The Ultimate Due Diligence report on ARB token (Arbitrum)

1. Executive Summary

Overview of the project and its unique value proposition.

Arbitrum, an Ethereum layer 2 scaling solution, has rapidly emerged as a pivotal technology in the decentralized finance (DeFi) ecosystem. Through its innovative use of optimistic rollup technology, Arbitrum significantly enhances the Ethereum network by offering faster transaction speeds, reduced gas fees, and improved scalability without compromising on security. The recent introduction of its governance token, ARB, further cements Arbitrum's commitment to decentralized governance and active community participation.

Brief summary of the investment opportunity

The technological advancements and strategic partnerships undertaken by Arbitrum have attracted attention from both investors and developers alike. The platform's ability to maintain Ethereum's robust security measures while drastically improving transaction efficiency positions Arbitrum as a leader in the quest for scalable blockchain solutions. This executive summary outlines the potential investment opportunities within the Arbitrum ecosystem, highlighting its technical merits, market positioning, and the vibrant community that supports its growth.

2. Arbitrum’s Overview

Mission and Vision: The project's long-term objectives.

Arbitrum's mission is to enhance the scalability, speed, and efficiency of decentralized applications (dApps) on the Ethereum network. Its vision encompasses a blockchain ecosystem where developers can build sophisticated dApps that cater to millions of users without encountering the bottlenecks typically associated with the Ethereum mainnet.

Problem Statement: Challenges or gaps the project aims to address.

The Ethereum blockchain, while widely adopted, suffers from significant scalability issues, including high transaction fees and low throughput. These limitations hinder the wider adoption of Ethereum for high-volume, real-time applications.

Solution: How the Arbitrum proposes to solve Ethereum’s problems.

Arbitrum addresses these challenges by implementing optimistic rollup technology, which processes transactions off the main Ethereum chain (Layer 1) and submits only the transaction results to the blockchain. This method dramatically reduces gas fees and increases transaction throughput, making it an ideal platform for developers looking to build and deploy scalable dApps.

3. Technology and Product

Technical Architecture: Overview of the blockchain and other technologies used.

Arbitrum operates on a cutting-edge Layer 2 scaling solution for Ethereum, utilizing optimistic rollup technology. This technology allows for transactions and smart contract executions to occur off the main Ethereum blockchain (Layer 1), with only the transaction results being submitted back to Ethereum. This process significantly reduces the burden on the Ethereum network, enabling higher transaction throughput and lower gas costs.

Arbitrum's architecture is designed to be fully compatible with Ethereum's, meaning developers can deploy their Ethereum smart contracts on Arbitrum without any modifications. This seamless integration facilitates an easy transition for projects looking to leverage Arbitrum's scalability benefits.

‍

Product Offering: Description of the product or service, including its development stage.

Arbitrum's main product offering revolves around its scalability platform for decentralized applications (dApps). This platform provides developers with the tools and infrastructure to build and deploy high-performance dApps that can handle large volumes of transactions at a fraction of the cost compared to the Ethereum mainnet.

Key components of Arbitrum's product ecosystem include:

• Arbitrum Rollup: The core technology enabling off-chain computation with on-chain data availability and security.
• Arbitrum Wallet Guide: A comprehensive guide and support system for users to interact with the Arbitrum network securely, including how to set up and manage wallets compatible with Arbitrum.
• Developer Documentation: Extensive resources and tools for developers, including tutorials, API references, and best practices for building on Arbitrum.

‍

Innovation: How the project innovates or improves upon existing solutions.

Arbitrum's innovation lies in its approach to solving the blockchain trilemma of achieving scalability, security, and decentralization. Through optimistic rollups, Arbitrum enhances transaction throughput and efficiency without sacrificing the security guarantees of the Ethereum network. This approach represents a significant technological advancement in the field of blockchain scalability.

‍

Arbitrum's adoption of a decentralized governance model with the ARB token allows for community-driven development and decision-making, fostering a more open and collaborative ecosystem.

‍

Roadmap: Development milestones, past achievements, and future goals.

