Sequencer revenue is heavily reliant on the DeFi ecosystem: The Arbitrum sequencer's revenue is notably concentrated, with 46.4% generated from the top 10 highest-earning days since Ethereum's Dencun upgrade. Apart from the LayerZero airdrop, these revenue peaks are primarily driven by DeFi transactions resulting from crypto market volatility, as users compete to execute liquidations and trading transactions. GMX, Vertex, and Uniswap have contributed over 27% of the fees generated.
Currently, DeFi-related transactions account for 42.8% of total daily gas fee paid on Arbitrum, including both DeFi activities (swaps, lending) and CeFi operations performed by MEV bots. Since the Dencun upgrade, CeFi transactions have grown significantly and now represent 21.8% of total daily gas consumed, overtaking DeFi transactions, which have seen little growth and currently represent 20.4% of total daily gas consumed.
We estimate that DeFi's contribution exceeds 50% when accounting for indirect transactions such as stablecoin transfers and considering that DeFi is responsible for most network congestion.
Sequencer margins are expected to remain under pressure in the mid-term: Blob fees represent the primary cost for the Arbitrum sequencer and have risen faster than revenue due to increased competition from new Layer 2 solutions and the growing market share of Base. Consequently, Arbitrum's gas fee market share has declined from 22% to 10%, while sequencer margins have fallen from 90% in summer 2024 to below 70% currently. These margins depend on Arbitrum's ability to retain market share as percentage of gas consumed.
Blob capacity is projected to double with the Pectra upgrade and increase further with subsequent upgrades. However, given that blob demand has been growing at an annualized rate exceeding 100% since the Dencun upgrade, the anticipated increase in capacity may not sufficiently offset demand.
In the long term, it is challenging to predict the impact of alternative data availability (DA) solutions, such as Celestia and EigenDA, on blob demand and gas prices. While there may be security trade-offs, projects like Fuel and Eclipse have opted for alternative DA solutions. As such, we expect Arbitrum's sequencer margin to fluctuate between the current range of 30%-90% depending on the demand and congestion.
This underscores the necessity for Arbitrum to maintain its level of DeFi transactions to ensure healthy sequencer margins.
DeFi protocols migrating to their own Layer 2 solutions and L2 interoperability pose significant risks to sequencer revenue: The migration of major DeFi protocols to independent Layer 2s is a critical concern for Arbitrum, given its reliance on DeFi activity. Large protocols, such as Uniswap, are incentivized to develop their own Layer 2s (Unichain) to capture a portion of the miner extractable value (MEV) they generate.
Our analysis indicates that DeFi activity is concentrated among three key protocols: GMX, Vertex, and Uniswap. These protocols migrating would have a substantial impact, as it would not only result in lost transactions but also diminish network effects, reduce congestion, and lower the MEV that can be extracted. Notably, MEV bots account for over half of the gas used in DeFi.
Increased Layer 2 interoperability presents an additional challenge. While this development has yet to materialize, we anticipate significant growth in the coming months, making it difficult to fully assess its potential impact. However, we believe it will intensify competition among Layer 2 solutions by removing barriers, leading to traffic migration towards the most competitive protocols and chains.
Conversely, Layer 2 interoperability also presents an opportunity for Arbitrum. If its DeFi ecosystem remains liquid and competitive, it could attract transactions from Orbit and external chains. We expect cross-chain transactions to become a crucial driver of sequencer revenue as interoperability becomes seamless in the coming future.
DeFi Protocol Retention & Growth is key to sustain Sequencer and also TimeBoost Revenue: Retaining and growing DeFi protocols is essential for sustaining sequencer and TimeBoost revenue, particularly in this high-growth sector. Currently, Arbitrum Orbit and Nova account for a small portion of sequencer fees, and this trend is expected to persist, making them unlikely growth drivers in the mid-term.
Our projections indicate that losing DeFi protocols to independent Layer 2 solutions could reduce net profit by up to 71% within three years, primarily due to lower margins and decreased congestion. To mitigate this risk, it is recommended to align incentives through the strategic use of sequencer and TimeBoost revenue to retain key players. Moreover, Arbitrum should be positioned as the liquidity hub for Orbit and external chains, allowing the DeFi ecosystem to thrive through seamless interoperability.
Growing the DeFi AI agents ecosystem will strengthen Arbitrum’s DeFi ecosystem: AI agents are poised to become significant contributors to DeFi revenue through automated portfolio management and agent-to-agent interactions. While their potential contribution is difficult to quantify at this stage—due to their immaturity and current focus on speculative tokens—there is considerable potential. Arbitrum should prioritize grants and onboarding projects like Virtuals to establish the foundation for an agentic economy that can drive long-term sequencer revenue. These AI agents can enhance transaction volumes through automated trading and interactions. With its high Total Value Secured and diverse protocol ecosystem, Arbitrum offers an ideal environment for AI agents. Establishing an early presence in this space can provide a first-mover advantage, attracting additional DeFi projects and further strengthening Arbitrum's DeFi ecosystem
Incentives should prioritize Gaming and Tokenization while avoiding dePIN and Memecoins: Reducing Arbitrum’s reliance on DeFi and developing high-potential verticals is essential. Gaming offers potential for increasing sequencer revenue and diversifying beyond DeFi. Ronin has processed over 1.5M (88% of Arbitrum) transactions since 2024. Meanwhile, tokenization has achieved product-market fit, gaining both institutional interest and adoption. Arbitrum can use its infrastructure to improve chain connectivity and offer targeted incentives to become the liquidity hub for gaming and tokenized assets. This approach is more strategic than pursuing dePIN or memecoins, where Arbitrum lacks first-mover advantages and faces significant competition.
The stability of Arbitrum's sequencer profit is critical to understanding the long-term economic sustainability of the network. Past research conducted has primarily focused on analyzing the Base Fee and its impact on Arbitrum’s sequencer revenue. This research aims to fill that gap by conducting a detailed analysis of Arbitrum’s sequencer revenue and profit across various verticals. This research evaluates the long-term sustainability of sequencer net profit, excluding potential economic contributions from Timeboost and any change to the base fee. 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.