Optimism Price Rise Triggers Ethereum Layer 2 Resurgence but on-Chain Data Sides With Arbitrum
Will Optimism Lead Ethereum Layer-2s in May? | Credit: Veronica Cestari
Key Takeaways
- Ethereum Layer-2 fees have fallen dramatically since Ethereum’s Dencun upgrade.
- In scaling protocols, they are the lowest in Arbitrum, followed by Optimism and Polygon.
- OP has performed the best in April out of the three. Can this momentum continue in May?
The Ethereum Layer-2 category has been the best performing one since the April 15 bottom, almost increasing by double digits. This could be a delayed reaction to the reduced fees from the Ethereum Dencun upgrade.
OP, ARB and MATIC are the best performing Layer-2s. They have differing on-chain data relating to transaction fees, total value locked and revenue. Additionally, the short-term price action since the bottom differs in all three. Which will be the one to perform the best in May?
Which Category Performs the Best?
April has been a bearish month for the cryptocurrency market, a resumption of the bearish trend starting in March. On April 13, numerous altcoins bounced significantly, and some have created higher lows, in what could be the first step of a bullish trend reversal.
An analysis of several different categories since the recovery shows that Ethereum Layer-2s have performed the best, increasing over 8%. Decentralized Finance (white), Liquid Staking (green) and Layer 1-s (blue) closely follow them.
So, it seems the Ethereum ecosystem is having a resurgence. With that in mind, it is understandable that Layer 2-s are performing well since the Dencun Upgrade greatly reduced their transaction fees. Also, Token Terminal noted that ETH has finally become profitable after nearly 10 years of existence.
Interestingly, AI and Gaming tokens, which have had much fanfare in the current market cycle and previously performed admirable were the worst performing ones. Specifically, AI tokens plunged 22% since April 13.
Since the temporary bottom, OP is the clear leader. This is despite a token unlock on April 29. MATIC and ARB are the other ones with a positive performance, while IMX, MNT and STRK have fallen. STRK (white) is the worst performer out of the six, having fallen 16%.
Diving Into the Layer-2 On-Chain Data
ARB and OP are very similar protocols, since they use optimistic rollups to help Ethereum scale. Polygon also shares similarities, but it uses a Zk-Rollup instead. When it comes to transaction costs, OP and ARB are more cost-effective than Polygon.
Even though Polygon fees have dropped dramatically since the Dencun upgrade, those of Optimism and Arbitrum have decreased to nearly zero. More specifically, a transaction on Polygon costs $0.129, one in Optimism $0.025 and one in Arbitrum $0.006. Nevertheless, they all pale in comparison to the $1.53 of Ethereum.
Just based on the Layer-2 transaction fees, it would make sense that decentralized exchange (DEX) volume is the lowest in Polygon. However, this is not the case. Rather, while Base is leading, Arbitrum is second, Polygon third and Optimism is fourth. So, the higher fees in Polygon are insufficient to discourage users from interacting with DEXes built on it.
Arbitrum Outpacing Optimism
An interesting observation is that Arbitrum (blue) is completely outpacing Optimism (red) in profit. It took the lead in March 2023, and has not let up since. This is because of the launch of the protocol’s native token, ARB, during the time.
In Arbitrum, the protocol that gives the most revenue is the decentralized exchange GMX, followed by Stargate and Pendle. Pendle has surged to the top in Total Value Locked (TVL) at $580 million, surpassing Aave in less than a year, showcasing the meteoric rise of the Yield trading protocol.
In Optimism, the biggest revenue is gained from Velodrome, an Automated Market Maker. Synthetix, a protocol for issuing synthetic assets is second. Positions for the two are reversed in TVL. Interestingly, the top 3 protocols on Arbitrum are not exclusive to the Layer-2. In Optimism, Velodrome is exclusive to the chain, though a forked version of it has been released in Base.
So, Arbitrum offers lower fees for protocols available on multiple blockchains, while Optimism charges slightly higher fees for protocols exclusive to Optimism or one other blockchain, like Synthetix on Ethereum.
Which of the Three Will Continue Increasing?
The short-term price movement for OP and MATIC is bearish. This is because since the aforementioned bottom, both have created bearish continuation patterns. ARB has created a symmetrical triangle while MATIC an ascending parallel channel.
While the symmetrical triangle is a neutral pattern, it usually leads to continuation. Since the previous trend is bearish, a breakdown from it is the most likely scenario. Currently, the prices are close to breaking down.
On the other hand, OP is trading inside an ascending wedge. While this is considered a bearish pattern, meaning that a breakdown from it is the most likely scenario, it could be part of a leading diagonal. If this is the case, OP will break down from the wedge, but eventually create a higher low and resume its upward trend to new highs.
So, the price action for OP is more akin to a bottom formation compared to ARB and MATIC.
OP Price Can Lead the Way in May
To conclude, Ethereum Layer-2s have been the best performing category since the April 15 bottom. OP has been the best performer and could continue this momentum in May because of its bullish formation since the bottom. On the other hand, ARB and MATIC can create new lows before eventually starting their bullish trend reversal.
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