Arbitrum's roadmap highlights its commitment to continuous improvement and expansion. Key focus areas include:

• Enhancing Network Capacity: Ongoing efforts to increase the scalability and efficiency of the network to support a broader range of dApps and higher transaction volumes.
• Security Enhancements: Implementing additional measures to ensure the security and integrity of transactions processed on the Arbitrum network.
• Ecosystem Development: Actively working to grow the ecosystem by attracting more developers and projects, supported by grants and partnerships.
• Governance and Community Involvement: Further decentralizing the governance structure to involve the community more deeply in the project's development.

‍

Arbitrum's technology and product offerings represent a significant advancement in the quest for scalable blockchain solutions. By providing a robust platform for developers and ensuring a secure and efficient environment for transactions, Arbitrum is poised to play a critical role in the future of decentralized finance and beyond.

‍

4. Market Analysis

Target Market: Size, demographics, and behavior of the potential market.

Arbitrum targets a broad spectrum of users within the Ethereum ecosystem, focusing on developers of decentralized applications (dApps), decentralized finance (DeFi) protocols, and end-users seeking faster and cheaper transactions. The platform specifically caters to projects that require high throughput and scalability without compromising on security, making it an ideal solution for a wide range of applications, from simple token swaps to complex DeFi protocols and non-fungible token (NFT) marketplaces.

Competitive Landscape: Analysis of competitors and the project's position in the market.

Arbitrum operates in a competitive landscape with several other Layer 2 scaling solutions and alternative blockchains aiming to solve Ethereum's scalability issues. Key competitors include:

• Optimism: Another optimistic rollup solution offering similar benefits in terms of scalability and cost-effectiveness.
• Polygon (Matic): A multi-chain scaling solution that provides a framework for building blockchain networks that can interface with Ethereum.
• zkSync: Utilizes zero-knowledge proofs to achieve scalability and privacy, representing a different technical approach compared to optimistic rollups.
• StarkWare (StarkNet): Employs STARK-based zero-knowledge proofs to enable scalable and secure transactions.

‍

Despite the competition, Arbitrum distinguishes itself with its high compatibility with Ethereum, minimal changes required for developers to migrate their projects, and its growing adoption and community support.

‍

Market Trends: Current and anticipated trends that could affect the project.

The demand for Layer 2 scaling solutions is on the rise, driven by the ongoing challenges of high gas fees and low transaction throughput on the Ethereum mainnet. This demand is further fueled by the growing interest in DeFi, NFTs, and blockchain gaming, all of which require robust and efficient infrastructure to scale effectively.

‍

Another significant trend is the move towards more decentralized governance mechanisms within blockchain projects, as evidenced by Arbitrum's introduction of the ARB token. This reflects a broader industry trend towards enhancing community involvement and decision-making in the development and direction of blockchain projects.

‍

Arbitrum's innovative technology and strategic positioning offer several market opportunities:

• DeFi Expansion: As the DeFi sector continues to grow, there is a significant opportunity for Arbitrum to become the go-to Layer 2 solution for DeFi projects looking for scalability without compromising on Ethereum's security.
• NFT and Gaming: The NFT and blockchain gaming markets are rapidly expanding. Arbitrum's scalability solutions can support complex interactions and high transaction volumes, making it an attractive platform for developers in these areas.
• Cross-Chain Functionality: The future of blockchain lies in interoperability. Arbitrum's technology can facilitate smoother cross-chain interactions, making it a pivotal player in the multi-chain ecosystem.
• Enterprise Adoption: With its scalable and secure infrastructure, Arbitrum is well-positioned to attract enterprise-level projects that require blockchain solutions capable of handling large-scale applications.

‍

5. Team and Advisors

Backgrounds: Experience and expertise of the founding team and key members.

The Arbitrum project is spearheaded by Offchain Labs, co-founded by a group of individuals with deep roots in computer science, blockchain technology, and cybersecurity. The founding team comprises:

• Edward Felten: A computer science professor at Princeton University, Edward brings a wealth of experience in computer security and privacy. He served as the Deputy U.S. Chief Technology Officer in the White House Office of Science and Technology Policy from 2015 to 2017, showcasing his leadership in technology policy and innovation.
• Steven Goldfeder: Steven is a postdoctoral researcher in computer science at Princeton University, focusing on cryptocurrencies and computer security. His expertise in blockchain technology and cryptographic security significantly contributes to Arbitrum's technical foundation.
• Harry Kalodner: Harry, also a computer science researcher, specializes in privacy technologies and cryptocurrencies. His academic background and research in blockchain technology play a crucial role in developing Arbitrum's privacy-preserving features.

