*Note: a SWOT analysis is an evaluation of the fundamental, operational, technical, social, economic, and even to some degree administrative elements of a project. This is not a model to be used for trading purposes. (NFA, DYOR)
Composed of four elements, Strengths, Weaknesses, Opportunities, and Threats, a SWOT analysis framework provides excellent insight for establishing a high-level understanding of the state of a project’s well-being through the lens of a birds-eye view.
It can help formulate decisions around which areas require more attention, set performance goals, and organize a foundational understanding of where a project is headed.
Rarely (if ever) used in crypto, it is time to apply this timeless method of evaluation to the digital asset space.
💪 Strengths (Internal) (Helpful)
1. DAO Governance Structure
Arbitrum heavily emphasizes decentralization. Everywhere, from the website to the docs, to the blogs, and even the AMAs, the word decentralization is lavishly applied. The industry is already well aware that Rollups as a solution, by their inherent architecture, are more centralized; nevertheless, Arbitrum has put a lot of effort towards realizing its progressive decentralization approach by distributing a noteworthy degree of influence over the network to the DAO. Arbitrum DAO controls both public chains, Arbitrum One and Nova.
2. Community Orientation
Community in Crypto is the defacto ultimate asset and metric for gauging the viability/sustainability of a project. At the core of Arbitrum’s success is the extremely loyal community that has sprung up. More than just the quantitative factors, such as passing the million social media followers count, is the quality of that community. Scooping up a lot of members who were displaced during the last bear market cycle, Arbitrum has recruited people who are well-versed and capable of navigating/interacting with Web3. These people, for the most part, have become devout believers in the project by becoming stakeholders via the Airdrop. Subjected to wealth effects, most members have shown a reluctance to dump their positions and instead coordinate to help bolster the ecosystem (users of the ARB airdrop would rather help a Dapp increase its TVL or invest in some early-stage projects building on Arbitrum).
3. First Mover Advantage
Arbitrum was the first layer two/rollup to launch on mainnet back in August of 2021. Being the first on the scene allowed Arbitrum to build the strongest foundation of members, tooling, and influence over the narrative within the scaling sector. As the industry continues to grow, new incoming projects will look to Arbitrum for inspiration and technological solutions, cementing the presence of Arbitrum indefinitely.
4. Sequencer Decentralization
The most sensitive architectural element of rollups that has riled crypto-puritans (decentralization maxis) is the role of sequencers. Sequencers are network nodes that, as the name might imply, organize transactions and control the flow of activity. This kind of power in an economic setting can be worrisome for reasons of MEV; if a single entity is building the chain, they can theoretically dictate what goes when and how. Acutely aware of this, Arbitrum has been careful with its Sequencer design, implementing FCFS (first-come-first-serve) ordering mechanisms for transactions ahead of time. Moving forward, the project plans of further de-risking the ecosystems by decentralizing the sequencer role.
5. Stylus Upgrade
Upgrading its Nitro stack by adding Web Assembly into the mix. One of the fundamental bottlenecks that has long faced the Web3 industry is developer adoption. Of the ~28 million developers globally, crypto’s monthly actives are floating around ~20 thousand, or less than 0.1% of mindshare. A prominent point of friction is the need to learn new languages. Abritum believes that in order to onboard the next 1,000,000 developers, we must reduce the learning curve by allowing for the creation of contracts in any language while not breaking EVM compatibility. By synthesizing the EVM with a WASM-based VM, devs can sidestep having to learn Solidity and just be able to deploy code in Rust, C, and C++. Deploying through the WAVM also offers an order of magnitude of improvement in execution/operational efficiency, allowing for more radical use cases (such as bringing in AI models).
6. BOLD Protocol
Further contributing to its mission of decentralization, Arbitrum is implementing a new validator dispute system to optimize for permissionless validation. Based on an “all-vs-all’ model, BOLD (Bounded Liquidity Delay) will empower any network participant with the right to challenge the correctness of the chain. Ultimately, the objectives of BOLD are to mitigate delay attacks (where malicious entities have the ability to indefinitely postpone resolution by re-triggering the settlement before it completes) and improve safety and liveness. The sheer capability to implement a system like this emphasizes Arbitrum’s qualitative security measurements and sets them apart from other L2s that do not support fraud proofs (yet*).
7. Timeboost Integration
MEV is the notorious art of on-chain extortion, but only for the end users. Thus far, Arbitrum has done a decent job at combating MEV through its FCFS model and lack of mempool. However, MEV has proven to be an important element to address for the profitability of a network. Removing MEV entirely means removing the associated revenue that it could generate. With the implementation of Timeboost, Arbitrum hopes to extrapolate benign MEV (arbitrage and back-ordering) by introducing fast, sealed-bid, priority gas auctions. Similar to what Ethereum currently does, priority gas auctions allow for users to submit extra fees to ensure their transactions are included faster. Sealed Bid means that nobody will actually know any sensitive information about the transactions (existing in a privacy-preserving mempool). So long as this truly does not allow for evil MEV (sandwiching or front-running), then this would be a net benefit to the network operators that can now capture any loose value flowing through the network.
😞 Weaknesses (Internal) (Harmful)
1. High FDV
During Bull Runs, project valuations can reach irrational, psychotic levels. The younger a project, the more economic sense it makes for it to have modest valuations. Launching >11.6 Billion ARB tokens (~11.6% supply) via airdrop, with a unit price of ~$1.20, Arbitrum came to market with a Fully Diluted Valuation of over $12,000,000,000 right out of the gate. Two and a half years into circulation have passed, and the token remains floating around the same place. Going into the next cycle, the already massive capitalization can potentially suppress the upside action.
