The Arbitrum DAO has passed a proposal aimed at enhancing the utility and security of the ARB token. This proposal was approved by 91% of more than 25,000 participants in an on-chain vote.

The initiative is set to introduce a new staking mechanism that promises to boost both governance security and token value.

Staking and Delegation: What’s New?

The approved proposal will allow ARB token holders to stake and delegate their tokens in exchange for a new liquid staked ARB token, known as stARB. This token will represent the staked ARB and offer several benefits, including auto-compounding of rewards, options for restaking, and compatibility with decentralized finance (DeFi) applications.

Although the proposal gives the Arbitrum DAO the option to activate fee distribution to ARB stakers, the current version does not include turning on the so-called “fee switch.” As a result, the DAO might be reserving the right to implement fee distribution at a later point.

Governance and Security Enhancements

The proposal, presented by Tally’s Chief Revenue Officer 0xFrisson, highlights pressing issues with the current ARB token structure. 

Notably, less than 1% of ARB tokens are actively used on-chain, and only 10% are engaged in governance. The new system aims to address these shortcomings by aligning incentives and increasing active participation.

The system will leverage a Karma Score to define "active delegates." This score will combine Snapshot voting statistics, on-chain activity, and forum engagement. 

The Arbitrum DAO will have the authority to adjust the Karma Score formula and set the minimum score required for delegates to qualify for staking rewards. This measure aims to enhance governance effectiveness and prevent potential attacks on the Arbitrum treasury, which holds over 16 million ETH in surplus fees.

The estimated cost for implementing this proposal is $200,000 in ARB tokens. This budget covers smart contract development, integration with Tally[dot]xyz, Karma score implementation, security audits, and funding for working groups focused on staking rewards and delegation strategies.

Mitigating Governance Risks

Staking stARB into restaking, DeFi, or centralized exchange smart contracts that do not maintain a 1:1 delegation ratio will trigger a return of voting power to the DAO. This mechanism ensures that the DAO retains control over how voting power is redistributed, thereby enhancing overall security

The proposal outlines a modular implementation strategy, allowing for future upgrades and integration with other staking systems. Providing this flexibility reportedly ensures long-term adaptability of the Arbitrum protocol as it evolves.

Impact on ARB Token Value

Since its launch in March 2023, ARB opened at approximately $1.30 and experienced a peak of $2.20 in January 2024. 

However, it is now trading at $0.5438, more than 50% below its launch price. In contrast, Bitcoin has surged by 150% during the same period.

However, Arbitrum remains the largest Ethereum Layer 2 (L2) solution by total value locked (TVL), with $2.7 billion in TVL.