In response to the most recent Pantera Capital Blockchain Letter, the crypto market could lastly flip a nook after a brutal bear market in 2022, and main Ethereum layer 2 answer Arbitrum is rising as one of many largest beneficiaries.
As Pantera’s letter illustrates,
“Arbitrum is a large share taker throughout the Ethereum ecosystem, and Ethereum, in flip, has itself been a large share taker throughout all of crypto.”
Furthering this level, Pantera stories that Arbitrum has single-handedly fueled 100% of the incremental progress in Ethereum’s transaction quantity this yr, whilst different layer 2 options and rivals stayed largely stagnant.
Pantera’s fundamentals-based investing.
Principally specializing in fundamentals-based investing, Pantera acknowledges the numerous bottlenecks Ethereum has grappled with on account of its scalability constraints. Reflecting on Ethereum’s predicament, the letter signifies that layer 2 options like Arbitrum are surfacing as most well-liked options, promising quicker and cheaper transactions whereas retaining Ethereum’s sturdy safety measures and wide-ranging software help.
Drawing from Pantera’s evaluation, Arbitrum’s vital edge lies in its capability to course of transactions which can be 40x quicker and 20x cheaper than the bottom Ethereum layer. This superiority has propelled Arbitrum to appreciable progress, each in absolute phrases and in distinction to its friends, making it one of many fastest-expanding layer 2 options on Ethereum and enabling it to grab a considerable proportion of Ethereum’s transaction market share over the previous yr.
Pantera notes that Arbitrum has constantly grown in transaction quantity regardless of a bearish development throughout the crypto market this yr. Citing accessible knowledge, Pantera’s letter reveals that Arbitrum has been instrumental within the Ethereum ecosystem’s progress this yr, contributing to 100% of its incremental progress.
Arbitrum progress and increasing person base.
The letter additional explores the driving components behind Arbitrum’s progress, spotlighting its increasing person base and the following rise in builders eager to construct new purposes on its platform. This virtuous upward spiral, as Pantera notes, is vital to Arbitrum’s continued evolution. Nevertheless, the agency underscores that the pivotal concern for basic worth traders resides within the potential income from this rising exercise.
Amplifying its distinctiveness out there, Arbitrum stands out as a worthwhile protocol in Pantera Capital’s evaluation. The platform generates income by amassing transaction charges on its community, assembling these transactions into bigger bundles, and consigning them to the Ethereum base layer. This mechanism implies a gross revenue of about 10 cents per transaction for Arbitrum.
With a product that has discovered a market match and a viable unit economics mannequin, Pantera Capital deems Arbitrum’s valuation as defensible. Per Pantera’s letter, the protocol has constantly grown quarter-over-quarter since its launch, with transactions nearing 90 million per quarter and income hitting $23 million in Q2. The gross revenue for a similar interval approached almost $5 million, equal to an annualized $20 million.
The letter illustrates that Arbitrum, with about 2.5 million month-to-month common customers and roughly 350 million transactions yearly, is sort of a $100 million annual income enterprise, producing round $50 million of standardized gross revenue.
Arbitrum market capitalization.
Relating to market capitalization, Arbitrum at the moment boasts a $5 billion determine on an issued shares foundation. This represents an interesting prospect to Pantera, notably when in comparison with comparable market capitalizations of different layer 1 and layer 2 protocols, given Arbitrum’s superior utilization, income, and revenue statistics.
From a progress and valuation perspective, the letter suggests Arbitrum might probably scale to a transaction run charge of over 1 billion at 10 cents revenue per transaction over the following yr. This projection implies a few hundred million in earnings and, at a $5 billion market capitalization, infers a valuation of roughly 50 occasions ahead earnings. Regardless of showing costly on an absolute foundation, Pantera considers this valuation cheap for an asset nonetheless rising within the triple digits.
Pantera Capital’s Blockchain Letter presents Arbitrum as a quickly evolving protocol that has discovered a product-market match, demonstrates profitability, and trades at an inexpensive valuation relative to its progress, different crypto belongings, and conventional monetary belongings.