2. Low Circulating Supply
Deterrant for potential investors that understand the inevitable financial physics that accompanies increases in circulating supply. The lower the circulating supply, the more impactful the near-medium term sell pressure, and the more dilution that is to be expected for existing holders. With over two and half years of history and still a meager ~12.5% supply in circulation, ARB token holders will be deprived of potential gains.
3. Security Council
Arbitrum deserves immense credit for the elegance and sophistication of the solution that it has built. From the technology to the brand to the community, everything is top-tier. However, one sensitive point that should be highlighted is that the Arbitrum ecosystem is still ultimately subject to a ruling class of operators in the form of the Security Council. Regardless of the systematization of DAO governance and the fancy language used to describe the granularities of control, everything ultimately rests in the hands of the Security Council. The council’s authority can circumvent any community/DAO decision and deny upgrades. While this kind of behavior is unlikely, as it is in their best interest to be an emergency-only backup, it still remains a prevalent risk vector.
🧐 Opportunities (External) (Helpful)
1. Layer 3 Orbit Solutions Stack
Reminiscent of Subnets in Avalanche, Parachains in PolkaDot, or hubs in Cosmis, Arbitrum Orbit allows projects to leverage Arbitrum’s functionality and primitives to launch their own custom networks. These networks are considered to be “Layer 3” in the sense that they reference Arbitrum as their “Base Chain.” These Networks are independent of any Arbitrum DAO influence and can be configured to operate with their own ERC-20 as the native gas token. While the direct value feedback to $ARB itself is unclear, the costs of setting up and posting data back to Arbitrum is a baseline benefit.
2. Coming-To-Market via Airdrop
Operational on mainnet for roughly ~2 very bearish years before the launch of its token, Arbitrum spent time building infrastructure, relationships, and community at a time when the entire market seemed bleak. Ultimately, launching its $ARB token into painful lows in crypto markets in March of 2023, Arbitrum became one of the few positive events that built up a hub of people buzzing about the future of crypto again. By opting for such a path, Arbitrum has become a foundational marker in the timeline of crypto history, a marker that likely cannot/ will not be removed.
3. TVL Leader
Floating around ~8 Billion USD, Arbitrum has by far the most total value locked in its network of all other L2s. In second place is Optimism, which has half (~4 Billion in TVL). TVL is a reflexive metric, meaning that as TVL grows, it becomes more attractive for future TVL to join in. Having the highest TVL inadvertently also means that other networks find you much more desirable for integrating with in order to tap into your liquidity reserves. Moreover, at a time when TVL across the industry was collapsing, Arbtitrum seemed immune, attracting ~6 billion USD, growing over >175%.
4. Support from Ethereum Ecosystem
Hosting over 521 applications (and growing), Arbitrum has attracted all of the major Ethereum Dapps, Uniswap, Sushiswap, Aave, 1inch, Gelato, and so on. As time moves on, Arbitrum will be able to benefit by providing for applications built natively on top of it, as well as, enjoy the benefits of applications built on Eth in the future.
😳 Threats (External) (Harmful)
1. Optimistic Transaction Model
Rollups come in two general flavors, Optimistic or ZK (also sometimes called validiums). Being at such an early stage in rollups, it is nearly impossible to predict which model would ultimately prove best, which one will be the most widely adopted, or which would provide the ideal techno-economic environment. While it is likely that there will be room for both (and even potentially new, yet-to-be discovered) options, it is likewise possible that some critical issues arise with the Optimistic model, such as a subtle way to squeeze invalid activity under the radar or causing indefinite network halts through engaging in “challenge periods,” which in turn could render the entire architecture of Arbtrium sub-optimal. To be fair here, this threat universally applies to every project that is leveraging an optimistic transaction scheme.
Arbitrum is a triple-A grade project.
The leading Ethereum L2 Rollup by every measure.
Many of the points about Arbtirum have dual implications, such as the presence of the Security Council, which can have arguments on both its positive and negative implications. However, the space is still so young, lacking any long-term data to prove the merits of any independent design, that the accuracy of any assumption is hard to ascertain.
From every angle, economic, social, and technological, Arbitrum checks the boxes. High levels of adoption and growing, new native ARB applications, such as GMX and Gains Network gaining traction, Google Cloud joining on as a validator in the DAC (Data Availability Committee), positive network wealth effects, active fraud proofs, the list of positives are substantial.
With any new innovation comes a degree of tradeoffs.
Scaling has been discussed for nearly as long as blockchain has existed. Layer 2s have been discussed for a few years, but rollups as a technology have only now begun to seep into the foundation of the crypto industry.
Arbtrium is a valid solution that holds the promise of solving one of crypto’s greatest bottlenecks.
If there had to be a comparative drawn between Web2 conglomerates and Web3, then Arbitrum feels like the equivalent of a Microsoft.
Centralization continues to be at the core thesis of crypto and Web3. The promise of a sovereign digital economic system that radically shifts risk models away from governments and empowers users with full control over their money (and data), drives innovation and imbues the fighting spirit into this nascent industry.
Without a doubt, it is important and must remain the core tenet, but the very definition of decentralization remains opaque. Arbitrum is doing an incredible job at balancing just enough efforts and conversation about decentralization as they are at understanding that not everything must be decentralized. The very ability for a project like Arbtirum to exist is decentralization in action. If somebody does not like it, they are free to go build their own competing network. When in an environment of 10,000 centralized entities, the environment itself becomes decentralized.
Thank you so much for reading,
I hope this serves you well on your journey.
Live long and prosper 🥂