Wicked Decentralization Stagecraft

In the last two weeks, both major Optimistic Rollups (Optimism & Arbitrum) have indicated an upcoming increase in float. But we know that not all float increases are created equal, thus paving the way for the astute to extract value from market inefficiencies.

When it comes to Optimism, the deed was done behind closed doors. A private sale of ~116M OP tokens split between seven entities was arranged. Although the tokens are subjected to a two-year lockup, the purchasers can delegate their tokens to unaffiliated third parties to participate in governance. The terms of the sale are rather unclear. If it is a handshake agreement for the lockup period, that is, then the holders will always have a $160M worth of looming sword over their heads.

But even if that is not the case and the tokens are custodied with a third party, the buyers can still hedge their inventory on perpetuals. And if/when OP rallies, the risk of suppression from these buyers will always be lurking in people’s minds. Besides, it is highly likely that the sale was facilitated at prices lower than the market price, thereby further incentivizing, at the very least, some hedging.

Arbitrum had a slightly different approach. Unlike Optimism, there was no token sale, and the deed was done by the book. The governance proposal passed with 120M ARB (66% of the voting tokens) to be released through Jan. 2024. This equates to about $42M of selling pressure (at current prices). Although it’s not nearly as scary as Optimism, the large unlocks in Mar. 2024 make the situation graver than it seems. Also, these tokens are used as incentives for Arbitrum-based protocols.

Based on the above, it might seem like there is no straightforward way to take advantage of these announcements. On one hand, OP seems scarier in the short term, but on a 6-month horizon, ARB steals the show with billions of dollars worth of token unlocks.

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The market seems to be aligning with this idea, too. After Optimism’s announcement, the ARB/OP pair has been consistently trending upwards. This gives credence to the theory that Optimism’s situation is graver in the short term.

The fact that Arbitrum-based tokens have also experienced a much-welcomed bid further acts as evidence of how the market seems to be thinking about the situation.

Lastly, the question of whether we’ll see a rotation back to OP as ARB’s unlock approaches is something that remains to be seen.

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