🔍 The Arbitrum Airdrop Is Finally Here

Tomorrow, Arbitrum will launch the ARB token and airdrop 12.75% of its supply, or 1.275 billion tokens, to Arbitrum users and DAOs. With the price of $ARB projected to be between $1-$2 at launch, this is shaping up to be one of the largest crypto airdrops of all time.

In case you need a quick revision, Arbitrum is a layer-2 network that settles transactions to Ethereum. Arbitrum is called an “optimistic rollup” for two reasons – one, all transactions on Arbitrum are rolled up into a bundle and posted on Ethereum, and two, all transactions are optimistically assumed to be valid unless challenged otherwise.

Tomorrow, the protocol will take a step towards becoming a self-executing DAO by launching the ARB governance token. Decentralizing Arbitrum’s governance is crucial to ensure that transactions will always roll up to canonical Ethereum as the base layer itself upgrades over time. Placing key governance decisions in the hands of token holders ensures there is no central point of failure toward Arbitrum rolling up to the wrong version of Ethereum, and thus losing the base layer’s security.

Over 625k wallets are eligible to receive the airdrop. Wallets and airdrop amounts were determined by considering the wallet’s organic participation in the Arbitrum ecosystem, focusing on user transactions, liquidity, and app usage.

Layer-2 networks like Arbitrum have the ability to carry out certain actions that Ethereum can’t. For one, faster block times enable money markets to process liquidations more efficiently, allowing users to take on higher leverage while trading. Cheaper gas fees allow users to transact more frequently and for more complex code to be executed on-chain. One type of product that leverages these benefits immensely is a decentralized perpetual exchange.

Enter GMX, the destination for most users bridging assets over to Arbitrum. A decentralized exchange for spot markets and perpetual futures, GMX has processed over $93B in volume since its inception on Arbitrum. While GMX currently constitutes 25% of the total value locked on Arbitrum, this is down from 45% in the second half of last year as other Arbitrum-based projects gain traction.

The exchange is a cash cow that rakes in fees from traders and pays them to GLP holders (the liquidity providers) and GMX stakers. These lucrative fees, paid in ETH on Arbitrum, have sparked a narrative of real yield where projects pay out fees generated from user activity in a mainstream asset. As liquidity on GMX increases, many are also competing to build innovative products on top, dubbed the GLP wars.

Arbitrum’s closest competitor is Optimism, also a layer-2 network that settles transactions to Ethereum as an optimistic rollup. Arbitrum beats Optimism on a range of metrics from daily active users to the amount of ETH bridged. Currently, Optimism is trading at a fully diluted valuation of $11B. If the ARB airdrop trades at the same valuation, the token will be priced at $1.09. This is calculated by dividing OP’s fully diluted capitalization by ARB’s total supply.

Derivatives contracts for ARB June futures are currently trading at $1.39 on BitMEX. OTC markets for the token are also pricing the token between $1 and $1.50 with trades being executed by transferring the wallet’s ownership. On the other hand, IOUs for the token on Hotbit and XT are being traded at a significant premium between $6 to $8 per token. Given that every other investor in crypto is excited about this airdrop, the price is likely to see a tad bit of volatility after listing.

Optimism also held an airdrop of their governance token OP over nine months ago. The token was listed on the market at a price of $1.40 and has since moved up 82% in USD terms and over 103% in ETH terms. This comes despite the daily transactions on Optimism falling by 72% after the end of the Optimism Quests program on Jan. 17, 2023. Quests was an initiative by Optimism that gave out free NFTs to users who interacted with protocols on the network. However, daily transactions on Optimism increased by more than 4x between the launch and end of the program, demonstrating the power of airdrops to incentivize usage.

Arbitrum tried to replicate this rise in activity via a similar program titled Odyssey which also gave out free NFTs to users who interacted with protocols on the network. This initiative was so successful that the team was forced to halt Odyssey after the chain experienced a heavy load from user activity. Since Arbitrum’s announcement of the ARB airdrop, daily transactions have actually increased 18% to hit a new all-time high of 1.3M. Since then, Arbitrum’s TVL has also increased by 22% to hit a new all-time high of $2.1B.

You can certainly argue that Arbitrum’s usage will drop after the airdrop has been distributed. A lot of activity on the chain is from airdrop farmers looking to maximize their ARB allocation. However, you can also argue that the billions of liquidity injected into the Arbitrum ecosystem can spark a new wave of activity. While airdrop farmers tend to be value extractors, the general idea of earning monetary rewards for being an early adopter is one of the key tenets of crypto.

