Request for Comment: Proposal to Activate ARB Staking

Abstract
We believe that the Arbitrum token needs native utility. We propose a locking mechanism that distributes token inflation to token lockers. We believe this would not only incentivise token holders but also help become a fundamental building block towards future proposals for more token utility in the future (e.g. sequencer revenues).

The Arbitrum DAO is entitled to mint up to 2% of the total supply of ARB as inflation per year and use this in any manner they see fit. This functionality already exists within the ARB token contract. However, the first opportunity to mint tokens is on March 15th, 2024 since the mint function can only be called once per year.

We propose minting 1.75% of the token supply and distributing this over a period of one year.

However, because the mint function is not yet available, we propose using an equivalent amount of funds from the Arbitrum DAO treasury along with a mechanism for distributing it among ARB lockers. The funds used from the treasury would be replenished through minting on March 15th, 2024 when the annual mint function becomes available.

Not only does this benefit ARB lockers, but it would also act as a precedent and stepping stone towards future actions, such as distributing DAO revenue where applicable. Finally, adding a locking mechanism that generates native yield in ARB would successfully differentiate the ARB token from competing L2s and offer a new level of composability within any application that integrates the ARB token.

We’d also like to thank the following delegates and several others for their valuable feedback during the process of drafting this proposal.

Westie from Blockworks Research
Coinflipcanada
Dopex
And several others

Motivation
The Arbitrum DAO is entitled to mint up to 2% of the total supply of ARB as inflation each year, as per the docs below. The total supply of ARB is 10B tokens, of which 2% is a total of 200M tokens.

In addition to having the capability to mint 2% of the total supply annually, all surplus revenues belong to the DAO (source tweet below).

We believe that a locking mechanism is a suitable method to distribute these funds, and would be an efficient way to distribute ARB tokens to those most aligned with the ecosystem. This locking mechanism may also be modified in the future to accommodate future AIPs, such as decentralising the sequencer.

Broader Implications for Arbitrum
We believe that this proposal passing would have extremely positive implications for the entire Arbitrum ecosystem. Having a native staking model that is officially approved by the DAO would be likely to have the following consequences:

  • Significantly increase interest in Arbitrum and the ARB token
  • Allow for composability around a yield-bearing ARB token
  • Reward long-term aligned stakers with yield, while penalizing mercenary capital and short-term actors
  • Positively differentiate ARB from any other L2 tokens and bring the spotlight back to Arbitrum
  • Offer a first step and infrastructure towards introducing other forms of revenue sharing in the future

It is important to acknowledge and explore the consequences of the fact that the source of yield would, for now, be entirely inflationary. However, this should be put into context - we believe that 1.75% annual inflation of the total supply is not meaningful in terms of increased dilution or sell pressure, given that the rewards will be going to users that are long-term aligned with Arbitrum and willing to lock their tokens for up to a year. In our opinion, the benefits detailed above far outweigh the potential concerns around dilution.

Benefits for Users
By introducing a staking contract that responsibly distributes the allotted 1.75% annual inflation of the total ARB supply to users who are willing to lock their ARB, the incentives are aligned in a way that rewards those parties most loyal to the Arbitrum ecosystem. This includes not only long-term holders of ARB but also DAOs that have received an airdrop and are willing to lock their tokens.

The figures below detail possible APRs for stakers at different staked percentages if 1.75% of the total supply was minted annually. The current circulating supply of ARB is 1.275B.

% of circulating ARB staked Estimated APR %
100 13.73
50 27.45
25 54.90
10 137.25

Specification

  • The ARB staking contract will allow users to lock their ARB for up to 365 calendar days. A user’s weight is proportional to their lock time.

  • Users may increase their lock times

  • Users may pause their lock times (meaning the time to unlock does not increase - this saves having to relock continuously)

  • Users may have many independent locks

  • Users will receive and may claim ARB emissions according to their weight.

  • A user may exit their lock for a penalty between 0-80% of their lock amount, linear vs lock time remaining (365 days remaining would mean an 80% penalty, 0 days would be a 0% penalty). This penalty is shared between remaining users according to weight.

