What Should You do With the Arbitrum Airdrop?

On March 23rd, approximately $1 billion in Arbitrum’s native governance token, ARB, will be distributed to early users of the platform. The size of the layer 2 scaling solution’s token distribution is unprecedented, and there could be an extreme amount of volatility in the token’s early trading hours. Let’s understand different strategies for maximizing value from the airdrop, adjusted for different levels of risk and sentiment. 

Arbitrum is Ethereum’s largest layer 2 scalability solution with a total value locked of over $3.3 billion. This also makes it the 4th biggest smart contract platform, behind only Ethereum, Tron, and Binance Smart Chain, and notably higher than Solana or Avalanche. Since the middle of 2022, it has been speculated that Arbitrum will release a governance token to decentralize the protocol and that early adopters will be rewarded with free tokens in an airdrop. Sure enough, this finally happened, as Arbitrum announced the release of the Arbitrum DAO and the ARB token on March 16th. The initial token allocation sees approximately 10% for the airdrop and slightly higher than 1% for the protocols on Arbitrum. Additionally, around 40% will go to the DAO treasury, some of which will likely be distributed to protocols later.

The circulating supply upon release is expected to be around 1 billion tokens. The market capitalization is estimated to be around $1 billion, giving each token a price of $1 and airdrop recipients a reward of up to $10,000. This is a significant amount of money, especially in the middle of a bear market, and many token holders will likely immediately sell some or all of their share. By looking at prior token airdrops and their price action after release, we can see this is not a bad strategy. Two recent large airdrops, Blur and Optimism, experienced a price increase shortly followed by large selloffs upon release for this exact reason. This happened to Optimism twice, after both of its airdrops. For more risk-tolerant investors who believe in Arbitrum, selling tokens and buying back when the price decreases more could be a promising play. For those who believe in Arbitrum and do not want to risk losing tokens, holding ARB is much simpler and safer.

Another strategy for those who believe in the Arbitrum ecosystem and want to diversify their portfolio is to sell ARB and buy tokens from Arbitrum-based DeFi protocols. Some of the biggest include decentralized perpetual exchange GMX, options platform Jones DAO, meta-governance hub Plutus, decentralized exchange Camelot, and gaming ecosystem Treasure DAO. These protocols will likely receive a portion of the 1% of tokens allocated for Arbitrum applications, increasing the value of their treasuries and consequently the token value. Moreover, these protocols may use their ARB allocation to incentivize users to use their platform by offering ARB rewards for staking or liquidity provision. Another reason to consider this strategy is because of the sheer increase in value on Arbitrum the token release will provide: the TVL will immediately increase by $1 billion, and slowly increase over time as more tokens are vested.

The fourth option, which correlates nicely with the previous, is to use ARB as a profit-generating token on a DeFi platform. For example, ARB will likely experience massive trading volume in its opening week, so being a liquidity provider on Camelot or another decentralized exchange could prove incredibly lucrative. Other opportunities for yield generation will certainly be introduced over time, especially since Arbitrum has historically been the chain focused on real yield within DeFi. Liquidity provision does come with the risk of impermanent loss, which occurs when there is a large price discrepancy between when tokens are provided and removed. This will be hard to avoid with the sizable volatility expected in the opening weeks.

Finally, the most risk-averse token recipients could sell a large portion and buy more stable assets, such as Bitcoin and Ethereum. This option, while potentially being the lowest reward, is also the safest and ensures that the ARB price volatility will have little to no impact on overall portfolio valuation. For those who have a smaller portfolio that is being heavily impacted by this airdrop, playing it safe could be a wise option to ensure that this new wealth is not immediately lost.

Though we do not know how the ARB token’s price will react upon its release, history tells us it will be incredibly volatile. By using basic portfolio diversification and ensuring that the ARB token is either generating yield or being liquidated for other assets, airdrop recipients can rest assured that their theoretical gains are preserved. 

By Lincoln Murr

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