As Arbitrum just marked the first anniversary since the launch of its nativer token ARB on March 23rd, 2023, a striking discrepancy emerges in the market dynamics between Optimism and Arbitrum. Despite Arbitrum boasting superior metrics, ARB's price consistently hovers at approximately half that of Optimism. Is the market overvaluing Optimism? A closer examination reveals that the OP token price may reflect not just Optimism itself but also the performance of the broader OP Stack. When factoring in the substantial contribution of Base, the revenue multiple (Price-to-Sales ratio) leans lower than Arbitrum, suggesting that OP is potentially less overvalued.

This article covers the period from March 23rd, 2023, to March 23rd, 2024, with snapshots taken on March 23rd, 2024. When comparing the OP Stack with the Arbitrum ecosystem, all chains operating within each respective ecosystem should be considered. However, among these chains, Base emerged as the primary contributor in terms of daily transactions, Total Value Locked (TVL), and revenue. Hence, the present evaluation only considers the impact of Base on the OP Stack.

Metrics Comparison

Token price

As mentioned in the introduction, the price of OP has been constantly higher than ARB, and the difference has widened since December 2023. Since then, OP has maintained almost double the value of ARB. At March 23, 2024, OP price was $3.41 while ARB was $1.60.

Circulating supply

(at March 23rd, 2024)

As a reminder, Optimism launched its native token OP on May 31st, 2022, while Arbitrum launched ARB almost a year later, on March 23rd, 2023. Circulating supply changed when Optimism unlocked 387 million tokens on May 31st, 2023, about 9% of the total token supply. The unlock raised the circulating supply by a massive 114%. Similarly, on March 16th, 2024, Arbitrum unlocked 1.1 billion ARB tokens. The amount is around 76% of the circulating supply. As of March 23rd, 2024, the circulating supply is the following:

• OP: 1,006,141,600 (23.43% of the total and max supply)

• ARB: 2,653,939,384 (26.53% of the total, but not of the max supply, which is uncapped).

Market Cap

(at March 23rd, 2024)

As a result of the recent massive unlock of ARB, Arbitrum’s market cap is currently higher than OP’s, despite the ARB token price being about half of OP's.

• OP market cap (at March 23rd, 2024): $3,458,387,903

• ARB market cap (at March 23rd, 2024): $4,241,023,327

Fully Diluted Market Cap

This metrics, which represents the market cap if the max supply was in circulation, so price*max.supply, is similar for the two blockchains. Since ARB doesn’t have max. supply, total supply is used instead:

• OP: $14,663,018,349

• ARB: $16,004,000,000

To sum up, Optimism has been performing much better in terms of valuation (token price and market cap). Does this find justification in its superior metrics?

Daily transactions volume

Base's dramatic increase in the number of daily transactions (over 3x increase, from an average of 400k to over 1.5 million) reflects rapid adoption growth. However, Arbitrum has maintained a similar level of activity throughout the whole period, and only when considering the OP Stack as a whole can Optimism surpass Arbitrum.

Total Value Locked (TVL)

When considering TVL, Arbitrum has been able to maintain a consistent and considerable edge over Optimism, Base, and the OP Stack as a whole.

Interestingly, it seems that Arbitrum’s total TVL has been increasing while Optimism’s has been slightly decreasing in favour of Base. A hypothesis can be made that Base has been ‘cannibalizing’ market share from Optimism.

Ecosystem

When examining the ecosystems developed around these two chains, it's important to consider both the number of projects and protocols launched on each chain, as well as the number of additional chains launched within their respective stacks. Arbitrum Orbit highlights the potential for launching L3 chains settling on Arbitrum, whereas the OP Stack enables projects to launch L2s united in the so-called ‘Superchain’ and settle directly on Ethereum.

Number of projects

As of March 23rd, 2024, DefiLlama reported 566 protocols built on Arbitrum, 223 on Optimism and 238 on Base. Even summing up Optimism and Base, Arbitrum still leads in the number of protocols and apps built on it.

Arbitrum Orbit vs OP Stack

A major winning point for Optimism (actually, the OP Stack) is the number and quality of projects launching an L2 chain, which drives additional monetary and branding value to the OP token. While Base and other L2 chains do not utilize OP as their native gas token, the revenue generated by their sequencers is distributed to the Optimism Collective to support OP RPG Funds. Notably, Base has committed to allocating 15% of its revenue to the Optimism Collective. It’s interesting to note that while Arbitrum hosts more projects in terms of apps and protocols, the OP Stack has attracted more projects that are willing to launch a semi-independent chain.

Revenue

Looking at the revenue generated by the OP Stack (Optimism and Base), it closely mirrors that of Arbitrum. While Base may have diverted a portion of transactions from Optimism (as evidenced by the Daily Transactions Volume section), it's reasonable to claim that Base had a positive overall impact on the revenue of the OP Stack.

Prior to the launch of Dencun, Arbitrum maintained a significant margin advantage, implying that the costs associated with Optimism and Base were higher than those of Arbitrum (Optimism even experienced several days of negative margins). However, following the deployment of Dencun and ArbOS (both of which had the effect of lowering fees), this trend changed: Arbitrum's L2 fees (and subsequently its revenue) notably decreased, thereby reducing the margin (calculated as L2 fees minus L1 costs) and margin percentage (calculated as (L2 fees minus L1 costs) divided by L2 fees).