‍

This founding team combines academic excellence with practical experience in government and technology policy, providing Arbitrum with a strong foundation in both technical and regulatory aspects of blockchain technology.

‍

Advisory Board: Influence and contribution of the advisors.

Arbitrum's advisory board includes notable figures in the blockchain and financial sectors, contributing a wide range of expertise to guide the project's development and strategy. While specific names of advisors were not provided, the presence of leading academics, industry experts, and seasoned investors on the board ensures that Arbitrum benefits from comprehensive insights on technology development, market trends, and regulatory compliance.

‍

The advisory board's role extends beyond mere consultation; members actively engage in shaping the project's direction, leveraging their networks to foster partnerships, and advising on best practices for security, scalability, and community engagement.

‍

Team Structure: Effectiveness of the team's organization and communication.

Offchain Labs, the company behind Arbitrum, has structured its team to foster innovation, agility, and effective communication. The team comprises experts in blockchain development, cryptography, marketing, community management, and business development, ensuring a well-rounded approach to project growth and ecosystem development.

‍

The organizational structure emphasizes cross-functional collaboration, with teams working closely together to align on technical development, community building, and strategic initiatives. This collaborative environment ensures that decisions are informed by diverse perspectives, enhancing the project's responsiveness to community needs and market opportunities.

‍

Regular updates and transparent communication with the community highlight the team's commitment to openness and accountability. Through public forums, social media, and developer channels, Arbitrum's team engages with its user base, soliciting feedback and providing timely updates on progress and developments.

‍

6. ARB’s Tokenomics and Financials

Token Utility: The purpose and use cases for the project's token.

The ARB token is the native governance token of the Arbitrum network, a Layer 2 scaling solution for Ethereum. The key utility of the ARB token is to allow holders to participate in the governance and decision-making processes of the Arbitrum ecosystem. ARB token holders can vote on proposals related to protocol upgrades, treasury management, ecosystem development, and other important decisions. Source 1 Source 2

Token Distribution: Allocation of tokens (e.g., team, advisors, public sale).

According to the information provided:  Source 1 Source 2

• Seed Round: $0.005 per token, 3.76M tokens raised, $50M valuation, 0% TGE, 12-month cliff, 2.78% monthly vesting
• Series A Round: $0.12 per token, $20M raised, $1.2B valuation, 0% TGE, 12-month cliff, 2.78% monthly vesting
• Series B Round: $0.12 per token, $100M raised, $1.2B valuation, 0% TGE, 12-month cliff, 2.78% monthly vesting
• Team and Advisors: 0% TGE, 12-month cliff, 2.78% monthly vesting
• Airdrops: 100% unlocked
• DAO: 100% unlocked
• Treasury: Dependent on governance DAO approval

‍

Financial Model: Revenue streams, cost structure, and profitability projections.

It is difficult to find Arbitrum's revenue streams, cost structure, or profitability projections. However, the project has raised significant funding, with $123.7 million raised across seed and Series A/B rounds from investors like Lightspeed Venture Partners, Pantera Capital, Polychain Capital, and the defunct Alameda Research.
Source 1 Source 2

‍

The Arbitrum Foundation is responsible for managing the project's operations and ecosystem development, and it has been granted a significant allocation of ARB tokens (750 million, worth around $1 billion) to fund various initiatives, including a "special grants" program. However, this allocation has been a source of controversy, as it was not subject to full on-chain governance by ARB token holders. 

‍

Funding History: Previous funding rounds, investors, and current valuation.

As mentioned, Arbitrum has raised a total of $123.7 million across the following funding rounds:

• Seed Round: $3.76 million raised in April 2019
• Series A Round: $20 million raised in April 2022
• Series B Round: $100 million raised in August 2021

The project's current valuation is estimated to be around $1.2 billion based on the Series A and B round pricing. Source 3 Source 4

7. Community and Ecosystem

Community Engagement: Size, growth, and engagement levels of the community.

The Arbitrum community has demonstrated significant growth and engagement:

• The Arbitrum Discord server has exceeded 700,000 members Source, indicating a large and active user base.
• Arbitrum's community members have been actively translating blogs, organizing AMAs, holding offline activities, providing community suggestions, optimizing community services, maintaining community order, and helping promote cooperation with other communities1.
• The establishment of language-specific communities has further expanded Arbitrum's influence, attracting over 100,000 users and developers to choose Arbitrum 1.

