As user Psy highlighted on the X (formerly Twitter) social network, “dilution through inflation” does not contribute positively to the ecosystem, as it merely distributes DAO treasury holdings.Beyond token governance, there are also concerns related to liquidation risks on both centralized and decentralized exchanges that offer leveraged trading. For instance, Lookonchain has observed a whale withdrawing ARB tokens from the Aave lending platform and transferring some to Binance.A whale who is long $ARB on #Aave is selling $ARB to repay the debt.Over the past 5 hours, the whale has withdrawn 5M $ARB ($3.85M) from #Aave and deposited 3.8M $ARB ($2.93M) to #Binance.And the whale currently holds 8M $ARB ($6.16M).https://t.co/HpuZnHbap4 pic.twitter.com/qduKeWC4ul— Lookonchain (@lookonchain) September 11, 2023
The challenge with this analysis lies in the ambiguity of cause and effect. Typically, leverage long positions are compelled to close when token prices have already fallen, rather than the reverse. This underscores the importance of investors examining Arbitrum’s activity and deposit trends over the past couple of months, which could have potentially triggered the recent price performance.Declining network activity is most likely the culpritArbitrum’s TVL has notably declined to $1.67 billion, marking its lowest level since mid-February.Arbitrum network total value locked. Source: DefiLlamaThis 25% decrease over the past two months raises several concerns, primarily indicating a loss of investor confidence. This downturn has the potential to reduce liquidity and undermine the project’s overall viability. Furthermore, it might deter new participants, impeding network growth and adoption. Next, it’s crucial to examine the number of active addresses within the network’s top DApps.Arbitrum network top decentralized applications by active addresses. Source: DappRadarThere is a noticeable decline in 30-day active addresses, even among well-established DApps like Uniswap, 1inch, Radiant, SushiSwap and GMX. Therefore, when considering the decrease in TVL alongside reduced user activity, it becomes evident that there is a substantial decline in demand for the network. While pinpointing a singular cause for this movement is challenging, one can speculate that competing chains such as zkSync Era and Coinbase’s Base may have contributed.The data suggests that Arbitrum’s 14.5% correction appears to result from a combination of investor dissatisfaction with the governance mechanism and the network’s lackluster activity, despite offering significantly lower fees compared to Ethereum. Unless there is an upswing in transactions and an expansion of its user base, it is unlikely that ARB will be able to close the price performance gap with its competitors.This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.