Ethereum’s layer 2 scaling solution, Arbitrum, capable of dramatically increasing transactions per second by bundling them off-chain into so-called roll-ups, is seeing explosive growth. The daily fees generated by the protocol hit their highest level since June 2022 on Thursday, at nearly $300,000. Arbitrum thus ranks seventh among the crypto protocols generating the most cash flows, according to Cryptofees.info.
This sharp increase in fees generated parallels the rise in the number of daily transactions taking place on the protocol, which now exceeds one million per day. This increase made headlines recently when Arbitrum transactions managed to outpace Ethereum network one-day transactions earlier this week. At the start of the year, Arbitrum’s daily trades were in the range of 200,000.
Daily active addresses, considered a good indicator of the number of daily active users on the protocol, have also hit new highs, surpassing 130,000 recently. They were less than 50,000 at the beginning of the year.
The number of unique addresses registered on the protocol continues to show impressive growth, and is expected to soon exceed 3 million.
“Arbitrum is seeing aggressive growth in terms of users/active users/transactions/revenue, driven by wider adoption and more DeFi apps and on-chain gaming,” commented analysts at Bernstein in a note published earlier this week. Bernstein noted impressive upside on a number of Arbitrum-based decentralized exchanges, including GMX.
GMX recently surpassed $100 billion in trading volume, according to DeFi Llama, and most of it took place on Arbitrum. On Wednesday, GMX’s daily trading volumes on Arbitrum hit their highest level last December, at over $23 million.
Arbitrum has a total trade value locked (TVL) in decentralized finance (DeFi) protocols of around $3.0 billion, making it the fourth highest TVL blockchain, according to DeFi data. Llama. Indeed, Arbitrum, as well as its counterpart OptimismEthereum’s Layer 2 scaling protocol, are the only two platforms to see significant TVL growth in the past month.
Due to this recent growth, Arbitrum’s market share across all TVL in DeFi protocols has grown to around 3.6%, from less than 2.5% last month, and from only around 1 .0% last year.
How Arbitrum’s Growth Benefits Ethereum
The recent growth and increasing success of layer 2 scaling protocols like Arbitrum, Optimism, and Polygon should be viewed as positive for the Ethereum network. Indeed, they fix two of the biggest drawbacks of the Ethereum network, namely its low transaction throughput and high network fees.
While the Ethereum network only has the capacity to process 14 transactions per second, Arbitrum can process around 40,000. Other existing Layer 2 scaling solutions can handle similar loads. Ethereum, as outlined in the protocol roadmap, will undergo a number of upgrades in the coming years, including sharding, which is expected to significantly increase the network’s TPS.
But the demand for scalable blockchains is currently strong, as wider adoption of crypto continues to unfold. Ethereum Tier 2 scaling solutions can compete with Ethereum’s more centralized but scalable Tier 1 competitors (like Solana) to host decentralized applications (dApps) and projects, allowing to maintain these projects in the so-called Ethereum sovereignty zone, even if they are not built directly on the Ethereum blockchain.
And transactions on Tier 2 solutions like Arbitrum cost just pennies each, solving another Ethereum network problem that might have tempted Ethereum users to try other chains. At the time of writing, the average transaction cost on the Ethereum network is around $2.0 each.
Since they use the underlying consensus layer of Ethereum to settle transactions, when protocols like Arbitrum experience growth, it also directly contributes to the growth of the Ethereum network. So if Ethereum Layer 2 is on fire, it can only be positive for ETH in the long run.
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