Welcome to Valid Points. In today’s issue, Sam Kessler discusses Arbitrum’s lead in Ethereum’s layer 2 landscape.
Ethereum’s layer 2 landscape is finally taking form, and Arbitrum is in the lead.
Arbitrum is currently the fourth-largest blockchain in terms of the total value locked (TVL) into its decentralized finance (DeFi) ecosystem, according to DefiLlama.
Its $1.49 billion TVL is nearly double that of its main competitor, Optimism, which uses similar technology to scale Ethereum yet has a TVL closer to $800 million.
Arbitrum owes much of its recent growth to GMX, a decentralized spot and perpetual exchange that launched in September 2021 and has since grown precipitously. GMX currently accounts for about 30% of Arbitrum’s entire TVL, about $457 million. (GMX is also deployed on the Avalanche blockchain, though its footprint there is around a quarter the size).
Decentralized finance platforms like GMX use smart contracts to allow users to transact without intermediaries, and they collect fees from users as a way to reward liquidity providers and community members. GMX has been so successful in recent months that, during a 24-hour period this past weekend, it earned more in transaction fees than the Ethereum blockchain did during the same period.
When Ethereum transaction fees skyrocketed last year in response to increased user demand, rollups – separate blockchains that bundle up and “settle” transactions on Ethereum – were viewed as an urgently needed solution to the chain’s growing accessibility problem. Unlike sidechains like Polygon PoS, which also bundle up transactions and settle them on Ethereum, rollups (also called “Layer 2” platforms) take advantage of Ethereum’s existing security apparatus.
The first big rollup chains to market were Optimism and Arbitrum, both classified as “optimistic” rollups in reference to the mechanism they use to borrow Ethereum’s security.
Transaction fees on Optimism and Arbitrum currently average around $0.20 and $0.14, respectively, according to data from Blockworks. In comparison, average transaction fees on Ethereum are over $0.75 according to yCharts.
Ethereum’s layer 2 ecosystem had a slow start, and the total value locked across layer 2 rollups continues to be an order of magnitude lower than that locked on Ethereum. However, in recent months, layer 2 projects have consistently seen higher combined transaction volumes than Ethereum’s base chain, according to L2beat.
Arbitrum employed a different growth strategy from Optimism, which, in a bid to attract more users, offered its native OP as an incentive for people to use some Optimism-based apps.
Arbitrum does not have a token, meaning it relied on the organic growth of its decentralized finance ecosystem to attract users to its platform. It is possible, though, that Arbitrum’s usage numbers have been inflated somewhat by bots designed to farm the platform’s yet-to-be-announced token. (When crypto protocols announce tokens, they frequently “airdrop” some of them as a reward to existing users.)
Arbitrum and Optimism remain the largest rollups today, but they will face stiff competition in the coming months from a new cohort of upcoming zkEVMs – a more advanced breed of rollups that uses zero-knowledge cryptography to improve fees and security.
On January 30, 2023, the U.S. Bankruptcy Court for the District of New Jersey (Trenton) approved BlockFi Inc.’s proposed bidding procedures. All interested bidder should carefully read the Notice of Bidding Procedures [Docket No. 441-2] and the Order [Docket No. 441]. Final bids of the debtors’ mining assets are due by February 20, 2023 at 12:00 p.m. Eastern Time and an auction, if any, will be held on February 28, 2023 at 10:00 a.m. Eastern Time.
Pulse Check
The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on ETH metrics.
Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.
BlockFi Inc., et al, have established bar dates for submitting proofs of claim. Persons and entities that agree with their claim as listed in the Schedules [Docket Nos. 242, 247, 249, 251, 253, 255, 257, 259, 261] need not submit a proof of claim. Otherwise, all persons and entities that assert a claim against the debtors must submit a proof of claim before the bar dates outlined in the Bar Date Notice.
WHY IT MATTERS: Despite the collapse of several centralized crypto players and the ongoing bear market, Avalanche demonstrated notable increases in NFT trading volume and overall number of transactions. Data analytics firm Nansen said, “While the network ended November 21, 2021, with nearly 27 million transactions, Avalanche’s cumulative total surpassed 450 million transactions on November 21, 2022.” Such transactional activity came even as the total value of tokens locked on Avalanche-based DeFi applications slid from $15 billion in 2021 to just over $900 million in Nov. 2022. Read more here.
WHY IT MATTERS: In an interview with CoinDesk, Mihailo Bjelic, Polygon’s co-founder, underscored how crucial ZK technology has become for the project’s development road map. He said that some ZK-based enhancements could eventually be made to Polygon’s main proof-of-stake chain – a sidechain of Ethereum – as a way of improving transaction security. The development is notable partly because Polygon has successfully attracted big corporate partners in recent years, lured by its fast and cheap transactions and marketing prowess. Read more here.
WHY IT MATTERS: The vote, which was open from Feb. 2-10, ended with Silicon Valley venture-capital project backer Andreesen Horowitz (a16z) on the losing side. 66% of community members voted in favor of deploying Uniswap onto BNB Chain, and 34% opposed. The lead dissenter was a16z, Uniswap’s largest investor, which has pushed instead for one of its own portfolio companies, LayerZero, to be used as the cross-chain bridge. When Uniswap arrives on BNB Chain, the blockchain built by the crypto exchange giant Binance, it will face competition from PancakeSwap, currently the chain’s largest DEX. Read more here.
Factoid of the Week
Open Comms
Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:
