stylus) and has been at the forefront of pioneering unique fee structures like Timeboost. All of these features meaningfully improve the experience of both developers and users. The Arbitrum brand stands for the promise to continue to innovate at the cutting edge of blockchain technology. This message resonates with many ecosystem participants.
The propositions above are not only theoretically true but can be seen in the data as well. Let’s analyze the positioning of Arbitrum across four key categories: Stablecoin Adoption, DEX Volume, Lending Markets and Stack Adoption.
Arbitrum Stablecoin Adoption
If you look at the chart above, Arbitrum is the leading L2 in terms of stablecoin adoption. Arbitrum’s lead is significantly larger when considering that more than $2 billion in stablecoins on Base are Coinbase’s treasury assets
. But this does not tell the whole story of stablecoin adoption on Arbitrum. We continuously see major players select Arbitrum as their platform of choice for stablecoin onramping and distribution. This is frequently attributed to its security, decentralization and credible neutrality. Most notably, Hyperliquid sources all of its USDC liquidity from Arbitrum. Additionally, the recently launched USDT0 chose Arbitrum to connect all chains adopting the standard and the legacy mesh of USDT issuance. Arbitrum’s liquidity, credible neutrality and advanced decentralization continuously makes it a leading environment for the launch of stablecoin assets.
Decentralized Exchange Trading Volumes
While most ecosystems have their own native DEXes, and we are fortunate to have Camelot and others supporting the Arbitrum ecosystem, Uniswap data provides a very valuable insight as it sits on every EVM chain and can be a proxy for natural demand of multichain users. Arbitrum does really well on Uniswap. Outside of Ethereum it has done more volume than on any other chain and had more than 25% more volume than any other chain in 2024. Uniswap has credited Arbitrum’s fast block times as the reason why it is a superior trading experience, and it is my hunch that it is the reason why they are so focused on trying to achieve faster block times on Unichain in an attempt to replicate the success we have seen on Arbitrum One.
Arbitrum has generally not been a market leader in some of the recent speculative trends like memecoin and AI agent token trading, but when you look at the volumes across all trading pairs, Arbitrum is consistently in the top five blockchains. We should always strive to improve access across categories for onchain trading, but we also must recognize the demand we see is from projects and traders that value our product and resonate with our mission. That’s why they choose Arbitrum.
Lending Markets
If you look across the lending markets that are deployed across Arbitrum and other major chains, Arbitrum continues to lead the L2 race. Across Aave, Compound and Fluid, there is more TVL on Arbitrum than on any other chain outside of Ethereum. While this data may be somewhat imprecise, as Morpho is not yet deployed on Arbitrum, the picture is quite clear. Despite being able to borrow/lend on any chain, users continue to deploy and engage on Arbitrum.
Stack Adoption
The Arbitrum Orbit product launched in January of last year and we have seen immense growth in adoption of the stack. The current pipeline is currently more than 100 chains from varying use cases. Our ecosystem has deep relationships with the different RaaS teams as distribution of the technology, and Offchain Labs, as the current core Arbitrum developer, continues to ship features that are responsive to the needs of developers looking to adopt the stack. Orbit is designed for Arbitrum to be everywhere and expand its economic zones of opportunity, and we are seeing increased demand to utilize the stack from major enterprises, even if that category of project has not been the source of success to date.
This perspective is very different from how most peers and competitors are approaching the category. Other ecosystems building stacks are primarily focusing on transaction fees as a business model, with interoperability features as the value proposition for why builders should join those networks. These priorities frequently have downstream limitations including the mandate that blockspace is largely uniform, and potentially subject to shared governance across different chains. Also, this approach impacts the ability to attract and align with varied use cases that may need differentiated blockspace. My assumption for why these other ecosystems are structuring their businesses this way is because they are trying to mirror what we typically see from L1s.
This approach feels like a losing battle. The chains that have the strongest demand for its blockspace and the most economic activity, will most likely also have the least interest in joining an interoperability set, and are certainly going to be less inclined to contribute chain revenue for such an opportunity. In fact, they may even demand compensation for such a role in an ecosystem. This means your potential highest profit centers can convert into cost centers to grow the broader vision.
