Arbitrum, one of Ethereum’s leading layer-2 scalability solutions, has witnessed a significant drop in its token price. Between September 9 and September 11, the price of Arbitrum (ARB) tokens experienced a sharp decline of 14.5%, hitting its lowest point in history. This decline has left investors questioning the competitive edge of Arbitrum, especially considering its substantial total value locked (TVL) of over $1.6 billion. While most cryptocurrencies experienced a challenging week, none of Ethereum’s scaling solutions encountered a drop exceeding 9%, making Arbitrum’s price slump particularly noteworthy.
One potential reason for concern revolves around the absence of any instances of fraud proof issuance since the launch of the Arbitrum mainnet in August 2021. While this may raise eyebrows, developers have justified this situation by explaining that the system operates in a way that penalizes validators with malicious intentions by risking the loss of their entire stake. Consequently, the lack of fraud proof issuance is unlikely to have had a significant impact on the recent price decline.
Governance proposals from Arbitrum’s decentralized autonomous organization (DAO) have also attracted attention. One such proposal aims to allocate up to 75 million ARB tokens from the project’s treasury to address short-term community needs for active decentralized applications (DApps) within the ecosystem. However, even if this proposal is approved, the allocation represents less than 2% of the DAO treasury holdings, making it an unlikely trigger for the ARB token price correction. Another governance proposal introduced by PlutusDAO seeks to activate a staking mechanism that would return tokens from the DAO treasury to ARB holders, providing a native yield. However, some investors view this approach as inflationary and argue that it exerts downward pressure on prices.
Liquidation Risks and Declining Total Value Locked
Another factor that has raised concerns is the risk of liquidation on both centralized and decentralized exchanges offering leveraged trading. Observations have been made regarding a whale withdrawing ARB tokens from the Aave lending platform and transferring them to Binance. However, it is challenging to establish a clear cause and effect relationship in this scenario, as leverage long positions typically close when token prices have already fallen. To gain a better understanding, investors need to analyze Arbitrum’s activity and deposit trends over the past couple of months, as these factors could have potentially triggered the recent price decline.
Arbitrum’s TVL has witnessed a significant decline, reaching $1.67 billion, its lowest level since mid-February. This 25% decrease over the past two months raises concerns about a loss of investor confidence, which could lead to reduced liquidity and undermine the viability of the project. Additionally, the decline in active addresses within the network’s top DApps, including well-established platforms like Uniswap, 1inch, Radiant, SushiSwap, and GMX, further indicates a substantial decline in demand for the network. While identifying a singular cause for this trend is challenging, it is plausible that competing chains like zkSync Era and Coinbase’s Base have contributed to the decline in demand.
The available data suggests that Arbitrum’s 14.5% correction is a result of both investor dissatisfaction with the governance mechanism and the lackluster activity within the network. Despite offering significantly lower fees compared to Ethereum, unless there is an increase in transactions and an expansion of its user base, it is unlikely that ARB will be able to close the price performance gap with its competitors. Arbitrum must address the concerns surrounding fraud proof issuance, governance proposals, and declining TVL to regain investor confidence and ensure long-term viability in the highly competitive Ethereum ecosystem.