Arbitrum’s Layer 2 solution contributes to the expansion of the Ethereum ecosystem, according to Pantera Capital.

As stated in the most recent Pantera Capital Blockchain Letter, the cryptocurrency market may be on the verge of recovery following a challenging bear market in 2022, with the prominent Ethereum layer 2 solution Arbitrum emerging as a significant beneficiary.

The letter from Pantera highlights that,

“Arbitrum is a major share taker within the Ethereum ecosystem, and Ethereum, in turn, has been a substantial share taker across the entire crypto landscape.”

Additionally, Pantera reports that Arbitrum has been solely responsible for 100% of the incremental increase in Ethereum’s transaction volume this year, while other layer 2 solutions and competitors have remained relatively stagnant.

Pantera’s fundamentals-based investing.

Focusing primarily on fundamentals-based investing, Pantera recognizes the significant challenges Ethereum has faced due to its scalability limitations. The letter reflects that layer 2 solutions like Arbitrum are emerging as preferred options, offering quicker and more cost-effective transactions while maintaining Ethereum’s strong security features and extensive application support.

According to Pantera’s analysis, Arbitrum’s key advantage lies in its ability to process transactions that are 40 times faster and 20 times cheaper than the base Ethereum layer. This advantage has driven Arbitrum’s substantial growth, both in absolute terms and relative to its competitors, positioning it as one of the fastest-growing layer 2 solutions on Ethereum and allowing it to capture a significant share of Ethereum’s transaction market over the past year.

Pantera observes that Arbitrum has consistently increased its transaction volume despite a bearish trend in the crypto market this year. Citing available data, the letter indicates that Arbitrum has played a crucial role in the growth of the Ethereum ecosystem this year, contributing to 100% of its incremental growth.

Arbitrum growth and expanding user base.

The letter further examines the factors driving Arbitrum’s growth, highlighting its expanding user base and the subsequent increase in developers eager to create new applications on its platform. This positive feedback loop, as noted by Pantera, is essential for Arbitrum’s ongoing development. However, the firm emphasizes that the primary concern for fundamental value investors lies in the potential revenue generated from this rising activity.

Enhancing its uniqueness in the market, Arbitrum is recognized as a profitable protocol in Pantera Capital’s assessment. The platform generates revenue by collecting transaction fees on its network, aggregating these transactions into larger bundles, and submitting them to the Ethereum base layer. This process results in a gross profit of approximately 10 cents per transaction for Arbitrum.

With a product that has achieved market fit and a sustainable unit economics model, Pantera Capital considers Arbitrum’s valuation to be defensible. According to Pantera’s letter, the protocol has consistently grown quarter-over-quarter since its inception, with transactions approaching 90 million per quarter and revenue reaching $23 million in Q2. The gross profit for the same period was nearly $5 million, translating to an annualized $20 million.

The letter illustrates that Arbitrum, with around 2.5 million monthly average users and approximately 350 million transactions annually, is nearing a $100 million annual revenue business, generating about $50 million in standardized gross profit.

Arbitrum market capitalization.

In terms of market capitalization, Arbitrum currently has a figure of $5 billion based on issued shares. This presents an attractive opportunity for Pantera, especially when compared to the market capitalizations of other layer 1 and layer 2 protocols, given Arbitrum’s superior usage, revenue, and profit metrics.

From a growth and valuation standpoint, the letter suggests that Arbitrum could potentially scale to a transaction run rate exceeding 1 billion at 10 cents profit per transaction over the next year. This forecast implies around a hundred million in earnings and, at a $5 billion market capitalization, suggests a valuation of roughly 50 times forward earnings. While this may seem high on an absolute basis, Pantera views this valuation as reasonable for an asset that continues to grow at triple-digit rates.

Pantera Capital’s Blockchain Letter portrays Arbitrum as a rapidly advancing protocol that has established a product-market fit, shows profitability, and is valued reasonably in relation to its growth, other crypto assets, and traditional financial instruments.

The post Layer 2 solution Arbitrum drives Ethereum ecosystem’s growth, suggests Pantera Capital appeared first on CryptoSlate.