Example Usage: ARB locker

  • User locks 100 ARB for 365 days.
    • The lock weight formula is (ARB amount locked * lock time / 365)
    • Their ARB lock ‘weight’ is currently 100 (100 ARB * 365/365).
    • All rewards are distributed based on a user’s weight / the total sum of all the users’ weights.
  • After 182.5 days, user will have a lock ‘weight’ of 50 (100 arb * 182.5/365).
    • At this point, they may choose to increase their lock time, do nothing, or withdraw.
    • The early exit penalty is (0.8 * locktime / 365)%.
    • For a lock time of 182.5 days, the penalty is therefore 40% of the locked amount - if the user were to withdraw now, they would receive back 60 ARB.
  • User is able to delegate voting power during this time - voting power is not affected by lock length

Frequently Asked Questions

  1. Why token inflation?

This mechanism is already built into the constitution, allowing for participants that are long term aligned to increase their share of the token. In addition, it gives a native and safe alternative to holding or farming in DeFi protocols, and allows us to set a baseline yield for ARB.

  1. Why a locking mechanism?

A locking mechanism allows users who are long term believers in Arbitrum to signal this belief through their actions and get rewarded for it accordingly. Locking for longer is always optional - users may lock for any time period of their choosing. We believe that 1 year is a reasonable lock time as compared to the previously popular 4 year locking model. We believe that this is not too long such that it disincentives locking, as users have the optionality to choose the lock duration.

  1. What are the consequences of this proposal?

Ultimately, this proposal introduces utility to ARB and gives users more incentive to hold. In addition, long term believers will be net increasing their share of the network, which

sets up a base from which we can build further proposals for ARB value accrual without having to worry about the distribution mechanism.

  1. Should vesting investor and team tokens be allowed to lock?

We hold a neutral view on whether investor and team tokens should be allowed to lock. For context, team and investor unlocks begin in March 2024 and continue monthly from there on out for the following four years. Several things should be considered in making the decision. Typically vesting tokens cannot earn yield, however investors and tokens from the team could be considered long-term investors depending on your perspective. We appreciate your comments and thoughts on the topic!

Summary
As it stands today, ARB holders have no native utility or yield. We propose the creation of the staking contract detailed above, which allows long-term ARB stakers to keep up as the circulating supply rapidly grows.

We propose minting the 1.75% of eligible ARB to the staking contract above once enabled on March 15th 2024. Until then, an equivalent amount of funds would be taken from the Arbitrum DAO treasury and replenished with the mint when available. The exact amounts would be dependant on when this proposal passes and is enacted upon.

It is important to note that ARB staked in this contract will still have voting rights / be able to be delegated. The staking contract will be upgradeable and controlled by the DAO - this ensures that the DAO is able to pause this distribution at any time.

Timeline
This proposal will follow the official lifecycle of an AIP detailed here. In order to maximize alignment with the community, we want to add a step before doing a temperature check. This first forum post will not include a Snapshot vote, but is rather a way of asking for comments and generating discussions, after which the proposal will be amended with feedback and then move to a temperature check and forwards.

Pending a successful Snapshot and subsequent Tally vote, we suggest that the locking mechanism goes live as soon as possible after clearing audits.

The suggested timeline can be found below.

Week 36-37 - Forum post & request for comments and feedback (1 week)
Week 38 - Temperature check forum post & Snapshot poll (1 week)
Week 39 - Formal AIP and call-for-voting (3 days)
Week 39-41 - On-chain DAO vote on Tally (14 days)
Week 42 onwards - Implementation phase

If the proposal passes, a draft of the implementation phase is detailed below in “Steps to Implement”. The final implementation schedule is dependent on the result of the community review, audit schedules and subsequent findings. A concrete schedule for the implementation stage will thus be locked in at a later stage.

Suggested Steps to Implement

  1. PlutusDAO will provide the contracts for ARB staking according to the above specification
  2. Contracts will be provided to the community for review for a period of 2 weeks
  3. Contracts will be audited by a top-tier audit firm chosen by the Arbitrum DAO
  4. Contracts to be deployed to Arbitrum and owned by the Arbitrum DAO
  5. Ratification of reimbursement of costs as illustrated in the Cost sections below and disbursement of such reimbursements to applicable service providers

Costs
PlutusDAO will cover the costs of creating the contracts. The DAO is recommended to fund an independent audit. We do not foresee other costs involved with the proposal.

18 Likes

Interesting proposal, not sure this is really needed at this time (the focus perhaps should be on getting grants passed), but it’s interesting nonetheless.

I’m not convinced that the locking formula should be linear (you mention weight = ARB amount locked * lock time / 365).

Instead having 2 or 3 types of locks with varying unstaking times seems more appropriate (similar to the Camelot xToken model). For example, having a 1 day cooldown, 30 day cooldown, and 180 day cooldown staked token. Give a set amount of tokens to each type and the yield is market determined.

