Arbitrum and Optimism made millions in profit despite the extended bear market hitting decentralized finance (DeFi) activities and Ethereum (ETH) valuation in 2022.
Arbitrage and optimism win big
By chain data shared on Twitter, Arbitrum and Optimism, general-purpose Ethereum layer 2 platforms, generated 2,906 ETH and 2,086 ETH, respectively. In USD terms, that translates to around $4.6 million and $3.3 million for each protocol.
L2s are awesome business
Arbitrum made 2,906 ETH ($4.6 million) of profit in 2022
Optimism made 2086 ETH ($3.3 million) of profit in 2022 pic.twitter.com/ViOkPA0Juv
—Kofi (@0xKofi) January 17, 2023
Based on user activity and the number of dApps launched on Ethereum, strong statistics show that developers prefer the first smart hire over the competition. Since its launch, the network has become a hub of activity, spearheading exciting innovations in decentralized finance (DeFi), NFTsmetaverse and games
Trackers in mid-January 2023 Express that the total value locked (TVL) in Ethereum is $26.88 billion, which represents more than half of the assets locked in DeFi. The fall in TVL reflects the fall in ETH prices in 2022.
In essence, Ethereum dominates with DeFi activity over the Binance Smart Chain (BSC), at less than a quarter of the TVL of the leading platform, at $4.65 billion.
Despite this dominance, Ethereum’s scaling problem directly impacts Gas fees. As demand increases, gas fees fluctuate, generating up to $50 on this blockchain to post a simple transaction. Smart contract implementation costs much more, sometimes over $80, when the network is congested. By way of illustration, the average transaction fees on Ethereum outstanding to $0.63 on January 17. However, on May 1, 2022, this figure was over $23.
Ethereum’s layer 2 protocols are part of scaling attempts by developers to relieve the mainnet. By routing transactions off-chain, Layer 2 solutions can help scale Ethereum but more importantly reduce gas fees by several magnitudes.
In the layer 2 realm of Ethereum, Arbitrum and Optimism dominate. According to L2Beat StatisticsArbitrum and Optimism had TVLs of $2.52 billion and $1.45 billion, with a market share of 52% and approximately 30%, respectively.
Riding on network effects
Although the associated fees in Arbitrum, Optimism, and all other Layer 2 networks are negligibly low, these protocols can benefit based on activity. For every Arbitrum and Optimism smart contract transfer or execution, there is an associated fee.
Arbitrage and Optimism load $0.11 and $0.23 for simple transfers, payable in ETH. If a smart contract is implemented, the fees increase to $0.30 and $0.35. They make more fees as more users implement smart contracts or initiate transfers. The accumulation of these amounts over months translates into a good profit for the operator of the protocol.
In 2022, Ethereum’s Layer 2 TVL fell by approximately 40%, from $7.45 billion to $3.3 billion in July 2022. Outflows were lower compared to Layer 1 DeFi. recover, Layer 2 carriers are likely to see higher revenue as users move assets to dApps launched on these low-cost and scalable protocols.
Featured image from Flickr, Charts from TradingView.com.
