On July 1, Robinhood Markets (HOOD -6.57%) launched the Robinhood Chain, an Ethereum (ETH -1.56%) Layer-2 (L2) blockchain built on Arbitrum‘s (ARB -2.82%) technology. Nearly three weeks in, the chain already has $257.4 million in total value locked (TVL) — a larger sum than many networks that have been operating for years — and it also cleared $4.5 billion of decentralized exchange (DEX) trading volume in the seven-day period ending on July 20.
At the same time, Ethereum’s price has been rising as a result of a narrative that more activity on Ethereum is good for the coin. In actuality, Robinhood’s dynamic entry into the crypto space is bearish for the second-largest cryptocurrency. Here’s why.
Image source: Getty Images.
The money doesn’t flow to the base chain
First, a technical point. For the purposes of this discussion, Layer-2 networks process transactions off of Ethereum’s main chain, reducing its congestion, much like how a side street shunts some local traffic away from the main boulevard. Then, once the transactions are processed, they’re bundled together to be more efficient, and the package is sent back to the main chain.
In this case, the Robinhood Chain runs on Arbitrum’s Orbit technology stack, and its gas fees are denominated in Ether.
Today’s Change
(-6.57%) $-6.67
Current Price
$94.91
Key Data Points
Market Cap
Day’s Range
$93.03 – $100.08
52wk Range
$63.52 – $153.86
Volume
24.4M
Avg Vol
28.3M
Gross Margin
94.92%
The Orbit-based chain routes 10% of its net protocol revenue back to Arbitrum’s network in a split of 8% to its native token holders and 2% to its ecosystem developers, with Robinhood keeping 90%.
As you may have noticed from the arithmetic, Ethereum’s slice of the fee pie is a rounding error. According to an estimate by Ark Invest analyst Lorenzo Valente, of the $816,000 in cumulative chain fees reported on Robinhood Chain through July 13, only 0.15% ended up flowing to Ethereum, or about $1,538. Arbitrum, on the other hand, got around $80,000 per Valente’s analysis.
So the new chain’s launch directly enriches Arbitrum holders while leaving a scant few crumbs for Ethereum.
Today’s Change
(-2.82%) $-0.00
Current Price
$0.08
Key Data Points
Market Cap
Day’s Range
$0.08 – $0.09
52wk Range
$0.07 – $0.62
Volume
31.2M
The road map is set to make this problem even worse
The recent Fusaka upgrade to Ethereum added a fee floor to make activity on Layer-2 chains pay Ether holders more. The trouble is that at Robinhood Chain’s economics, the fee floor is extremely low.
Closing this gap almost certainly requires “a wholesale change in developer mindset and in ETH’s token economics,” per Bitwise’s Max Shannon. That change, which would really be more like a handful of moderate and major overhauls to tokenomics, supply control, and staking yields, would reshape the drivers of the token’s value to make holding it far more appealing than it is now.
But no such change is on the table.
Today’s Change
(-1.56%) $-29.50
Current Price
$1,856.65
Key Data Points
Market Cap
Day’s Range
$1849.13 – $1886.15
52wk Range
$1512.07 – $4946.05
Volume
6.3B
If Ethereum’s leaders decide to fix that, and alter the chain so that it captures a meaningful share of Layer-2 activity revenue and converts that activity into burning of Ether so as to reduce its outstanding supply like a stock buyback, Robinhood’s success with its chain would actually become very bullish for the coin overnight.
Until then, the arithmetic here just rewards Arbitrum holders and Robinhood shareholders while starving Ethereum of the fee-driven scarcity that would be the capstone in the investment thesis for buying it.
