Arbitrum vs Optimism | Which Token Will Capture EIP4844 Narrative Best
The Blockchain Sector 2023-06-20
Arbitrum and Optimism are the two most popular Layer 2 Ethereum rollups. They use optimistic rollup technology to batch transactions together and submit them to the Ethereum mainnet for verification.
Both use ETH as the native token to pay for gas fees but also have a native governance token.
Arbitrum ARB Token
Price: $0.99
Circulating supply 1,275,000,000 ARB
Total supply 10,000,000,000 ARB
Market Cap $1.2B
Fully Diluted Valuation $10B
Optimism OP Token
Price: $1.10
Circulating supply 644,594,782 OP
Total supply 4,294,967,296 OP
Market Cap $0.7B
Fully Diluted Valuation $4.7B
There are some minor differences in the way that fraud proofs are submitted and transactions are sequenced but for the most part the technology is comparable.
From an adoption perspective Arbitrum has significantly more TVL with $2.4B in on-chain funds relative to $0.9B for Optimism. Arbitrum benefits from being home to GMX while the biggest dApp on Optimism is Velodrome. Both have deployed official cross-chain versions of DeFi blue chips such as Uniswap, Curve and Aave.
The EIP4844 Update
EIP-4844 will roll out Proto-Danksharding to the Ethereum mainnet later this year. The upgrade will improve the scalability of layer 2 rollups by introducing a new type of transaction called a "blob". Blob transactions allow rollups to store data off-chain, which reduces the amount of data that needs to be stored on the Ethereum mainnet. This will ultimately reduce the cost of running a layer 2 and reduce the gas fees for layer 2 transactions.
Layer 2 rollups will be cheaper to run and lower transaction fees will increase demand, potentially increasing the value captured by the L2 network. This value could be returned to treasuries and ultimately governance holders. More users are expected to migrate to layer 2’s over time and more value is going to be captured by these networks which become more profitable with greater usage and due to EIP4844.
ARB vs OP
I generally look for the best in class digital asset to capture a potential future narrative. Arbitrum is leading the way both in FDV and TVL however there is a major concern around the circulating supply which currently stands at just 12.75% of the total supply.
Note that this figure is based on CoinMarketCap which uses a strict criteria for what is considered circulating. However these charts from token.unlocks.app show that there are 1.1 billion vested tokens from investors, team and advisors that are going to reach the cliff and be unlocked in March 2024.
This will significantly increase supply and if there is any requirements for liquidity from those investors it could have a significant impact on price. The unlock is happening around the same time as the Bitcoin halving as well which makes for an interesting market dynamic.
For Optimism it is a very similar story with low circulating supply and high FDV but the unlock took place a few weeks ago. Optimisms OP distribution was more widespread with user airdrops and public goods funding.
Throughout the last month and all the way back to April OP has underperformed relative to ARB. This I believe is most likely due to the negative implications of the unlock event and traders frontrunning it either as a short or hedge.
It will be interesting to see what happens to this chart over the next few months and as we get closer to the Arbitrum cliff I expect we will see OP start to outperform.
There are a lot of tokens unlocking for both projects and there isn’t enough demand to satisfy a combined $15 billion dollar FDV. Anyone looking at these today as an investment thesis is at the mercy of the teams and their investors who are sitting on unrealisable gains.
Layer 2’s & AppChains
With layer 2’s we compromise on decentralization in exchange for fast execution and increased on-chain storage capacity. AppChain’s work like a layer 3 and take this a step further to bring execution cost down to almost zero while the chain is maintained by a single project.
Potentially projects like GMX are well suited to independent appChains where users can bridge assets in, use that as collateral for trading and then withdraw back to an L1 or L2.
Layer 2 technology is evolving too and there are a number of zkEVM rollups being rolled out (with training wheels) as we speak. Most devs agree that the future of Ethereum execution is on zkEVM layer two’s, once they are battle tested. These projects will no doubt eat into the value proposition and userbases of the optimistic rollup layer 2’s over time.
For Arbitrum and Optimism I think the tokenomics of both projects are not favourable for speculative investors, however EIP4844 is going to be a significant update and bullish for the pair.
A narrative of Ethereum scaling infrastructure around this time could see both tokens do well in the short term and I would recommend keeping an eye on the valuations relative to each other and ETH over the next 3-12 months.
Recent Research Posts
Social links are below and if you enjoyed this piece I would appreciate it if you could share this content around social media.