Our vision for Orbit is totally different. Yes, the AEP provides for a 10% share to the Arbitrum treasury for chains that don’t settle to Arbitrum One, but this is not the primary goal and is only a means to an end. The goal is to have Arbitrum everywhere. Every company, developer, builder and user who is touching crypto should be interacting with and using Arbitrum. The only way to get there is to have a platform that allows developers to build what they want and where they want it. Orbit enables opinionated blockspace, and that is what I believe is going to be the main driver of the next wave of adoption and growth. What I mean by opinionated blockspace is the use of a chain to further the product and user experience, not solely as a tool to settle and utilize for validation. This includes features like custom gas token, permissioned validation or contract deployments, compliance features implemented, or any other modification that projects want to make. Blockspace is not scarce today and most applications that want to launch something plain vanilla would likely be best served to do so on Arbitrum One or another general purpose chain (unless they already have their own non-overlapping massive user base in which case it makes sense to own the economics) unless cost prohibitive to do so. But, there are many use cases that require opinionated blockspace and I want them all to be using Arbitrum.
It is also important to recognize that not all of those use cases should see their primary revenue come from transaction fees. For example, if we are talking about a gaming chain, nobody wants there to be heavy transaction fees. Users don’t want to pay for it (or more likely the company is sponsoring and abstracting it), and it isn’t a core business driver for the game as they likely are making their revenue off in-game purchases. So if nobody wants it, Arbitrum’s position shouldn’t be to insert our business model in order to be able to support it. We need to get creative in how we can align with the business goals of our partners, and we will discuss in further detail how we should do that below.
To hammer this point home, another example of this same problem would be Orbit chains dedicated to RWA asset issuance. Many of these chains, for compliance reasons or otherwise, will need to make deep customizations to the plain vanilla stack. They need opinionated blockspace. But if our only mechanism for aligning with the category was through transaction fees it would be very difficult to make the business justification. The reason for this is because despite the capital intensity of the vertical, the demand for transactions is quite low. Most of these assets are still not fully integrated into DeFi and sit behind KYC and compliance for regulatory reasons. Despite all that though, it would be a mistake for the ArbitrumDAO not to prioritize both gaming and traditional finance coming onchain. These two verticals represent conduits for potentially tens of millions of users and billions of dollars in liquidity and capital. We want these organizations and users to be touching Arbitrum. We want Arbitrum everywhere. So the way we do that, sustainably, is by building businesses that can be flexible with our ever expanding zones of opportunity.
Economic Zones of Opportunity and DAO-Owned Business Units
I have used the phrase “economic zones of opportunity” a few times in this article already, and I haven’t really defined what exactly it means. What I am trying to convey with this idea is that Arbitrum should be prioritizing getting the Arbitrum technology stack everywhere and acknowledging that that should be the case. If the ArbitrumDAO can properly establish its business units, it should have an immense opportunity to both support its builders and partners but also make a lot of money in the process.
This is precisely why I am such a staunch supporter of the Gaming Catalyst Program. While I am receptive to arguments, even though I disagree, that Web3 gaming has no product-market-fit and the vertical is not worth prioritizing, if we assume arguendo that we agree that gaming has the ability to onboard tens of millions into the Arbitrum ecosystem it is the best possible structure to sustainably align with gaming studios and publishers.
There are two things that are almost assured to be undeniably true should the category see meaningful success. First, the way to make money is not going to be via transaction fees. Second, the revenue and returns are more likely to be a function of in-game purchases and economies.
The market is fairly competitive for the top games in the industry, and from what my team has seen, deals have been historically structured either as grants for achieving certain milestones, or the foundations associated with blockchains receive equity or tokens in the project. From my perspective, neither structure is effective or sufficient.
