Background

This research analyzes the sustainability of sequencer net profit, excluding contributions from Timeboost. It examines key drivers, Arbitrum's competitive positioning, and main risks related to technology and competition. Finally, it explores how these factors may shape Arbitrum's future incentives and marketing strategy.

Current Revenue Structure

• Arbitrum sequencer revenue is concentrated over a small number of days. The top 10 days represented 46.4% of total revenue since Dencun. This revenue is volatile and difficult to forecast as it depends on external factors independent from Arbitrum, such as potential airdrops (Layer Zero) or volatility in crypto markets.
• As a result, we have decided to focus our analysis on the other 53.6% of revenue which is more stable and more linked to Arbitrum's fundamentals.
• Financial use cases (DeFi and MEV/bot transactions also referred as CeFi) comprise nearly half of Arbitrum sequencer revenue. The Dencun upgrade reduced fees, making arbitrage trading more profitable and driving MEV bot activity up 10x. This growth trend is likely to continue with increased L2 interoperability and AI integration.

                                              Source: [growthepie](<https://www.growthepie.xyz/chains/arbitrum>)

Risk and Opportunities

• Arbitrum faces key challenges and opportunities in the L2 landscape. The primary risk stems from DeFi protocols (Uniswap, Ethena, Ondo) launching their own L2s, which could impact sequencer and Timeboost revenue. Additionally, increased L2 interoperability will intensify competition for market share and will force L2s to specialize.
• Arbitrum sequencer has several opportunities ahead. Arbitrum's Universal Intent Engine could drive higher volumes from other chains through interoperability, while reduced fees can help attract users and transactions. The platform is well-positioned to capitalize on emerging sectors like AI agents, and RWA.
• As the leading L2 by Total Value Secured, Arbitrum can build on its strengths. Its mature DeFi ecosystem enables the platform to use sequencer revenue to retain and attract projects and expand the DeFi ecosystem. Vertical specialization provides another avenue for differentiation.
• Key focus areas for its incentives programme should include:
  • Redistributing part of the sequencer and Timeboost revenue to existing projects to maintain network effects.
  • Onboarding more RWA assets to increase MEV potential and transaction volume.
  • Incentivizing niche and innovative projects such as GMX for differentiation.
  • Developing the AI agent ecosystem, which could become a crucial growth driver and a source of competitive advantage for its DeFI apps.

Profit Margin and Cost Structure

• Blob fees represent the largest portion of Arbitrum's costs, particularly during periods of high network activity, surpassing L1 settlement fees as a profitability driver.
• As new Layer 2 solutions enter the market and Base gains popularity, Arbitrum has experienced a loss in market share, resulting in higher blob costs and reduced profit margins. Consequently, the profitability of Arbitrum's sequencer is heavily reliant on maintaining competitiveness and market share.

                                                                   Source: [growthepie.xyz](<https://www.growthepie.xyz/chains/arbitrum>)

• Currently, blobs are operating at full capacity, averaging three blobs per block. The Pectra Upgrade, expected in April 2025, will increase the target number of blobs per block from three to six and the maximum from six to nine, potentially exerting downward pressure on blob prices. However, blob usage has been increasing at an annualized rate of 131% since the Dencun upgrade, suggesting that Pectra may only provide temporary relief in blob fees. Future technical improvements, such as PeerDAS and Advanced DA Scaling, aim to significantly enhance blob capacity and reduce costs.

                                         Source: growthepie.xyz

• In the long term, blob prices are expected to decline due to technological advancements and the emergence of alternative data availability solutions like Celestia and EigenDA. As of January 2025, Ethereum blob prices were, on average, 500 times higher than Celestia's cost for 1 MB of data. This price disparity may constrain the increase in blob gas usage and help balance the market, potentially prompting projects to migrate to modular Layer 2 solutions where they can select their data availability solution and reduce costs.

Disclaimer