Would like to see some discussion on this, but should probably be pushed off until after the finalization of the grants process.

4 Likes

the focus perhaps should be on getting grants passed

Plutus would supply the contracts to be audited by an auditor of Arbitrum DAO’s choosing, would likely have little impact on DAO resources beyond administrative efforts, and so would be unlikely to have any effect on grants timelines.

7 Likes

Love the proposal, I expect many will poo poo the inflation and cite Ohm fork 100,000% APY madness, however 1.75% is not comparable.

Without Arb yield for stakers, VC unlocks will dilute Arb holders, but with staking yield, the playing field is slightly more even. I strongly believe vesting tokens should not be allowed to stake!

Imagine the frenzy if max 1 year staked Arb is paying out 30-50% APR.

6 Likes

Feels like 1.75% of the supply of Arb at this stage would be more impactful as grants/protocol incentives than a staking reward.

8 Likes

To be clear, this would be newly minted tokens and would not affect the DAO’s current allocations for such nor the treasury beyond what would be required to pay for the suggested auditing after the contracts are submitted by Plutus, and could be adjusted in the future when there are other potential revenue streams or greater regulatory clarity surrounding distribution of sequencer fees.

8 Likes

I have reservations about whether this proposal, as written, aligns with Arbitrum’s overall goal.

The core motivation seems to just be minting and handing out more ARB tokens, without clearly explaining how this will create tangible utility or value for the protocol. I worry it risks diluting the value of existing tokens through unnecessary inflation, without us regular users seeing meaningful benefits.

What concrete uses or alignment does this offer for those who aren’t already major ARB whales? The proposal lacks details on why minting these new tokens is so urgent right now, or how it substantially advances Arbitrum’s technical roadmap versus just rewarding passive holding.

My biggest concern is that perpetual inflation could seriously undermine long-term confidence in ARB’s scarcity and value. Without any compensating token sinks, the supply could keep expanding indefinitely. That gradual dilution could really hurt ARB’s upside potential.

I’m also skeptical about staking rewards being offered solely for passive holding, rather than active contributions that enrich the ecosystem. To me, that misaligns incentives by promoting unproductive rent-seeking rather than value creation. I worry it will attract profiteers rather than builders.

Frankly, I’m concerned that users may lose faith in ARB if the supply keeps ballooning without being tied to real platform usage and economic activity. Shouldn’t we reward contributions that strengthen Arbitrum, not just holding?

What really gave me pause is how the proposal frames inflation as a negligible “consideration” rather than a core design flaw. Also, the lack of any concrete plan to reduce reliance on inflation long-term seems shortsighted given the risks.

Hopefully, I explained my perspective clearly! I’m open to other views here.

3 Likes

Which would ultimately make the entire process a lot easier in implementation.

Would be interested in hearing what Dopex and Radiant have to say on this as well as it would likely provide for some interesting opportunities for both of them too

7 Likes

Imagine the benefit from a protocol marketing perspective as well - timing is good for this as we move to the end of '23 and into early '24 - if the market stabilises and we start to see significant growth this kind of protocol marketing opportunity will make a big difference in a fairly full field

7 Likes

Definitely agree with @Soby 's sentiment here. The community is still sorting out the best way for the Arbitrum ecosystem to move forward in terms of long-term growth and safety. While it makes sense to reward long-term holders in terms of this yield, the roughly $20M in capital may be more efficiently allocated on grants in the short term.

On the yield itself, 1.75% seems like a fair target as it is inflationary, but below the levels we see in the real economy. The Fed targets 2% price inflation and inflation (call it 3.5%) is running hotter than that. What the community should be aware of is that while the 1.75% staking yield is a nominal return, this nominal return is a negative real yield (1.75 - 3.5 < 0).

Hence, while this 1.75% staking yield seems inflationary on its face, it is less inflationary than the external monetary regime. In fact, on a relative basis it is actually deflationary.

Beyond these comments, the community could also consider options like burning tokens similar to ETH (which is the equivalent of a share buyback in the equity world). Such actions accrete value to all members of the network (ARB token price goes up as supply goes down when network value remains the same) and move the token in the direction of truly hard money.

5 Likes

Can we get some clarity around this? I understand the tokens from the treasury would be replaced but what is the reasoning for pushing this now instead of waiting until March when the tokens are available to mint?

Also some clarity here. While I think it’s great PlutusDAO views this as a public good and is willing to fund/create the the contracts… what is the timeframe, once deployed, that the proxy contracts would be under PlutusDAO control?