Arbitrum displays the power of crypto and how aligning incentives can create real network effects. Both layer-2 networks tried to account for the inevitability of airdrop farmers participating in their token launch. But rather than trying to build around them, they embraced the “gamers” of the system in a way that didn’t harm the experience of their real community. Rewarding users for completing on-chain tasks created a path to align incentives in a way where everybody wins. The users bootstrap liquidity across the networks and get rewarded with an airdrop. Along the way, many who entered as airdrop farmers get onboarded as real users.

We cover these meta-models in more detail in our report on crypto gaming, published in July 2022, available exclusively for Delphi Pro members here. Here’s an edited snippet from the report:

“At its core, soccer is a game of skill. Its path to monetization starts with people caring for the sport itself, then taking metadata from the most meaningful games, and playing metagames with it… As such, we see a dramatic expansion of opportunity for participation beyond the core game in the form of coaches, fans, commentators, analysts, scouts, prediction markets, merchandise, collectibles, and so on.”

At its core, crypto is a game of attracting and keeping liquidity. Its path to monetization starts with people caring for the liquidity itself, then taking the metadata from the most meaningful liquidity, and playing metagames with it. As such, a dramatic expansion of opportunity for participating beyond the core game of liquidity exists. Airdrop farming is one such metagame that can be designed by all projects to onboard large user bases and bootstrap liquidity, one that Arbitrum has mastered.

🎬 Policy Paper Series: Reframing How We Look at a Crypto Legislative Solution

Guest authors Sarah Brennan (General Counsel at Delphi Research and Delphi Ventures), Gabriel Shapiro (General Counsel at Delphi Labs), and Marc Goldich (General Counsel at Proximity Labs) propose a regulatory framework that embraces principles of transparency, disintermediation, and decentralization.

Read the policy paper series here.

📝 This Week in Delphi Research

Avoiding the Real Banking Iceberg

Two of the largest (and only) crypto-friendly banks have been shut down, while the most integrated bank in Silicon Valley is now the largest bank to fail since 2008. This report by Kevin and Jason explore how we got here, why this is a big deal, and where we go from here.

Everybody Needs *******

Blockchain infrastructure can be broadly summarized in three verticals: scalability, privacy, and UX. Due to high fees, most of our focus has historically been on scalability. We’ve also covered UX in previous reports like The Wallet Wars. In this report, Can dives into the third vertical, privacy. This vertical has become especially important after the US sanctions on Tornado Cash.

NFT Debrief – March 2023

Catch up with the latest in the NFT space as YH takes you through the current state of the market in this monthly highlight. Apart from exploring some upcoming mints that are worth watching, he takes a look at Blur’s performance after the airdrop. The NFT marketplace is now the clear leader in terms of NFT volume, although the volume is likely inflated as a result of token incentives.

The FOMC at the End of the Universe

Bull vs. Bear is a premium livestream that focuses on key market trends and macro outlooks. In this episode, Kevin and Jason explore market reactions to the Fed’s 25 bps rate hike. They also delve into Balaji’s audacious $1 million BTC bet, examining the ideological stakes and potential impact from various perspectives.

📖 Delphi Reads

The latest piece from Arthur Hayes explores the current state of our global economy after the infamous bank runs. In the blog post, he proclaims that the end game is here as we step into the age of infinite money printing globally. Read the piece here or listen to Arthur talking about some of the core themes here.

Balaji Srinivasan has been doubling down on his conviction that Bitcoin will hit $1M in less than 90 days. In a recent tweet, he claims that US banks have the same balance sheet problems that led to the implosion of FTX. Read his thesis behind making the bet here or listen to Balaji discuss his predictions of hyperinflation here.

🗓️ Calendar

March 23 – Arbitrum Airdrop: 12.75% of the total supply will be distributed to Arbitrum ecosystem users and DAOs.
March 27 – Polygon zkEVM mainnet beta
April 12 – Ethereum Shanghai upgrade

🔥 Meme of the Week

First Republic Bank’s stock has hit a new all-time low this week as the banking sector continues to be in a downturn. After jumping from one rug pull to the next, jaded crypto users are intricately familiar with a price chart like this one. Except for this time, it’s not an obscure altcoin with an anonymous team but a US bank with $200B in assets.

Meme via @HsakaTrades.