Arbitrum has emerged as a major competitor in the Ethereum network’s layer-2 scalability solutions, with significant total value locked (TVL) and notable activity. However, between September 9 and September 11, the price of the Arbitrum token (ARB) experienced a sharp decline of 14.5%, marking its lowest point in history.
Investors are now eagerly seeking insight into the factors driving this move and questioning whether Arbitrum still has a competitive advantage, especially considering that despite the performance of the ARB token, the network TVL exceeds $1.6 billion.
It is worth noting that last week was a challenging week for most cryptocurrencies, but among Ethereum scaling solutions, none experienced a decline exceeding 9%, except Arbitrum.
The ARB governance proposal carries questionable benefits
One source of potential concern stems from the absence of published evidence of fraud since the launch of Arbitrum mainnet in August 2021. Offchain Labs confirmed this information to Cointelegraph on September 4. However, the developers have explained that this situation is in line with the expected operation of the system, as validators with malicious intent risk losing their entire stake. As a result, this data is unlikely to have had a significant impact on prices in the past week.
An additional factor that may help explain the recent price drop relates to the governance proposal of the decentralized autonomous organization (DAO) Arbitrum. The first proposal, posted on September 2, aims to allocate up to 75 million ARB tokens from the project treasury to meet “short-term community needs” for active decentralized applications (DApps) in the ecosystem. However, even if approved, this allocation represents less than 2% of DAO’s treasury holdings and is unlikely to trigger a price correction for the ARB token, regardless of one’s stance on the proposal.
Another governance proposal that received attention was introduced on September 9 by PlutusDAO. This proposal aims to return tokens from the DAO treasury to ARB holders through the activation of the staking mechanism, creating a genuine yield for participants, which can involve up to 2% of the total supply annually. However, some investors view this inflation approach as unnecessary and argue that it only puts pressure on prices.
I’m not a VC so I will “benefit” from this but..
dilution through inflation would be the PVP proposal, instead of trying to provide more value to the ecosystem, it would instead take advantage of other ARB holders.
Arbitrum is in a good position overall, one of the most popular chains, large… https://t.co/IDpcdQfQHT
– PSY (@PSYTWEAK) September 10, 2023
As highlighted by user Psy on the social network
In addition to token governance, there are also concerns regarding liquidation risks on centralized and decentralized exchanges that offer leveraged trading. For example, Lookonchain has observed a whale withdrawing ARB tokens from lending platform Aave and transferring some to Binance.
A long whale $ARB on #Ghost is selling $ARB to pay his debts.
Over the past 5 hours, whales have attracted 5 million $ARB ($3.85 million) from #Ghost and deposited 3.8M $ARB ($2.93 million) to #Binance.
And the whale currently holds 8 million $ARB ($6.16 million).https://t.co/HpuZnHbap4 pic.twitter.com/qduKeWC4ul
— Lookonchain (@lookonchain) September 11, 2023
The challenge of this analysis lies in the ambiguity of cause and effect. Typically, long leveraged positions are forced to close when the token price has fallen, not vice versa. This underscores the importance of investors examining Arbitrum’s activity and deposit trends over the past few months, which could potentially drive its recent price performance.
Decreased network activity is the most likely cause
Arbitrum’s TVL has declined to $1.67 billion, marking the lowest level since mid-February.
The 25% decline over the past two months raises some concerns, mainly indicating a loss of investor confidence. This decline has the potential to reduce liquidity and weaken the overall viability of the project. Additionally, this may discourage new participants, thereby hindering network growth and adoption.
Next, it is important to check the number of active addresses within the network’s top DApps.
There was a noticeable decline in 30-day active addresses, even among established DApps such as Uniswap, 1inch, Radiant, SushiSwap, and GMX. Therefore, when considering the decrease in TVL along with reduced user activity, it is clear that there is a substantial decrease in demand for the network. While it’s difficult to pinpoint a single cause for this move, we can speculate that rival chains like zkSync Era and Coinbase’s Base may have contributed.
Data shows that Arbitrum’s correction of 14.5% appears to be the result of a combination of investor dissatisfaction with its governance mechanisms and sluggish network activity, despite offering much lower fees compared to Ethereum. Unless there is an increase in transactions and expansion of its user base, it is unlikely that ARB will be able to close the price performance gap with its competitors.
This article is intended for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are the author’s alone and do not reflect or represent the views and opinions of Cointelegraph.