I also understand there are some regulatory issues around distribution of sequencer fees but I think it’s better to either wait or spend time to find a way “around” the issue.

Arbitrum has real, live yield generation and I don’t think it’s a good idea to ignore that and settle for an old model that we’ve all seen fail a thousand times.

4 Likes

Expectations arbfi、arbstables, and the long-term financial viability of start-up projects built through inflation.

2 Likes

True @cryptowx , it is a classic move , recipe .
Ad also potentials new markets and and emergence of derivatives financial product , where we can bet on proposals. Like betting on sport.
If the proposal win or fail .

@Frisson maybe future features in tally or related or existing betting platforms @tnorm @krst @DisruptionJoe .
So delegates, vc whales , retail, an community , off chain labs, marke makers , quants, insiders can or not bet on proposals. In my humble imo.

3 Likes

I quess this is very much needed thing to do. Arbitrum ecosystem is vibrant, innovative etc… but if we lose the holders because of ARB token is losing its value it will eventualy decrease the holders and we will end up having less decantralization.

Unfortunaly accept or not, success of the projects are very well aligned with the token prices. If we can increase the utility of ARB it will help to bring even more people to the ecosystem.

Layer 2s are getting more and more = more competition, StarkNet token will have more utility as well.

Lets do this !

4 Likes

Some feedback on a couple different approaches:

  1. Passing through ETH / protocol revenue
  • The preferred long term way to accrue value to ARB. Timelocking this revenue is a fair proposal, long term users should be incentivized more heavily than other stakeholders.
  • Doing this in its current state will divert funds the Arbitrum DAO could otherwise use for growth/grant/marketing. There is likely a balance in there where the DAO could spend X% of this revenue once grants/growth gets it stride. At this point of a deep bear grants seem really appetizing.
  • Passing through revenue has regulatory risks. I do not agree with those risks and I dont agree with the SEC’s stance on things but it will cause issues in the present climate. Distributing the sequencer set will alleviate this.
  1. Inflation
  • Inflation is just a form of payment from spot holders to lockers. Question is, if we set inflation at 175M tokens per year, why would ecosystem want to pay stakers $146M just to timelock their tokens? The opportunity cost decision is why not just use inflation for grants instead of paying time locked stakers?

Listed Reasons:

Significantly increase interest in Arbitrum and the ARB token

Increased interest from which stakeholders? Is there differentiation here from grants? It could increase interest from yield farming capital although its a tricky value prop

Allow for composability around a yield-bearing ARB token

This is a good reason IMO. It allows for more experimentation with tokenomics and would show Arb DAO governance can execute on chain decisions with a large stakeholder set, something that people have been critical of in the past.

Reward long-term aligned stakers with yield, while penalizing mercenary capital and short-term actors

Mercenary capital isn’t being penalized cause there currently aren’t opportunities they can take advantage of. Using grants to help teams build on ARB with the inflation also aligns long term stakers with yield.

Positively differentiate ARB from any other L2 tokens and bring the spotlight back to Arbitrum

Grants will bring some spotlight back too, user activity is what really brings this back with really good dapps and user growth.

Offer a first step and infrastructure towards introducing other forms of revenue sharing in the future

Taking the first step isn’t a bad thing but need to get it right and ensure it’s the right time. The question around VC locks shouldn’t be taken lightly. They are obvious supporters of the protocol and shouldn’t be tied to the bad rap everyone in crypto gives VCs. Ostracizing them through governance is not a benefit, and one option could be to execute these changes early next year or at least ensure we don’t throw them under the bus with inflation.

There’re probably synergies in some of these proposals:
One thing we could try is paying out grants with time-locked ARB. Could be a composable token that pushes the value to builders in the ecosystem. That gives the inflation a use for growth while also introducing a composable staking model in the ecosystem. At some point when VCs start unlocking this staking could get pushed into the entire float where inflation accrues to any staker who wants to receive. Ratio of how inflation is pushed (to DAO for grants vs public staking) can be up to governance votes.

5 Likes

I would vote no on this proposal. I also think the motivations of the posting “DAO” should be closely considered, on all proposals but especially in this situation.

1 Like

reasoning for pushing this now instead of waiting until March

With the given timeframes, and assuming the audit takes a month, and that the contract could be written instantly, we’d be looking at mid-November as earliest possible release. That’s not factoring in any delays, time to code, governance back-and-forth, and so on. The amount shouldn’t be so much that the DAO is unable to carry it for the max. 4 months to the time when it can actually be triggered.

proxy contracts would be under PlutusDAO control?

