Arbitrum staking proposal sparks controversy Is ARB issuing more?

Controversy Surrounding Arbitrum Staking Proposal Is ARB Increasing Issuance?

Author: Azuma, Odaily Star Daily

On the evening of October 30th, the proposal put forward by PlutusDAO to activate the ARB staking function in Arbitrum governance tokens began to be voted on. The proposal set five options: “100 million ARB incentive,” “125 million ARB incentive,” “150 million ARB incentive,” “175 million ARB incentive,” and “no incentive.”

Currently, the option proposed by PlutusDAO, “175 million ARB incentive,” has the highest voting rate, with a support rate of 87.56%.

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ARB issuance? Just a misunderstanding!

Odaily Star Daily found that there is a certain deviation between the rumors circulating in the community and the actual situation regarding this proposal by PlutusDAO. Some users in the Arbitrum community believe that the ARB tokens used for staking incentives come from the 2% annual inflation minting rights of Arbitrum DAO, leading them to interpret it as an increase in ARB issuance. However, this is not the case.

After querying PlutusDAO’s historical proposals, Odaily Star Daily discovered that the misconception was caused by some users’ impression of the initial version of the proposal from September. However, in fact, PlutusDAO made significant modifications to the proposal in October.

As shown in the following figure, the initial proposal in September was described as follows:

“Arbitrum DAO has the right to mint 2% of the total supply of ARB tokens each year as inflation and use it in a way deemed appropriate by the DAO. This functionality already exists in the ARB token contract, and the optional time for the first token minting is March 15, 2024, as this minting function can only be called once a year. PlutusDAO proposes to mint an additional 1.75% of the total supply of ARB and distribute it as staking incentives within one year.”

In the final version launched for voting in October, the proposal description has been modified as follows:

“Arbitrum DAO’s treasury is growing rapidly, but this growth is not currently shared with ARB token holders. The treasury address of Arbitrum DAO holds 3.54 billion ARB tokens, and the recently unclaimed 64 million ARB airdrop has been transferred to the treasury address. Arbitrum DAO’s funds are ample, and all surplus income will belong to the DAO, including Layer 2 sequencer revenue.”

“We believe that ARB needs a staking mechanism… and propose requesting a reserve of 1.75%, 1.5%, 1.25%, or 1% of ARB from the Arbitrum DAO treasury as an incentive budget to distribute to ARB stakers within 12 months.”

By comparing the two versions of the proposal mentioned above, it can be seen that the source of staking incentives has changed from “inflation minting” to “treasury payment,” so it will not involve any new ARB issuance. This does not mean that the Arbitrum DAO will not undergo inflation minting for other reasons; these two matters are completely independent.

How will the actual circulation of ARB change?

Combining some calculations from PlutusDAO, we can roughly estimate the changes in ARB’s circulation if the proposal is passed.

In the short term, it is foreseeable that many ARB holders will consider staking for incentive rewards, which may effectively reduce the actual circulation of ARB.

Depending on the specific incentive tier, the expected returns corresponding to different staking rates are as follows. Odaily Planet Daily predicts that if the final governance vote chooses the 1.75% incentive tier, the ARB staking rate is likely to exceed 50% (corresponding to an annualized return of 27.45%), which means that the circulating supply of ARB can be reduced by more than 50% in the short term.

In the medium term (within one year), with the continuous release of incentive tokens, the actual circulation of ARB is theoretically expected to grow. However, PlutusDAO has designed a “combination of soft and hard measures” lock-up control mechanism to hedge against this growth. Specifically, stakers can choose staking periods of varying lengths, corresponding to different levels of incentive coefficients. The longer the staking period, the higher the return rate. At the same time, prematurely unlocking the staking will incur a penalty of up to 60% of the principal (the severity of the penalty is linearly correlated with the remaining time).

In the long term (one year), since PlutusDAO’s proposal only involves one year of staking activity, the circulating supply of ARB will inevitably increase as staking ends (current circulation + incentive circulation). However, this can also be resolved by extending the proposal. PlutusDAO hopes to treat the first year of staking as an experiment and will decide whether to continue based on the situation in the future.

Upgrade in ARB utility

Overall, the essence of this proposal by PlutusDAO is to provide a new utility for ARB based on governance – sharing the revenue in the Arbitrum DAO.

According to ARB’s token economic model, the use of funds in the Arbitrum DAO treasury should be governed by the community (i.e., ARB holders), so the current proposal has relatively high support from the community.

However, it needs to be clear that in this round, voting on Snapshot is only a survey conducted by the Arbitrum DAO regarding this proposal. The actual on-chain voting will still need to be completed on Tally. The specific timeline is as follows:

• Forum posting to gather opinions and feedback (completed);
• Heat check and survey (in progress, lasting for 1 week);
• Formally initiate the AIP and call for voting (to be conducted, lasting for 3 days);
• Official on-chain voting on Tally (to be conducted, lasting for 14 days);
• Deployment and execution.

This also means that even if this survey is approved, it will still take at least half a month for this proposal to be implemented. The biggest test for this proposal lies in whether it can pass the formal on-chain voting on Tally.

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