Arbitrum has emerged as a leading contender in layer 2 scalability solutions for the Ethereum network, with significant total value locked (TVL) and compelling activity. However, between September 9 and 11, the price of the Arbitrum (ARB) token experienced a massive 14.5% drop, hitting an all-time low.
Investors are now eagerly seeking insight into the factors driving this trend and questioning whether Arbitrum still has a competitive advantage, especially considering that network TVL exceeds $1.6 billion regardless of the performance of the ARB token.
It’s worth noting that the past week has been challenging for most cryptocurrencies, but among Ethereum’s scaling solutions, none other than Arbitrum fell more than 9%.
ARB Governance Proposal Offers Questionable Benefits
One potential concern stems from the fact that there have not been any instances of fraud proofs released since the launch of the Arbitrum mainnet in August 2021. Offchain Labs confirmed this information to Cointelegraph on September 4. However, the developers explained that this situation is inconsistent with the intended functioning of the system, as validators with malicious intent could lose their entire stake. Therefore, the data is unlikely to have a significant impact on prices over the past week.
Other factors that may help illuminate the recent price decline relate to the Arbitrum Decentralized Autonomous Organization (DAO) governance proposal.The first proposal was released on September 2 and aimed to distribute Up to 75 million ARB tokens will be withdrawn from the project pool to meet “short-term community demand” from active decentralized applications (DApps) within the ecosystem. However, even if approved, this allocation would represent less than 2% of the DAO’s treasury holdings and is unlikely to trigger an ARB token price correction regardless of one’s stance on the proposal.
PlutusDAO proposed another governance proposal on September 9 that attracted attention. The proposal aims to return tokens in the DAO vault to ARB holders by activating them. pledge Mechanism to create native revenue for participants, involving up to 2% of the total supply each year. However, some investors believe this approach to inflation is unnecessary and believe it will only put downward pressure on prices.
I’m not a venture capitalist, so I would “benefit” from this, but…
Dilution through inflation would be a PVP proposal that, rather than trying to bring more value to the ecosystem, would extract value from other ARB holders
Arbitrum is well-positioned in every aspect and is one of the most popular chains with huge… https://t.co/IDpcdQfQHT
—PSY (@PSYTWEAK) September 10, 2023
As user Psy highlighted on the
In addition to token governance, there are also concerns related to liquidation risks on centralized and decentralized exchanges that offer leveraged trading. For example, Lookonchain observed whales withdrawing ARB tokens from the Aave lending platform and transferring some of the tokens to Binance.
a long whale $ARB exist #ghost now selling $ARB repay loan.
Whales have withdrawn 5M in the past 5 hours $ARB ($3.85 million) from #ghost And deposit 3.8M $ARB ($2.93 million) to #binance.
The whale currently holds 8M $ARB ($6.16 million). pic.twitter.com/qduKeWC4ul
— Lookonchain (@lookonchain) September 11, 2023
The challenge with this analysis lies in the ambiguity of causal relationships. Typically, leveraged long positions are forced to close when the price of a coin has already fallen, not the other way around. This highlights the importance for investors to examine Arbitrum activity and deposit trends over the past few months, which may have triggered the recent price performance.
Decreased network activity is likely the culprit
Arbitrum’s TVL fell significantly to $1.67 billion, its lowest level since mid-February.
The 25% decline over the past two months has prompted some concerns, mostly pointing to a loss of investor confidence. This downturn could reduce liquidity and undermine the overall viability of the project. Additionally, it may deter new players and hinder network growth and adoption.
Next, it is crucial to check the number of active addresses in the network’s top DApps.
Even among mature DApps such as Uniswap, 1inch, Radiant, SushiSwap, and GMX, 30-day active addresses have dropped significantly. Therefore, when taking into account the decline in TVL and the reduction in user activity, network demand dropped significantly. While pinpointing a single cause of this movement is challenging, one can speculate that competing chains such as the zkSync Era and Coinbase’s Base may have contributed.
Data suggests that Arbitrum’s 14.5% correction appears to be a combination of investor dissatisfaction with governance mechanisms and lackluster network activity, despite Arbitrum offering significantly lower fees compared to Ethereum. Unless trading volumes rise and the user base expands, ARB is unlikely to close the price/performance gap with its competitors.
This article is for general information purposes only and is not intended to be, and should not be construed as, legal or investment advice. The views, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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