Solely milestone-based grant proposals are not going to be giving the gaming teams the capital and opportunity that they may need to build out the games and find success. Game development takes a lot of time and money. Also, what exactly are the milestones for? If it is transactions, nobody wants this source of revenue to be primary. If it’s economic activity, unless you are doing a revenue share deal structure, you don’t have any upside in that activity. For the category, investment makes a lot more sense. It allows you to grow with your builders and share in their success. But, what makes the GCP unique compared to when foundations in other ecosystems invest off their balance sheet, is that the DAO and its tokenholders have control over the economics of the GCP. The value is captured by the DAO’s treasury. This structure is uniquely positioning Arbitrum to fulfill its mandate of Arbitrum everywhere, support its builders sustainably and continue to grow the DAO’s business. That doesn’t mean that there aren’t things that the GCP can improve, but the structure is there for Arbitrum to benefit from the vast opportunity available to it.
The STEP program is another example of a DAO-owned initiative that provides relevant support to its builders. For those unaware, the STEP program was designed with a dual-mandate - (1) diversify the DAO’s treasury and (2) grow the RWA category within the Arbitrum ecosystem. RWA issuers don’t typically need grants in order to deploy on networks, what they need is AUM. STEP is an acknowledgement that the form of support that Arbitrum offers is responsive to our partners’ needs while also bringing in millions of dollars in yield to the DAO. The STEP program has supported the onboarding of many of the world’s largest financial institutions into Arbitrum, and have laid the groundwork for many other developers to leverage the financial assets that they are bringing onchain. This compounds the demand for Arbitrum as a platform which further increases the economic opportunity available to the DAO. Similar to the GCP discussion above, most foundations are doing this sort of work within their ecosystems, so why is STEP different and unique? The answer goes back to agency and authority over assets. The DAO is the one earning this yield. The DAO is growing its treasury.
So while the framework is getting established for these business lines to propel the DAO forward, there is still a lot of work that needs to be done before we can be effectively operating.
I have identified three different areas for improvement before I would feel confident with significant evolution and investment in this vision. All of these are doable, but are going to require meaningful coordination and buy-in across stakeholders.
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Belief in this vision of Arbitrum as a Digital Sovereign Nation: If the stakeholders don’t find this argument compelling, it is going to be challenging to make the investment necessary to effectuate this change. One of the biggest challenges that Arbitrum faces in its infancy is that as different business lines mature, the majority of the treasury is still in our native $ARB token. If you believe in this vision, the disbursement of $ARB reflects an investment in growth. If you don’t it is perceived as unnecessary dilution. Arbitrum needs to be supporting builders and we need to think about doing it sustainably. Conviction in the vision is the difference between two opposite perspectives.
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Organizational Structure to Operate Effectively: The establishment of the OpCo plays a critical role in satisfying this prong for two reasons. First, the different business units must not operate in isolation. They must be coordinating and in sync. The OpCo is going to be the control panel across all of these different organizations on behalf of the DAO, ensuring their continued success and impact. Opco will also play another necessary role - the conduit between the DAO and the operations. Realistically speaking, business units, while owned by the DAO, are not going to successfully operate if their business operations are litigated in public. We are going to need to establish a layer of control, reporting and other mechanisms to ensure proper corporate governance is in place. But if we are going to build business units, we should expect them to operate in the same form that non-DAO owned businesses operate.
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A Strategic Business Plan and Budgeting: I know a lot of this work has been happening among key delegates and other stakeholders to build this out. To date, I have not sufficiently participated in these conversations but I fully intend to rectify that moving forward. We need to develop an ambitious and thoughtful plan that balances the needs of all our constituents and stakeholders with the resources that we have and propose to the delegates to make the necessary funds available. (While out of the scope of this article, the next two business units that I would pursue are (1) an actively managed DeFi strategy fund deploying capital into the ecosystem and (2) an early-stage incubation arm. I think these could both provide immense value to Arbitrum as it executes on its dual mandate.
In closing, and I will try to be brief as this article went on much longer than I expected, I don’t believe Arbitrum is uniquely positioned solely because it has the best technology platform to offer builders. The greatest strength that Arbitrum has is that its technology platform and governance structure enables the DAO to be ambitious, invest in builders and sustainably grow Arbitrum into the world’s largest digital sovereign nation. Let’s get after it. Arbitrum will win. Arbitrum Everywhere.
