This research evaluates the long-term sustainability of sequencer net profit, excluding potential economic contributions from Timeboost. The analysis begins by identifying the key protocols and verticals driving sequencer revenue and assessing their current growth trajectories.
We then examine the sequencer's cost structure, with a particular focus on blob fees and Layer 1 settlement fees, evaluating how these costs are expected to evolve and their potential impact on sequencer margins.
Furthermore, we assess the influence of technological advancements, such as Ethereum upgrades and the migration of DeFi protocols to dedicated Layer 2 solutions, on sequencer profitability.
Finally, the report outlines strategic recommendations for Arbitrum to enhance its incentive framework and marketing strategy, positioning the platform to maximize future revenue potential. Projected revenue and profit figures are provided to illustrate the sequencer's potential long-term economic stability based on the comprehensive analysis.
The revenue of the Arbitrum sequencer is highly concentrated, with 46.4% generated from the top 10 highest-earning days since the Dencun upgrade. The revenue structure has shifted significantly, with DeFi's contribution declining from over 50% in late 2023 to 20.4% year-to-date. In contrast, CeFi, primarily from MEV/bot transactions, now accounts for 21.8% of total revenue.
Future revenue projections face several challenges. Arbitrum's market share has decreased from 22% to 10% due to rising competition, which affects profit margins as blob costs increase without a corresponding growth in transaction volume.
Key factors influencing future revenue include the migration of major DeFi protocols to their own L2 solutions, which may reduce fee generation, and increasing L2 interoperability, which could either boost transaction volumes or heighten competition.
Sustainability hinges on Arbitrum maintaining its competitive advantages, including its leading position as the L2 with the highest Total Value Secured ($14.2 billion) and its dominant share in DeFi volumes. Success will require a strategic focus on emerging verticals and the retention of key protocols through effective incentivization.
To maintain sequencer profitability, Arbitrum must focus on DeFi protocol retention and growth through targeted incentives. Analysis indicates that losing DeFi protocols to independent Layer 2 solutions could reduce net profit by 71% within 3 years.
This goal can be achieved by aligning protocols' interests with Arbitrum's through strategic use of sequencer and Timeboost revenue as incentives. The ecosystem can be further strengthened by onboarding real-world asset projects and attracting niche projects that provide competitive advantages.
For the emerging DeFi AI agent sector, we recommend increasing incentives to establish a foundation for agents that provide real utility and enhance existing DeFi offerings. Strategic collaboration with Virtuals Protocol for AI agents and expansion of the Trailblazer AI Grant Program will secure a first-mover advantage in this sector.
Gaming presents another promising vertical to enhance sequencer revenue and reduce DeFi dependence. Arbitrum should capitalize on its existing infrastructure through efficient cross-chain interoperability and targeted liquidity incentive programs, establishing itself as the primary liquidity hub for in-game assets.
According to our projections, investing in and developing these verticals could more than double the sequencer's net profit over the next 3 years.
We recommend against major investments in memecoins and DePIN, given the high barriers to entry and Arbitrum's relative market size disadvantage compared to competitors. Instead, efforts should focus on developing a dedicated memecoin launchpad.