Arbitrum Airdrop: Strong Network Metrics, Weak Token Economics (ARB-USD)

The long awaited Arbitrum (ARB-USD) airdrop has finally happened. Like Optimism (OP-USD) or Polygon (MATIC-USD) Arbitrum is the latest Ethereum (ETH-USD) scaling chain that now has a token. However, unlike Polygon, gas fees on Arbitrum are paid in ETH not in the chain native token. In this article, we’ll look at Arbitrum’s network activity since the airdrop, explore the economics of the ARB token, and attempt to put a fair valuation on ARB.

The Airdrop

For those who don’t know, “airdropped” coins are tokens or currencies that are distributed to blockchain wallet addresses as a reward for some other action. They are generally granted to crypto users as a “thank you” for participating in network growth or development. Up until last week, Arbitrum operated without a native token. But earlier this month the long anticipated Arbitrum token was announced and we had the distribution begin on March 23rd.

Anyone who met certain usage criteria on the Arbitrum network before March 16th of this year qualified for the airdrop. According to Blockworks, roughly 625k addresses qualified to receive the token and 87% of those addresses have already claimed their tokens as of article submission. On Friday the 24th, token holders eclipsed 292k but we saw that number dip down to roughly 245k on Saturday as many of the “tourists” had exited their holdings:

However, after a brief dip in total token holders over the weekend, we’ve seen ARB holders stabilize and slowly edge back up to 267k. Initially, 625k wallet addresses were eligible. Of those, 543k addresses claimed which suggests a little over half the addresses that have claimed have sold the token given the current 267k current holders. There was so much interest in this drop that the front end website crashed at one point last week when token claiming was enabled.

Depending on how many interactions with the chain users had pre-token launch, there were differing amounts of ARB that each user qualified for. The maximum any one wallet address could receive was 10,250 coins. However, the majority of the tokens that were distributed were much smaller individual allocations.

Network Usage

As part of the push to claim airdrop coins, daily transactions on Arbitrum spiked over 2.7 million on Thursday – which was nearly three times the transactions of Ethereum and more than ten times the transactions of L2 peer Optimism.

Arbitrum previously lost share to Optimism as the OP chain had rolled out an ecosystem building initiative – when that initiative ended, the activity on Optimism quickly fell back to early 2022 levels. Now that the ARB airdrop is largely in the rearview mirror and all the “free money” has been handed out, it should be interesting to see if the level of activity on Arbitrum remains as high as it has been over the last several months or if we see a reversion to prior levels now that the airdrop incentive is over.

So far, we’ve seen more tokens come into lock on Arbitrum than leave. I’d view that as a generally positive sign for ARB holders. Arbitrum now has over $2.2 billion in TVL, which makes it the fourth largest blockchain by TVL after Ethereum, Tron (TRON-USD), and Binance (BNB-USD). Arbitrum now has more TVL than Polygon and Optimism combined and a solidly diversified footprint of 262 protocols with top protocol dominance coming in at just 23%.

Click to enlarge

Source: Defi Llama

This top protocol dominance figure is a big improvement from just three months ago and one could actually argue that Arbitrum has the healthiest Defi footprint in the crypto ecosystem judging by the lower top protocol dominance figures in the table above. Of course, there are no sure things in crypto and ARB is no different.

Key Risk: Tokenomics

The major flaw I see in going long ARB today is that the token itself isn’t used for gas or any real utility beyond governance voting. And anyone who has followed my work on Seeking Alpha closely may know how I personally feel about governance as a sole utility. It’s fine if the network or protocol token distribution is truly decentralized. But as we learned with Uniswap (UNI-USD) last year, “governance” is often used to justify a token that has no real purpose and major decisions concerning protocol governance may never actually go to a vote.

I’m not saying that will be the case with Arbitrum, but the token holders who were just airdropped ARB are a minority vote in the broader governance table:

Click to enlarge

Source: Arbitrum Foundation

Beyond the utility problem, the token still has a large amount of token emission remaining with just 12.7% of total initial supply in circulation. According to the Arbitrum Foundation, investor unlocks don’t start for a year:

While the user and DAO airdrops will be available in one week, all investor and team tokens are subject to 4 year lockups, with the first unlocks happening in one year and then monthly unlocks for the remaining three years.

Until we have a more clear vesting schedule, I’d be very careful about buying ARB as a long term investment today. ARB holders may be able to avoid significant sell pressure for the next 12 months, but we could see quite a bit of ARB on the ask in the next 12-48 months.

Valuation

As is so often the case in crypto, finding the proper valuation metric can be challenging and vary depending on what a coin does. Since Arbitrum is a smart contract chain, price to fees is probably a good place to start. Despite the limited history of the ARB token, it actually trades at a lower fully diluted P/F ratio than both MATIC and OP:

Another metric to consider is market cap to TVL ratio. This can be a good way to assess whether a chain is cheap based on DeFi activity. The larger the ratio, the more overvalued the chain token could conceivably be. However like the P/F ratio, ARB’s Mcap/TVL ratio is also lower than peers:

Click to enlarge

Source: Defi Llama

Arbitrum and Optimism both have very similar market cap to TVL ratios – each of which are significantly cheaper than peers. My guess as to why those valuations are so much lower than chains like Ethereum and Polygon are due to the fact that OP and ARB aren’t necessary to pay gas fees, but that’s admittedly just a guess.

Something else to consider is smart contract chains aren’t always focused on DeFi – this could create a large divergence in Mcap/TVL between two chains that have similar market valuations. For instance, Polygon and Arbitrum have close P/F ratios but very different Mcap/TVL ratios. In my view, this is likely because Polygon has a much larger footprint in NFTs than Arbitrum. Regardless, market cap to TVL is another instance of ARB actually looking pretty cheap compared to peer chains if you care about such metrics.

Summary

ARB is a bit like a tech stock that pays no dividend. If you can get past the idea that the token doesn’t have much utility to the average user, it may be one of the better bets in the crypto space if you view it as a legitimate proxy on the success of the Arbitrum network. I take the view that Ethereum is going to be a long term winner in this industry and chains that help on-board users to that ecosystem will do very well provided they aren’t cannibalized by any future scaling initiatives at the base layer.

Arbitrum fits that thesis as a network, but the token itself needs better utility for me to personally buy it as a long-term investment. Now that the airdrop has come and gone, prospective buyers and holders should keep an eye on the activity level on the network.