Revenue Multiples or Price-to-Sales (P/S) Ratio

Revenue multiples are a type of valuation metric that compares a company's market value to its revenue. They are calculated as Market Cap (the current price per share multiplied by the total number of outstanding shares) divided by Total Revenue in a selected period, typically a year. A higher ratio typically indicates that the company is being valued more highly by the market compared to its sales revenue, suggesting potential overvaluation. Conversely, a lower ratio may indicate possible undervaluation. Various factors, including future growth prospects, market sentiment, and competitive advantages, might influence perception and hence the P/S ratio.

P/S Ratio Applied to Blockchains

This type of valuation model is equally applicable to blockchains, given their nature as platforms that offer a product (blockspace), generate revenue (users’ fees), and are represented in the market by their shares (tokens).

These are the P/S ratio values for Optimism, OP Stack (Optimism and Base), and Arbitrum, for the period considered:

• P/S ratio for Optimism: 75

• P/S ratio for the OP Stack (Optimism + Base): 47*

• P/S ratio for Arbitrum: 56

*The price is OP token price, and the revenue is the combined revenue of Optimism and Base over the considered period.

Optimism's high P/S ratio of 75 may seem to suggest that the market has placed a premium on its revenue compared to its sales. Conversely, Arbitrum's P/S ratio of 56 indicates a somewhat lower valuation in relation to its sales, possibly reflecting different investor sentiments or growth prospects. From this reading, it seems that the valuation of ARB more closely matches the performance, while OP may be overvalued. This was probably the case until the launch of Base.

When factoring in Base as a contributor to the OP Stack, the scenario is reversed. The combined P/S ratio for the OP Stack drops to 47, signalling that Base considerably influences the overall valuation. This suggests that investors perceive additional value in the combined ecosystem offered by the OP Stack, leveraging the synergies between Optimism, Base, and the other L2s that chose this infrastructure. When looking at the broader picture, the OP token's price currently appears less overvalued compared to ARB.

In addition to comparing different blockchains, examining the Price-to-Sales (P/S) ratios of these blockchains alongside traditional sectors of the economy proves to be intriguing. For instance, industries such as Biotechnology and Software often exhibit high revenue multiples due to their substantial growth prospects and significant role in fostering innovation. Biotechnology sectors, for instance, have demonstrated multiples as high as 17.75. Among large tech companies, Amazon boasts the lowest P/S ratio, just above 3, while Alphabet and Apple are both hovering around 6. Meta's P/S ratio sits slightly above 10, while Microsoft's around 13. NVIDIA stands out with a much higher P/S ratio of above 35, closely resembling the 47 of the OP Stack. This similarity suggests that digital infrastructure plays a pivotal role in facilitating a diverse range of digital companies, products, and services, thus justifying their relatively higher valuation metrics. Nevertheless, other microchip manufacturers like Qualcomm and Intel present significantly lower P/S ratios, approximately 5 and 3, respectively. This contrast underscores the nuanced nature of revenue multiples and underscores the importance of considering multiple factors when evaluating valuation metrics.

The significant disparity in revenue multiples between these rollups and traditional companies may stem from the fact that blockchains function more akin to infrastructure rather than individual entities or products. Infrastructure benefits from what could be described as a "double network effect". Essentially, most decentralized applications (dApps) and projects launched on a blockchain thrive on network effects: as more users engage with the platform, its attractiveness increases, leading to further user adoption (first order of network effect). In the same way, as more projects and dApps decide to build on a blockchain, others are incentivized to follow suit, attracted by potential synergies and benefits, such as deeper liquidity (second order of network effect).

In the case of rollup-as-a-service platforms like Arbitrum and Optimism, there may even be a third layer of network effects at play. Beyond the aforementioned dual network effects (users and dApps), there exists a third dynamic where the more blockchains are built on each respective stack, the greater the likelihood that additional projects will choose to do the same in the future. This triple network effect can catalyze exponential revenue growth, providing justification for a higher Price-to-Sales (P/S) ratio.

Conclusion

The analysis of market dynamics between Optimism and Arbitrum reveals a fascinating dissonance. Despite Arbitrum showcasing superior metrics in various aspects such as transaction volume, project proliferation, Total Value Locked (TVL), revenue, and profitability compared to Optimism, the price of ARB consistently lags behind that of Optimism, prompting speculation about Optimism's potential overvaluation. While at a first glance this seems to be the case, factoring in the significant contribution of Base reveals a different and more nuanced picture, one where the P/S for the OP Stack is lower, and hence possibly less overvalued, than for Arbitrum.

Furthermore, comparing the revenue multiples of these blockchains with traditional sectors of the economy underscores the unique dynamics of blockchain platforms as infrastructure rather than individual entities. The triple network effects enjoyed by rollup-as-a-service platforms like Arbitrum and Optimism may account for some of these disparities, although further research would surely help shed a brighter light on this topic.

As a final note, it's worth noting that since the conclusion of the observed period, Base has undergone significant growth in terms of daily transactions, TVL, and revenue. As a result, it's likely that the revenue multiple for the OP Stack has already shifted. A forthcoming update will provide insight into these changes.