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Ethereum Layer 2 expected to witness massive growth in 2023

Since December of 2022, the price of Bitcoin has been fluctuating around $16,500, returning to the price levels of November 2020. Although America and Europe are showing symptoms of an economic slowdown and signs of a possible recession in the future, other data indicate that the American economy is still very strong. The market believes that there is still sufficient evidence to suggest that the Federal Reserve will maintain its hawkish monetary policy.

Although the Federal Reserve has slowed its rate of interest hikes down to 50 basis points, it has done little to lower the inflation rate to its target of 2%. Due to this, the market anticipates that the interest rate peak will be maintained for at least two quarters. For now, according to IRD (interest rate derivative) traders, the interest rate will start peaking in March, and will be sustained until November of 2023. Faced with this monetary stance, the liquidity of the crypto market will likely continue to deteriorate and wither, which means that the value of cryptocurrencies is unlikely to see a resurgence soon. 

As of writing, America’s 3-month bond yield is at 4.37% and the 6-month bond yield is at 4.76%, which is higher than some of the yields for staking popular cryptocurrencies. Because of this, a substantial amount of investors have withdrawn funds from the crypto market to invest in the US bond market instead. 

In spite of the bearish market forming, Arbitrum has risen as an anomaly with massive potential. 

In the bearish second half of 2022, many crypto protocols have been facing issues with liquidity runs. However, Arbitrum’s TVL has continued to rebound, and has now stabilized at around USD $1 billion. The number of active Arbitrum wallet addresses also increased from under 30,000 last year to approximately 200,000, which is very impressive under the current market conditions.


Besides growth in users, the trading volume of Arbitrum has seen a massive increase as well, from 5 million units in the first quarter to over 34 million units in the fourth quarter. This is mainly due to the surge in popularity of derivative trading platforms such as perpetual contracts exchange platform GMX and other DEXs, and the introduction of Arbitrum Nitro, which greatly increased throughput and decreased the gas fee, substantially increasing the scalability of Arbitrum.


The collapse of the cryptocurrency market last year started with Terra and spread to many CeFi players, such as 3AC, BlockFi, Celsius, FTX/Alameda. With the United States and other countries pushing the implementation of stricter compliance policies, coupled with more exchanges restricting users from derivatives, it is believed that the trend of users migrating to Layer 2 DEXs will continue. 


It is worth mentioning that Arbitrum has not yet launched its own native token. If we assume that Arbitrum follows the path of fellow Layer 2 solution Optimism, the airdrop of their new token may lead to surges in speculative activity, resulting in a massive increase in liquidity. 


From what we’ve seen so far, Layer 2 is a rare growth point in the entire cryptocurrency ecosystem in 2022. Like the bearish crypto market in 2018, the market will never lack slumps, but there will always be builders in the market, which is why 2023 is anticipated to be an exciting year for Layer 2 solutions growth. 


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