How Arbitrum is Supercharging Ethereum: The Game-Changer in Layer-2 Scaling!

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7 Nov 2024

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In 2024, Ethereum’s performance fell short of expectations for many investors, lagging considerably behind both Bitcoin (BTC) and Solana (SOL). Despite a number of positive developments, such as the smooth implementation of the Dencun upgrade and the launch of the Ethereum ETF in July 2024, Ethereum’s underwhelming market performance has impacted several Layer-2 (L2) networks built on its infrastructure, many of which have also underperformed.
Layer-2 solutions are designed to enhance the scalability and efficiency of a primary blockchain, like Ethereum or Bitcoin. By conducting transactions and computations off the main network, Layer-2 solutions alleviate congestion, facilitating faster and more affordable transactions. This approach retains the security of the main blockchain while improving user experience, a crucial advantage in today’s competitive blockchain landscape.

Arbitrum’s Architecture and Advantages

The architecture of Arbitrum showcases its integration with Ethereum as a Layer-2 solution. Transactions are managed in an Off-chain component by Arbitrum nodes and validators, with ArbOS (Arbitrum’s operating system) bridging operations between the Ethereum Virtual Machine (EVM) and the AVM (Arbitrum Virtual Machine). Optimistic Rollups, the backbone of Arbitrum’s technology, allow off-chain transaction processing, reporting only finalized outcomes back to Ethereum’s Layer-1. This structure results in lower gas fees and higher transaction speeds without compromising Ethereum’s security, making Arbitrum a highly scalable Layer-2 solution.

Figure 1: Arbitrum’s Architecture . Source: Trapdoor

Figure 2: Layer-2 Projects . Source: DeFiPlanet

With transaction speeds reaching 40,000 TPS, Arbitrum significantly outpaces competitors like Optimism, which caps at around 2,000 TPS. Arbitrum also prioritizes decentralization, standing out against alternatives such as zkSync and StarkNet, which retain some centralized sequencer management. Additionally, Arbitrum’s low average gas fees ($0.11 per transaction) appeal to users frustrated with the higher costs on competing platforms like StarkEx and zkSync. The high total value locked (TVL) in Arbitrum—$1.946 billion on Arbitrum One and $3.07 million on Arbitrum Nova—reflects the platform’s broad adoption within the DeFi community.

Figure 3. Arbitrum’s Total Value Locked (TVL) & Revenue . Source: DeFiLlama

Balanced Token Distribution, with Potential Drawbacks

Arbitrum’s token allocation shows a strong focus on decentralized governance, with 42.78% dedicated to the DAO treasury, allowing the community to fund new initiatives and influence project direction. However, the allocation of 44.47% to the team and investors (26.94% for the team and 17.53% for investors) could raise concerns about potential selling pressure, especially if token lockups are not effectively managed. Additionally, the 11.62% allocation for airdrops may add some volatility to the $ARB token’s market price.

Strong Investor Support

The strength of Arbitrum’s investor backing is another indicator of its potential. In August 2021, the project secured $100 million in a Series B funding round led by Lightspeed Venture Partners, with participation from Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, and Alameda Research. The support of such prominent venture capital firms speaks to Arbitrum’s appeal as an innovative Layer-2 solution within the broader crypto investment landscape.

Figure 4: Arbitrum’s Token Allocation and Investors. Source: ICO Analysis

Technical Outlook

Arbitrum appears to be approaching a pivotal inflection point on the weekly chart, potentially signaling a trend reversal. This movement presents an opportunity for investors to consider “scaling in” at what may prove to be a favorable entry level. Recent analysis of Arbitrum’s performance metrics suggests that, following a period of consolidation, the network is beginning to establish traction. Volume indicators have shown consistent increases, while a crucial support level has remained resilient, reflecting confidence among users and developers.
Key momentum indicators, such as the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI), are showing signs of bullish divergence, which may point toward upward momentum in the near term. Additionally, the RSI has transitioned into a neutral zone after recent oversold conditions—often a precursor to a stronger rebound. This shift implies that, for traders seeking a lower-risk entry, Arbitrum’s current levels could offer a strategic opportunity as the asset stabilizes post-breakout.

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