Each project takes a unique way of growing its user base. Whereas Optimism focuses on rewarding user participation, Arbitrum seems to have grown more organically. The success of either model will be judged by the sort of users maintained and the ability of these long-term customers to offer value to future ecosystems.<h2>User growth</h2>Looking at user growth over the last year, it is obvious that user activity on <a href="https://www.builder.news/project-review/optimism-op-a-layer2-scaling-solution-for-ethereum-applications" alt="Optimism (OP) - A Layer-2 scaling solution for Ethereum applications" title="Optimism (OP) - A Layer-2 scaling solution for Ethereum applications" target="_blank" rel="nofollow" class="">Optimism</a> has changed significantly based on the network's incentive schemes, which would reward participation with tokens or NFTs. Activity drops considerably once each campaign concludes. For example, once the Quests campaign finished in January, the number of daily active users on Optimism was cut in half.<a href="https://www.builder.news/crypto-insights/arbitrum-the-mosttvl-layer-2-project" alt="Arbitrum - Story about most-TVL layer 2 project" title="Arbitrum - Story about most-TVL layer 2 project" target="_blank" rel="nofollow" class="">Arbitrum</a>, on the other hand, only had one short-lived incentive program, the Arbitrum Odyssey. That resulted in the greatest monthly flood of new users to date. Other than that, its usage has slowly increased over time without a clear trigger, even though rumors of an airdrop may be to blame for some of the activity.Monitoring daily active users offer a high-level picture of blockchain network operation, but it lacks the granularity required to measure long-term user engagement and value. Cohort analysis is a more powerful tool for identifying growth potential and customer behavior over time. A common attribute defines a cohort. The time span in which the users initially entered the ecosystem will be used to determine the groups in this article.The graph below separates Arbitrum users into cohorts depending on when they first accessed any network application in 2022. The retention rate indicates how many users in each cohort returned to transact the following month. In particular, 49% of users in the January 2022 cohort transacted at least once in February, one month later. Zooming out to 2022, Arbitrum had a reasonably consistent 3-month retention rate, with about 23-29% of users remaining after 6 months.<img src="https://cdn.builder.news/news/11edc7c2bb829d0391de028438497b73.jpg" alt="arbitrum cohort analysis" title="arbitrum cohort analysis" width="600" height="233">Arbitrum started the Odyssey campaign in June 2022 to increase engagement. Users got an NFT from Galxe for utilizing apps at certain periods. Users that connect with these apps may boost their chances of obtaining an Arbitrum token airdrop in the future. Within the first week, gas expenses had virtually overtaken Ethereum fees. The high gas prices harmed the Arbitrum user experience, requiring Odyssey to be delayed until the Nitro update was released. Yet, the biggest influx of new Arbitrum users in the previous year happened in June, and more than 30% of these users remained active for the next six months.Arbitrum's new monthly user cohort size then doubled in 2022, rising from 29,000 in January to 236,000 in December. As cohort numbers increased during the year, short-term retention rates followed a similar pattern, hovering around 25-30%. Although not enough time has elapsed to assess long-term retention for new users in Q3 and Q4 of last year, one should expect a similar tendency to continue until something unexpected happens.Optimism released the OP governance token retrospectively based on user participation around 3 weeks before Arbitrum began the Odyssey campaign. As a result, there was a big surge of users claiming tokens in June (1 month after May, 2 months after April, etc.), since consumers had to re-engage with Optimism to claim their tokens. Nevertheless, the retention rate for Optimism's 189,000 new members fell by double the average 1-month retention rate of 40-50% in June.After the airdrop, Optimism continued to run incentive campaigns for various applications in order to provide value to its ecosystem. Following the airdrop, the number of new monthly users has steadily increased. Indeed, the cohort that joined at the end of the Optimism Quests campaign in December was the biggest yet.As with Arbitrum, Optimism's short-term retention rate stayed pretty consistent throughout the year as the number of new users climbed. Yet, long-term retention rates have failed to approach the industry average of 35-40%. The performance of the early cohorts may not be predictive of what is to come with later-onboarded cohorts. Yet, prior involvement with each user base might provide information.