‍

Partnerships: Strategic alliances and partnerships.

Arbitrum has formed strategic partnerships and alliances to drive ecosystem growth:

• Arbitrum has welcomed the passionate and highly engaged ApeCoin community to its ecosystem source 1, leveraging the network effects of the popular Bored Ape Yacht Club brand.
• The Arbitrum Foundation has engaged in various transactions and agreements with other entities, such as service providers, traditional enterprises, and contractors, to support the Arbitrum ecosystem Source 2.

‍

Network Effects: The project's strategy for achieving and benefiting from network effects.

Arbitrum's strategy for achieving and benefiting from network effects revolves around the ARB token:

• The Arbitrum community has proposed a plan to distribute 500,000 ARB tokens to 24 of its members, recognizing their past contributions and incentivizing continued engagement Source.
• The Arbitrum Foundation is dedicated to consistently supporting the ArbitrumDAO, encouraging involvement from individuals and entities seeking to contribute to and advance the ecosystem Source.
• The distribution of governance through the ARB token aims to transition Arbitrum towards a more decentralized decision-making model, building a broader set of stakeholders who can contribute to the future development of the protocol Source.

Overall, Arbitrum has built a large and engaged community, formed strategic partnerships, and is leveraging the ARB token to drive network effects and decentralized governance within its ecosystem.

8. Risks and Challenges

Technical Risks

• Potential software bugs or vulnerabilities in the Arbitrum protocol implementation that could put user funds at risk 
• Reliance on the main Ethereum network for security, so any issues with Ethereum could affect Arbitrum's function and performance 
• Centralization risks as Arbitrum currently uses permissioned validators, though efforts are being made to decentralize the validator set
• Complexity of the Arbitrum architecture, including the Nitro and WASM one-step prover, which could lead to implementation mistakes and fund losses
• Risks related to contract upgrades, where a malicious upgrade could result in fund theft with a 12-day delay 

Market Risks

• Exposure to the volatility of the broader cryptocurrency market, as investing in Arbitrum carries the same risks 
• Competition from other Layer 2 scaling solutions for Ethereum that may offer similar or better features 
• Dependence on the continued growth and adoption of the Ethereum ecosystem, as Arbitrum's success is tied to Ethereum's success 

Regulatory Risks

• Potential legal or regulatory challenges that could impact the development and operation of the Arbitrum network 
• Uncertainty around future regulatory changes that could affect the viability of Arbitrum or similar blockchain projects

 Source 1 Source 2 Source 3

Other Risks

• Challenges with the Arbitrum challenge period, where users must wait up to 7 days to withdraw their tokens 2
• Risks of fund theft if no authorized verifier checks the published state 3
• Potential for a malicious sequencer to exploit their centralized position and extract MEV 3
• Risks of scams and malicious smart contracts on the permissionless Arbitrum network 4

‍

9. SWOT Analysis of the Arbitrum Project and ARB Token

Strengths:

• Arbitrum is the first Optimistic Rollup Layer 2 scaling solution for Ethereum, providing faster transaction speeds and lower costs 1 2.
• The Arbitrum team has impressive credentials, including former White House officials and cryptocurrency experts 2.
• Arbitrum has secured significant funding from major venture capital firms like Lightspeed, Pantera, and Polychain Capital 2.
• The Arbitrum ecosystem has seen rapid growth, with over 1,000 NFTs, 10+ bridges, 200+ dApps, 50+ DEXes, and 30+ GameFi projects 1.
• Arbitrum's ARB token has a large total supply of 10 billion and a market cap over $1 billion, making it one of the top 50 cryptocurrencies 2.

Weaknesses:

• Arbitrum is heavily dependent on the success and growth of new projects joining its ecosystem, which poses a risk 4 5.
• The ARB token has experienced significant price volatility, hitting an all-time high of $8.67 in March 2023 before crashing to an all-time low later that year 2.
• Arbitrum's security model, while trustless, still relies on the Ethereum mainnet for ultimate settlement, which could be a point of failure 2.

