Arbitrum

Please review the proposal forum post for a full proposal description: https://forum.arbitrum.foundation/t/arb-staking-unlock-arb-utility-and-align-governance/25084/1

Constitutional / Non-Constitutional

Constitutional

Abstract

We propose to unlock ARB utility and improve the governance and security of the Arbitrum protocol by implementing ARB staking, without yet turning on fee distribution to token holders. Through ARB staking, token holders who delegate to active governance participants will be able to capture value. The proposal will also implement a liquid staked ARB token (stARB) via the Tally Protocol that enables any future rewards to auto-compound, is (re)stakeable, and is compatible with DeFi. Separately, we will work with the Arbitrum DAO to decide whether and how to fund rewards and split rewards between token holders and delegates.

Motivation

The ARB token is struggling to accrue value.

• Governance power is the only source of fundamental demand for ARB, while there are multiple sources of new supply (unlocks, treasury spending).
• The ability to restake ARB or use it on DeFi is not compatible with governance. Voting power breaks when ARB is deposited into smart contracts. Less than 1% of ARB tokens are used actively in the onchain ecosystem.

The ARB token is struggling as a governance mechanism

• Only about 10% of the circulating supply of ARB is actively used in governance
• Voter participation in the DAO has been steadily declining since DAO launch

Meanwhile, the Arbitrum DAO treasury has accumulated over 16 Million $ETH in surplus fees from Arbitrum One and Nova. As a result, it is becoming economically attractive for a malicious actor to launch a governance attack on the DAO treasury. The potential profit of attacking the DAO treasury is increasing as more ETH accumulates in the treasury, while the cost of attacking the DAO through purchasing ARB for its voting power is not increasing proportionally to defend against attacks. A more developed version of this dynamic exists in the ENS and Compound DAOs, both of which are actively fighting off governance attacks (ENS documented here).

ARB staking unlocks utility and aligns governance by creating a mechanism to stream future rewards from DAO-generated sources like sequencer fees, MEV fees, validator fees, token inflation, and treasury diversification to token holders who are delegated to an active governance participant. ARB staking makes ARB usable in restaking and DeFi by returning voting power locked in contracts to the DAO.

Rationale

This proposal contributes to Arbitrum Community Values by making the Arbitrum DAO more sustainable and secure.

Specifications and Steps to Implement

System architecture

ARB staking enables ARB utility while allowing the DAO to retain governance power. It includes a few modular components that come together to power the system.

ARB staking via the Tally governance staking system

• Has the power to distribute fees proportionally to token holders who have delegated voting power to an active governance participant.

The DAO

• Has the power to turn on fee distribution and send fees to ARB staking
• Controls how voting power is distributed to delegates, including delegation strategies for unused voting power

stARB (Tally Protocol LST)

• Auto-compounds potential rewards if they are turned on in the future
• Provides token holders a liquid position
• Allows stARB holders to continue delegating directly to their preferred delegate. This can be accomplished through Flexible Voting, or by deploying surrogate contracts for each depositor.
• Returns voting power to the DAO if stARB is deposited into restaking, DeFi, or centralized exchange smart contracts that do not maintain a 1:1 delegation relationship. The Arbitrum DAO exclusively has the ability to determine how this voting power is distributed/redelegated via a governance proposal. The DAO will decide how to set up the initial redelegation logic for stARB.

Estimated Timeline

Post proposal on forum for feedback: June

Post temp check proposal on Snapshot: August

Post onchain proposal on Tally for funding: August

Begin development: August

Submit smart contracts for audit: September

Submit onchain proposal on Tally including full ARB staking implementation: October

Overall Cost

If this proposal passes temperature check, we will submit an onchain proposal that includes $200,000 USD in ARB of funding to cover the costs of development, including the following funding categories:

• $50,000 USD in ARB: Develop ARB staking smart contracts
  • Implement staking contracts
  • Integrate Arbitrum’s current and potential fee mechanisms
  • Integrate Karma Score requirement
  • Enable the DAO to block Karma Scores if it believes they are being calculated incorrectly
• $20,000 USD in ARB: Integrate ARB staking into Tally.xyz
• $50,000 USD in ARB: Integrate Karma into ARB staking
  • Develop and deploy a smart contract to store key stats and Karma scores onchain
  • Create a system to record stats onchain and store detailed delegate data off-chain (using Arweave or IPFS) for easy verification
  • Continuously improve scoring algorithms to adapt to evolving Arbitrum community needs
  • Provide technical support to delegates experiencing issues with their statistics
• $60,000 USD in ARB: Audit ARB staking smart contracts
  • The final cost of the audit including documentation will be published on this thread. Any leftover funds from the $100,000 budget will be returned to the DAO.
• $20,000 USD in ARB: Fund Staking Rewards and ARB Staking & Delegation working groups

Separately, we will submit an onchain proposal with the full ARB staking implementation at the conclusion of the development process.

Disclaimer

This proposal should not be relied on as legal, tax, or investment advice. Any projections included here are based on our best estimates and presented for informational purposes only.