What factors determine ARB price?
In this piece of writing, I will explore various factors that can affect the price of ARB tokens.
tl;dr: While ARB acts as an ETH derivative, its price can also be influenced by macroeconomic events, regulatory developments, vesting schedules, or the emergence of decentralized sequencers.
Note: This is NOT financial advice.
1. Introduction to Arbitrum
Before delving into the main discussion, it would be beneficial to become acquainted with Arbitrum itself.
What is Arbitrum?
Arbitrum is the leading layer 2 scaling solution for Ethereum. It aims to enhance the speed of Ethereum by processing transactions off-chain, resulting in a faster and more cost-effective user experience.
To accomplish this objective, Arbitrum employs an “Optimistic rollup.” The term “rollup” refers to the process of gathering layer 2 transactions, forming a bundle with them, and then rolling it up onto the Ethereum network. The term “Optimistic” reflects the optimistic approach taken by Arbitrum, where layer 2 transactions are considered valid unless explicitly challenged, calling into question the integrity of such transactions.
DApps in Arbitrum
Thanks to their competitive advantages in terms of speed and cost, numerous applications have been onboarded on Arbitrum. As shown above, they are divided into five categories: Bridge and On-ramps, DeFi, Gaming, Infra & Tools, and NFTs.
As evident from the ranking provided, DeFi DApps have firmly established their presence in Arbitrum.
Arbitrum: unrivaled leader in layer 2 environment
Compared to its competitors, Arbitrum (highlighted in blue) has managed to retain a significantly larger amount of capital within its network.
Regarding the number of active addresses, Arbitrum (highlighted in blue) had faced challenges in surpassing its archrival Optimism until early 2023. However, since then, it has established a substantial lead over Optimism.
Arbitrum (highlighted in blue) has recently taken the lead over Optimism in terms of the daily transaction volume as well.
2. ARB token: governance token of Arbitrum
With the rapid growth of Arbitrum, there has been a natural emergence of the need for community-based governance to effectively manage the network. This is precisely where ARB begins its journey toward decentralized governance.
Holding ARB grants you the ability to influence the decisions made within the on-chain environment of Arbitrum. For instance, ARB holders can participate in determining the allocation of funds from the Arbitrum DAO treasury to specific entities. Similar to other token-based governance systems, the more ARB tokens you hold, the greater influence you can exert in the decision-making process.
Tokenomics
Out of the total supply of 10 billion ARB tokens, only 1.275 billion ARB tokens are currently in circulation, which includes the distribution for user airdrops and the Arbitrum ecosystem DAOs. The allocation for the DAO treasury will be made available only upon approval from ARB holders. Starting from March 2024, which is one year after the token generation event, investors, team members, and advisors will be able to gradually claim their ARB tokens on a monthly basis over a period of three years.
Just to clarify, 750 million ARB tokens from the Arbitrum DAO treasury have already been transferred to the Arbitrum Foundation. It was intended to cover administrative and operational expenses.
Market metrics
After reaching its all-time high (ATH) in mid-April, the price of the ARB token declined, along with the broader crypto market. The daily trading volume of ARB tokens followed a similar trajectory.
Despite the challenging market conditions, the number of addresses holding ARB tokens with a non-zero balance has shown a consistent upward trend.
However, the distribution of ARB tokens remains somewhat centralized, as approximately 91% of the total supply is held by the top 100 ARB token holders. Even when excluding the Arbitrum DAO treasury, the holdings of the top 100 token holders still account for more than half of the total supply.
3. Determination of ARB token price
While ARB serves as the governance token of Arbitrum, it may be premature to assign significant value to its voting rights. Firstly, the Arbitrum DAO is still in an early experimental stage, leaving uncertainty regarding how ARB tokens will effectively shape governance. Furthermore, as previously mentioned, the uneven distribution of ARB tokens diminishes the appeal of participating in governance.
As a result, our analysis will focus on exploring the relationship between the price of ARB tokens and four key variables: ETH price, daily transaction volume, daily active users, and daily fees. These variables were chosen due to their strong relevance to the core aspects of Arbitrum.
To provide a comprehensive assessment, we will also conduct a comparative analysis using the OP token, which offers a longer historical perspective, employing the same standards.
ETH price: convincing
The price of the ARB token tends to move in sync with the price of ETH. Additionally, the OP token also demonstrates a similar correlation.
Interestingly, when the price of ARB tokens experiences a downturn, it tends to incur more substantial losses compared to ETH. Once again, we can observe a similar pattern with the OP token, where its price also tends to be more affected during a decline in ETH’s price.
To put it from a derivative perspective, purchasing ARB is akin to assuming a leveraged-long position on ETH.
Daily transaction volume: not convincing
While the price of the ARB token seems to be in line with the daily transactions on the Arbitrum network, the relationship between the price of the OP token and the daily transactions on the Optimism network is not consistent. In fact, the derived correlation is approximately -0.002, which suggests a virtually meaningless result.
Daily active users: not convincing
The price of both the ARB and OP tokens does not imply a meaningful relationship with the number of daily active addresses.
Daily fees: not convincing
Similar to daily transaction volume and active users, it is difficult to establish a deep correlation between daily fees and the price of ARB or OP tokens.
4. Other factors potentially affecting ARB price
Macroeconomics
Over the past two years, the crypto market has been significantly influenced by macroeconomic uncertainties. Central banks worldwide have implemented tighter monetary policies, resulting in reduced liquidity within the crypto industry. Additionally, geopolitical tensions, such as the Russian invasion of Ukraine, have negatively impacted investor sentiment.
Regulations
Regulatory scrutiny on the cryptocurrency industry has intensified in recent times. The recent lawsuits filed by the Securities and Exchange Commission (SEC) against Binance and Coinbase serve as notable examples. Additionally, the ongoing litigation between the SEC and Ripple cannot be overlooked. If ARB is deemed to possess certain characteristics of security, it could significantly impact its price and future prospects.
Vesting schedule
As the lock-up period for ARB gradually matures and more tokens are released into the market, it can potentially exert downward pressure on its price due to the increased supply.
Decentralized sequencers
If Arbitrum successfully implements decentralized sequencers, it is probable that a staking mechanism will be involved. This staking mechanism can help establish a minimum demand for ARB tokens, potentially creating a price floor.
