With over $2.2B total value locked in DeFi applications alone, Arbitrum One has established itself as one of the premier layer 2 chains. While Arbitrum One transactions are powered by ETH (i.e. gas fees charged in ETH), the Arbitrum ecosystem also has its own ARB token that guides its future.
Implemented as an ERC20 token, ARB can be utilized across DeFi enabling its underlying value to be integrated into any DeFi strategy. From loans to swaps, ARB composability creates new earning opportunities and this playbook guides you through each.
tldr:
- Lend ARB to earn supply interest while maintaining ARB exposure
- Borrow various tokens against ARB to access more capital
- Loop ARB lend/borrows to get leveraged upside/downside exposure
- Pair ARB with ETH/stables to earn market making fees
What is ARB?
ARB is the governance token of the Arbitrum DAO. ARB holders can submit on-chain votes that guides the development of the Arbitrum One and Nova chains. This governance function underlies ARB valuation and functions as a forward looking value proxy for the Arbitrum ecosystem.
ARB holders can either vote directly on governance proposals or delegate their votes to an elected representative. As such, to influence the future development of the Arbitrum ecosystem, users will have to obtain ARB upfront to first vote on the proposal. This aligns the ARB holder with the future Arbitrum roadmap as voted on by the community.
Further reading: The $ARB token: A conceptual overview, Arbitrum DAO Governance docs
ARB DeFi Strategies
As the governance token of one of the most established chains, ARB can be used across almost all major protocols that are on the Arbitrum network. ARB was created with an initial supply of 10B with a max annual inflation of 2% at the DAO’s discretion.
While ARB does not have any native yields, DeFi makes it possible to generate a return on the underlying value of your ARB holdings. As part of the Arbitrum DAO’s commitment to further decentralization, a large portion of the ARB emissions have been allocated to various ecosystem incentives which includes staking liquidity in target DeFi protocols.
Lending & Borrowing
Many money markets enable ARB to be used as collateral to:
- Earn lending interest by supplying ARB for other users to borrow
- Access more capital by borrowing various tokens against ARB
While the supply interest for ARB tends to be lower, the ability to borrow against the value of your ARB significantly opens up various opportunities to generate yield without having to sell your ARB.
Carry Trades
By borrowing against your ARB, you will also incur borrow interest corresponding to the specific debt token selected. This creates opportunities to earn interest differentials if you are able to find higher yielding opportunities:
- If the supply % for the same token is higher on another market, borrow the token at lower borrow % and lend it on the high supply % market
- Depeg risks aside, stables are highly correlated hence borrow a stable at a low borrow % and swap it for a stable to supply it to a market with a high supply %
- For tokens that have yield-bearing equivalents, you can borrow the underlying token at a lower borrow % and swap it for the yield-bearing token with higher returns
By finding carry trades for various debt tokens, you can earn additional debt token denominated yields. For example, one simple way to earn consistent yields with minimal risks is to borrow ETH and swap it to its liquid staked equivalents (e.g. rETH, wstETH). As ETH borrow costs tend to be below ETH staking yields, you can earn ETH denominated yields on top of your ARB.
Levered Trades
As borrowed tokens can be swapped for more ARB, you can get leveraged exposure to ARB by repeating the lend → borrow → swap process:
- Loop stablecoin borrows against ARB lending to get amplified exposure to ARB upside
- Loop other token borrows against ARB lending to amplify ARB outperformance against borrowed tokens
The total borrow interest is the cost to maintain the leveraged exposure and accrues automatically. You can also get leveraged ARB downside exposure by borrowing ARB against other tokens instead.
The availability of DeFi native flash loans allows you to skip this manual looping and create your intended leverage with just a single loop.
Market Making
ARB can also be deposited into AMMs to earn a portion of the trading fees for facilitating swaps:
- Add liquidity to ARB:stable pairs to earn from ARB price swings
- Add liquidity to ARB:ETH pair to earn fees for any ARB:ETH price deviations
Providing ARB as liquidity to AMMs generally provides higher yields as long as you are indifferent to holding either of the tokens in the pool. This is because if ARB continues to outperform the other token, your ARB will be gradually sold leaving only the other token in your position (and vice versa).
Staking
Lastly, you can also earn additional rewards which are external to the strategy performance by staking your ARB liquidity. Such staking rewards are protocol dependent and usually time sensitive. Reward amounts per period are generally fixed and therefore tends to be dilutive depending on the proportion of liquidity staked.
Of note, a significant portion of the ARB emissions are allocated towards various DeFi protocols via the Arbitrum DAO which is then redistributed towards protocol users as liquidity incentives. As such, there are usually many staking opportunities on Arbitrum.
ARB + DeFi = Mutually Beneficial Returns
If you’re bullish on the future of Arbitrum and are holding onto ARB (for future gains or voting power), DeFi composability makes it easy to generate returns on your liquid ARB. Aside from just trading, the financialization of ARB also provides supplementary value on top of just a pure governance function.
Without native yield, borrowing against your ARB is one of the best ways to unlock further value through alternate token plays. By combining strategies across major bluechip tokens (e.g. stables, ETH, WBTC, etc.), you can earn blended yields on your ARB without any trading risks. Alternatively, providing ARB as AMM liquidity also provides greater returns at the expense of losing exposure to ARB.
Related DeFi Resources
- DeFi Explainers: Lending/Borrowing, Looping, Yield Farming, AMM, Concentrated Liquidity, DEX Aggregators, Flash Loans
- Strategy Cheatsheets: Lending, Borrowing, Swaps, Liquidity Provision