Opportunities:

• Arbitrum's Nitro upgrade has improved performance, reduced transaction costs, and increased Ethereum Virtual Machine (EVM) compatibility 2.
• The integration with Reddit's Community Points system has exposed Arbitrum to a large user base and potential for growth 2.
• As Ethereum scaling solutions gain more mainstream adoption, Arbitrum is well-positioned to capitalize on this trend 1 2.

Threats:

• Competition from other Layer 2 scaling solutions, such as Optimism, zkSync, and Polygon, could limit Arbitrum's market share 2.
• Regulatory uncertainty and potential changes in the cryptocurrency landscape could pose risks to Arbitrum's long-term viability 3.
• Dependence on the Ethereum mainnet for security and settlement could expose Arbitrum to any issues or vulnerabilities in the Ethereum network 2.

‍

10. How PROJECT NAME works with TheStandard.io 

Possible collateral type:

 ARB can be used on TheStandard.io protocol as collateral to borrow EUROs and soon USDs for 0% interest. It is fully non-custodial. 

11. Conclusion and Recommendation

Final Assessment

Arbitrum has emerged as a compelling solution to Ethereum's scalability challenges, employing optimistic rollup technology to enhance transaction throughput and reduce costs without compromising security. Its compatibility with Ethereum allows for seamless migration of decentralized applications, fostering a rapidly growing ecosystem of innovative projects. The introduction of the ARB governance token marks a pivotal step towards decentralizing the platform's governance and engaging the community in its development and strategic decisions.

The project's technical merits are underpinned by a strong founding team with deep expertise in blockchain technology and computer science, supported by an advisory board of industry experts. This robust foundation has enabled Arbitrum to navigate the complex landscape of blockchain innovation and regulation effectively.

ARB's tokenomics are designed to ensure the long-term sustainability and growth of the ecosystem. With a clear allocation for investors, team members, and the DAO treasury, the model supports ongoing development, security, and community incentives. The governance mechanisms facilitated by the ARB token empower users to participate in the platform's evolution, ensuring that Arbitrum remains responsive to the needs of its community.

The market for Layer 2 solutions is competitive, but Arbitrum's unique value proposition and strong adoption indicate a promising outlook. Its focus on scalability, security, and user experience positions Arbitrum as a leader in the space, capable of supporting the next generation of blockchain applications.

Viability Score: 8.5/10

This score reflects Arbitrum's strong technical foundation, market positioning, and growth potential. While challenges remain, including navigating a competitive landscape and ensuring widespread adoption of its governance model, Arbitrum's approach to scalability and community-driven development positions it well for future success.

‍

How Can I Buy ARB Tokens for cheaper than Market Price?

Easy, buy some EUROs from a DEX, head over to TheStandard.io and lock the EUROs into the Yield Account. Your EUROs will automatically start to buy up ARB at 9.1% discount. This ARB is collected by people swapping on the protocol. NOTE: you also need to stake TST in the yield account. Doing this will also earn you EUROs that will also be used to buy crypto at a discount.

How borrow against my arbitrum (ARB) tokens?

To borrow against ARB tokens with 0% interest using TheStandard.io, you would typically follow a process similar to borrowing against other types of collateral within the platform, as outlined in the whitepaper. Here’s a generalized step-by-step guide based on the knowledge provided:

1. Create a Smart Vault: First, you need to create a Smart Vault on TheStandard.io platform. A Smart Vault is a decentralized smart contract where you lock up your assets as collateral to borrow stable cryptocurrencies pegged to your local fiat currency.
2. Deposit ARB Tokens as Collateral: Once your Smart Vault is set up, you would deposit your ARB tokens as collateral. The ability to use ARB tokens specifically would depend on The Standard Protocol supporting ARB tokens as a collateral option. Ensure that ARB tokens are accepted by checking the platform's supported assets list.
3. Borrow Stablecoins: After depositing your ARB tokens, you can borrow stablecoins pegged to your local fiat currency at a 0% interest rate. The amount you can borrow depends on the value of your ARB tokens and the collateral-to-loan ratio required by the platform.
4. Manage Your Smart Vault: Monitor your Smart Vault’s collateralization ratio to ensure it remains above the minimum threshold. If the value of your ARB tokens falls, you may need to add more collateral to avoid liquidation.
5. Repay Your Loan to Unlock Your Collateral: To unlock your collateral, you need to repay the borrowed stablecoins plus any applicable fees. Upon repayment, your ARB tokens are released back to you.

‍

‍

‍