The landscape of Ethereum’s Layer 2 projects has diversified significantly compared to the past, with Arbitrum and Optimism still standing out as quintessential Layer 2 solutions. Despite pursuing distinct technological approaches, both projects collectively aim to reduce transaction costs and offer enhanced performance compared to traditional systems.
In this document, we intend to explore and analyze based on the on-chain data of Arbitrum and Optimism.
2023 Q3 On-Chain Key Metrics : Overview
In the Q3, both the Arbitrum and Optimism projects exhibited a declining or stagnant trend in metrics such as Active Addresses, Daily Transaction Count, and DeFi Total Value Locked (TVL).
This trend is predominantly influenced by the crypto winter. Considering that the fundamental objectives of these projects are centered on reducing transaction costs and enhancing performance, evaluating them solely based on absolute values might not yield accurate interpretations.
Hence, a more viable approach to analysis would involve a comparative review against similar Layer 2 products and Ethereum’s Layer 1 data, ensuring a more nuanced and contextually accurate assessment of their performance and positioning in the market.
Change in Competitive Advantage : Arbitrum → Optimism
Among the practical use cases of Layer 2, Arbitrum and Optimism are predominantly noteworthy. Initially, Arbitrum maintained a formidable presence amongst competitors in the market. However, a notable shift in Arbitrum's robust positioning occurred following the incorporation of Coinbase’s Base and World Coin ($WLD) into Optimism in the Q2 2023.
Until the first half of 2023, the Revenue (USD) index, which is one of the indicators reflecting the profitability of Layer2, showed a ratio between Arbitrum and Optimism ranging from 7:3 to 9:1. However, after July 2023, as demonstrated in the attached indicators in this document, Q3 has seen a shift where it becomes challenging to determine a distinct dominance of a specific chain.
The Moment Arbitrum Conceded Dominance: The Issue of Limited Scalability
To foster a seamless development environment based on Arbitrum, adherence to the Business Source License (BSL) was crucial. Initially, this stipulation acted as a cornerstone, enabling the delivery of high-quality services within the Arbitrum ecosystem. However, following the substantial embrace of Optimism in Q2 2023, along with the advent of diverse Layer2 projects, this prerequisite has paradoxically evolved into a hindrance in terms of scalability.
This challenge has captured the attention within the Arbitrum community, and is also acknowledged by Offchain Labs, a central pillar behind Arbitrum. The imminent trajectory of Arbitrum seems heavily influenced by how Offchain Labs chooses to revise its licensing policies.
Optimism Ecosystem’s Dilemma: Achieving Massive User Adoption but Struggling with Profitability
Leveraging the strengths of the Bedrock upgrade and EIP-1559, Optimism has significantly reduced transaction fees, nearing a daily transaction count of 500K and even renewing the all-time high (ATH) from 800K to 944.6K in the third quarter of 2023.
This downtrend seems to be a compounded result of the impacts of the crypto winter and the efforts to reduce transaction costs. While this might not pose a significant issue in the short term, the lack of a direct mechanism to enhance the intrinsic value of Optimism could become a major vulnerability moving forward.
Among the projects that have adopted Optimism, only BASE has demonstrated clear profitability. This necessitates a careful observation to discern whether an expanded Optimism ecosystem can generate greater synergies than the present, and to see how it will evolve to address these challenges in the future.