I’ll check on this, but afaik it means owned by Arbitrum DAO when it says “owned by the DAO”, not Plutus; that is, they would be handed over to Arbitrum DAO to control effectively at the time of deployment.
(Update: Confirmed, OP now states this more explicitly)

I also understand there are some regulatory issues around distribution of sequencer fees but I think it’s better to either wait or spend time to find a way “around” the issue.

This could potentially be a way around the issue actually. To be clear, I’m not speaking to the proposal at hand here, and afaik there are no plans on the books to do this, but the regulatory issues that exist as disbursing the sequencer fees to arb holders would likely be far less or nonexistent if the sequencer fee revenue was used for grants and other Arbitrum DAO expenses rather than disbursed, and the arb stakers receive minted arb in this form instead. Grant recipients will likely need to sell anyway in order to fund whatever they have received their grant for, and are likely better served by greater liquidity in the form of eth, believers in the Arbitrum eco that they may be. Stakers are less likely to have the need or desire to sell, given that they hold and are willing to lock arb already.

Obviously “real yield” would be preferable, but governments are not known for moving speedily, and this would help satiate those looking for yield and would provide a head start on the tech if/when we get to a place where distributing sequencer fees is feasible, as well as provide useful metrics about the willingness to lock in order to receive yield.

6 Likes

If there is no corresponding BURNING plan, similar to EIP1559, I will vote against it

2 Likes

I think it’s important to note that there’s no indication that Arbitrum’s leader election mechanism will rely on Proof of Stake (PoS). This suggests that if/when Arbitrum introduces new sequencers, they might not necessarily be required to stake $ARB to engage in the network’s sequencing operations.

With that in mind, one can envision the DAO holding a vote to elect new sequencers and determine the allocation of sequencer revenues. Options might include a) allocating a portion to infrastructure providers and b) reserving the remaining funds for the DAO itself.

In the case of Arbitrum, such a model seems more logical than any other PoS systems in terms of both governance and revenue distribution.

Giving power to the the DAO with decisions on sequencer revenues (i.e both fees and MEV) paves the way for different possibilities. These might range from burning the funds, redirecting them to the treasury, supporting public goods, and so on.

Also worth considering that if, over the span of a year, inflationary rewards are directed to the operators managing the sequencer, and a significant portion of the sequencer’s revenues are utilized to burn $ARB, the token would result in net deflation by year-end. Under the assumption of a stable market cap, this would likely lead to an increase in the $ARB’s price.

I don’t think it would leave any party out. Isn’t this the endgoal after all ? Happy to take feedback!

2 Likes

So, for disclaimer i dont hold pls-arb and i have no conflict of interest in this game, i dont arbitrage the token.

Maybe @Plutus dao aiming for product to stake more arb and more arb overtime for to be a dominant player but via a product like like Defract (yeah the prism idea can be fork)

Plutus Dao
you decompose your token in 2 parts :
users to split a yield- generating asset into its most basic components: a Yield Token (YT) and a Principal Token (PT). These new assets will allow users to isolate the exact risks they wish to speculate on or protect against.

Example

Fixing interest rates: A user could commit X to the new plutus dao stakiing derivatives for one year and receive a corresponding $PT and $YT.

Purchasing Tokens at a Discount:

Exposure to Interest Rates:
$/ FX Swap: A user may be swapping their yield received from X as a way of funding a purchase of another asset “Y”. Rather than performing the manual process of selling variable rewards, they instead sell their $YT and use that to purchase Y or Y’s $YT or $PT.

Here the part that you maybe to dig in or not if your are interrest or not plutus dao

Liquid Staking: A user wants to earn X’s staking rewards but wants the flexibility to trade their position without having to wait for the unstaking period of x days. They mint $PT and $YT and stake the $YT in your dao app . If they want to trade their position, there is no unstaking period for their $YT and they can immediately trade their $PT, $YT .
They could also lend out their $PT in a money market protocol to earn additional yield or be an LP in the $PT pool and earn AMM fees.

Arbitrage: The price of X moves down 90 , but the $PT remains at 85 $ or eth value, and the $YT remains at 15 $. A user buys X for 90 UST and mints $YT and $PT, which they immediately sell, netting a risk-free profit of 10 $ (85 + 15 – 90). This process can then be repeated until prices normalize.

@ModalQuant @mrstego123 @Soby
Just my 2 cents.

4 Likes