13 October 2023

Here we go again. A decisive week for crypto in terms of a directional trend – while Bitcoin is down by about 3% this week, key altcoins including Ethereum, XRP, Solana, Cardano, and Polygon are down by more than 5%. Bitcoin dominance as share of total market cap has now risen to nearly 51%. Ethereum, in particular, is slowly losing value to Bitcoin – ETH/BTC pair has broken down from a descending wedge that we covered in this newsletter earlier.

Against this backdrop, the US CPI inflation data printing higher than expected at 3.7% is significant. While the Israel-Gaza conflict threatens to increase oil prices in the interim, increasing inflation due to other factors will strengthen the dollar index DXY taking liquidity away from risker assets including crypto.

While this plays out, we want to cover an interesting war brewing among Ethereum’s Layer 2s – especially between Arbitrum and Optimism. That’s our focus in the Hot Take today.

Top-3 stories of the week:

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2

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The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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WEEKLY MACROS

• Total crypto market cap - $1.05 trillion - DOWN 2.8%

• Bitcoin price - $27,521 - DOWN 2.7%

• The dollar index (DXY) - 106.43 - UNCHANGED 

• Bitcoin Dominance - 50.97% - UP 0.7%

• Crypto Fear and Greed Index - 39 - the market is in fear

ICO CALENDAR

• 14^th Oct - AIMALLS (AIT)

• 16^th Oct - XRender Ai (XRAI)

THE HOT TAKE

New Layer 2s: Arbitrum or Optimism?

While Ethereum continues to be the top network in terms of adoption and usage, Layer-2 solutions are gaining in popularity as a means to decongest the ETH network. They allow for scalability and increased throughput, while still holding the integrity of the Ethereum blockchain, allowing for complete decentralization, transparency, and security while also reducing the carbon footprint (less gas).

Within the Layer-2 realm, Arbitrum and Optimism are the new darlings of 2023 due to their ‘rollups’ technology to attain finality which makes these blockchains faster and more efficient. They take the heavy lifting off the main blockchain and move it to a separate layer to process more transactions in less time and with lower fees.

We analyse some key trends and differences between these networks and their tokens ARB and OP.

1) ARB, OP fundamentals and token unlocks

Arbitrum, ARB, got listed in March of this year at about $1.2 a token and quickly rose to $1.8 based on hype and speculation. The token has depreciated 55% in value since and is now trading at $0.8.

Optimism, OP, on the other hand, is up 30% since the start of the year. Currently trading at $1.19, OP token reached a high of $3 in February this year.

However, token prices can’t be truly compared without a lens on circulating supply. OP has a circulating supply of 880 million whereas ARB’s is 1.28 billion. In terms of market cap, both tokens have a similar valuation (~$1 billion), ranking them at 39^th and 41^st places respectively.

It is pertinent to note that OP, while doing well, has many token unlocks planned (early investors who are now able to sell the tokens as per their vesting schedule). In late September, OP slid 10% as traders got wary of a planned unlock flooding the market. ARB has a big unlock coming up in March 2024, which may see a rapid decline in value around that time (good to plan trades accordingly).

2) Total Value Locked (TVL) data is promising

In terms of TVL, Ethereum leads the crypto ecosystem followed by Tron. Arbitrum and Optimism have slowly risen the ranks this year with a combined TVL of $2.2 billion. That Arbitrum is 3x that of Optimism today in terms of TVL having launched only 7 months back is significant to note.

3) Ecosystem and other on-chain metrics

Currently, protocols working within Arbitrum are almost double that of Optimism at 343 and 185, respectively. While nearly incomparable to the TVL on Ethereum, both Layer 2s poise as an alternative to DeFi on the mainnet, with faster transaction speeds and cheaper fees.

Some notable projects built on Arbitrum include GMX, Curve, Cream Finance, and Uniswap, while Optimism has its own share of popular dapps such as Synthetix and Lyra.

Arbitrum and Optimism have generated $43.6 million and $27.4 million in gas fees, respectively (year to date). Arbitrum has seen average daily addresses of 152,000 in 2023 while Optimism has seen 68,000.

4)  Optimism has a stronger suite of partners

Optimism has been in the news with some strong and relevant partnership announcements. In February, Coinbase announced that it will work with OP Labs as a core developer to contribute to the Optimism Collective’s mission. Coinbase’s layer 2 network, BASE, is based on OP Stack codebase of Optimism. OP has also partnered with much-hyped WorldCoin to provide their scalable infrastructure.

Arbitrum’s partnerships aren’t eyebrow raising yet. Last month, they announced a partnership with Chainlink for cross-chain Dapp development while ZTX is looking to build a new 3D virtual world atop Arbitrum blockchain.

5) Future outlook and takeaway

Both the chains present exciting prospects capable of reshaping the L2 space. Optimism spearheads an innovative project with OP Stack: an ambitious plan aiming to create a scalable, modular, and interoperable blockchain system. Their superchain project aims at an unified future that doesn’t fracture their ecosystems, applications, or their ability to interoperate together.

On the other hand, Arbitrum relies on Arbitrum Nitro, the tech stack behind the blockchain. Recently Offchain Labs, the company behind Arbitrum, revealed a testnet for Arbitrum Stylus that enables multi-language coding for smart contract developers. This is aimed to lower fees to execute smart contracts and for the same cost to do an ADD instruction in Solidity (Ethereum’s programming language), you can execute 150 ADD instructions in Stylus.

Given the above, both these Layer 2s are doing well. But relatively, Arbitrum seems to have an edge at the moment. Their ARB unlock in March 2024, just ahead of the Bitcoin halving, is worth noting. If price falls, it might be the right time to gain a small entry into the project.

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If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

Disclaimer: Crypto-asset or VDA investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.