Why Arbitrum? An Investment Memo of Arbitrum, May 2023 (2024)

Executive summary:

Arbitrum is a layer-2 scaling solution based on Ethereum. Arbitrum uses Optimistic Rollups as a scaling solution to increase the throughput of the Ethereum network, thereby achieving lower transaction fees while maintaining the original security and decentralization.

The Arbitrum team has extensive industry experience and has established partnerships with many well-known companies. The platform’s user base is growing steadily, showing its traction in the market. We believe that Arbitrum has the potential to become a leading ecosystem in the scale of blockchain infrastructures.

The total token holders of Arbitrum is rapidly growing after the token launch from around 250K to 500K in less than 30 days (TokenTerminal, 2023)

Market opportunities:

The Ethereum network has exploded in recent years, with the total value locked in DeFi protocols exceeding $100 billion at one point. However, the network has struggled to keep up with demand, resulting in high transaction fees and slow transaction times. This creates a significant market opportunity for layer 2 scaling solutions like Arbitrum, which can increase the throughput of the network and reduce transaction costs.

The total transactions per second of L2 has grown to 2x of Ethereum. And, the scaling factor (L2 + ETH transactions / ETH transactions) has reached to 3+ .

Business model:

Arbitrum generates revenue by charging fees for transactions processed on its platform. These fees are competitive with other layer 2 solutions and are designed to be affordable for users. The company also offers enterprise solutions for businesses looking to integrate with the platform, thereby providing an additional revenue stream.

The supply-side fees (share of transaction fees that goes to Ethereum validators) and the protocol revenue (share of transaction fees that goes to the Network Fee account) of Arbitrum have been growing steadily in the past 90 days. Since May, the daily fees plus revenue have been upon $300k.

Competitive landscape:

The Layer 2 scaling space is becoming increasingly crowded, with many players vying for market share. However, Arbitrum has several advantages over its competitors. The platform is built on top of Ethereum, which gives it significant advantages in terms of network effects and developer mind-sharing. The team also has a proven track record in the blockchain industry, with experience in both academia and industry.

On the Total Value Locked of all Rollup chains, Arbitrum has gained a dominant market share of 70% in the overall TVL compared with other Rollup chains. The second biggest in TVL is Optimism with 25% share in the overall TVL of Rollup chains.

Team:

The team behind Arbitrum is led by co-founders Steven Goldfeder and Harry Kalodner, both of whom have extensive experience in the blockchain industry. Goldfeder is a professor of computer science at Princeton University and has published several papers on blockchain security. Kalodner is a former researcher at Microsoft Research and has published multiple papers on blockchain scalability. The team also includes several other experienced developers and researchers.

Investment thesis:

We believe Arbitrum has the potential to become a leader in the blockchain ecosystem. The platform offers significant advantages over other layer 2 scaling solutions, including faster transaction times, lower fees, and improved security. The team behind the project has a proven track record in the blockchain industry and has already gained significant traction through several high-profile partnerships. We believe that as the Ethereum network continues to expand, the platform will grow in popularity and has the potential to generate attractive returns for investors.

Risk:

As with any investment, investing in Arbitrum carries a number of risks. The platform is still in its early stages and may face technical challenges as it scales up. There is also the risk of regulatory uncertainty, as governments around the world are still grappling with how to regulate blockchain technology. Finally, there is a risk of competing with other layer 2 scaling solutions that may offer similar benefits to users.

In conclusion:

Overall, we believe Arbitrum is an attractive investment opportunity for investors looking to gain exposure to the blockchain ecosystem. The platform has significant advantages over other layer 2 scaling solutions and has a strong team behind it. While investment is risky, we believe the potential returns outweigh the risks and Arbitrum has the potential to deliver substantial returns for investors.