<img src="https://cdn.builder.news/news/11edc7c2bb82a4ba91de028438497b73.jpg" alt="optimism arbitrum retention rate" title="optimism arbitrum retention rate" width="600" height="172">Source: Dune analyticsOptimism has a much greater long-term monthly retention rate than Arbitrum, performing 10% better each cohort 6+ months later, based on the retention rate for all new customers throughout all 2022 cohorts. This group of Optimism users initially engaged with the network at the platform's token launch and the start of its summer incentive campaign. Around the same time, users on Arbitrum were participating in the short-lived Odyssey campaign and the launch of Galxe.The number of applications on both networks has expanded dramatically in the last year. Since there are more options for users in later cohorts to interact, the increase may have resulted in increased short-term retention.Overall, the difference in the retention curves indicates that, historically, Optimism users are more likely to continue transacting on the network than Arbitrum users. At first appearance, the major engine of Optimism's success seems to be its continuous user incentives systems. The effect of these methods on engagement at the application level should be examined to further measure the efficacy of incentives in establishing long-term value.The previous paragraph focused on how often consumers return to Arbitrum and Optimism after their first transaction. We researched application retention rates to better understand retention rates – the chance of users returning to transact inside a certain application.<h2>Incentivized vs non-incentivized apps</h2>As previously stated, both Optimism and Arbitrum rely on incentive schemes to increase application engagement. When classifying these apps depending on whether or not they participated in a rewards program the previous year, there is a notable difference in user retention on Optimism. As compared to the network-wide application-level average, apps that encouraged users maintained a larger proportion of users over time.The identical categories on Arbitrum, on the other hand, show no discernible variation in retention rates over time. Although news of the Odyssey campaign sparked a rise in new activity on Arbitrum, owing to rumors of an airdrop, it did nothing to keep new users. This is most likely due to the fact that the promotion ended within a week, leaving users with little time to engage with the participating apps.It's hardly unexpected that motivating customers with prizes boosts product adoption. Yet, the incentives given to users are often derived from the protocol itself as a fraction of prospective income. This strategy has proved unsustainable in the long run, since platforms may fail to compensate users on a consistent basis. Additionally, if an application isn't unique enough to attract or keep users from an initial incentive campaign, it won't be there for long.<h2>Non-Native vs. Native Apps</h2>For Arbitrum, native network apps such as GMX and Radiant Capital maintained a higher-than-average network user base as compared to non-native rivals. Importantly, GMX, a perps exchange, has been a major driver of Arbitrum user growth since its launch after the network's Nitro update. Although GMX is not the first decentralized perp protocol to appear in cryptocurrency, it has attracted a huge number of users due to its high-leverage trading, oracle-based pricing mechanism, and attractive staking returns. Traders from other platforms, like as dYdX or Perpetual Protocol, may have switched to boost their chances of receiving an Arbitrum token airdrop. Overall, GMX had 43% short-term and 31% long-term customer retention rates, both of which were higher than the network averages of 32% and 22%, respectively.<img src="https://cdn.builder.news/news/11edc7c2bb82aa0691de028438497b73.jpg" alt="application cohort" title="application cohort" width="600" height="235">Source: MessariOptimism noticed no discernible difference in retention rates across native and non-native apps. Native apps like Velodrome, Perpetual Protocol, and Rubicon have accounted for around 35% of transaction activity on Optimism during the last year, but have consistently fallen short of the network-wide retention rate.Good user retention not only increases income for the individual program, but it also increases brand loyalty. Faithful users may recruit the next wave of users, expanding the application's reach and income sources. If people return to the same project without being enticed, the application has certainly succeeded in delivering an interesting user experience.Optimism showed higher variety in app-level vs network-wide retention than Arbitrum when both category situations (incentivization and nativeness) were included. This suggests that, over time, users will become more likely to interact with other aspects of the Optimism ecosystem than transacting just inside a single application. The app-level variety may be attributable in part to the sequential chronology of incentive promotions, but it's impossible to say whether or not the variance is beneficial to Optimism as a whole without knowing where users go following their initial application engagement.A high retention rate in a single application, on the other hand, might be both positive and harmful to the underlying network. If the application is critical to the development of other apps, it may provide the groundwork for future ecosystem expansion. Yet, if the functionality of the program can be readily replaced or even deprecated, overall network expansion may be stifled.<h2>Retained User Value</h2>Each individual application and network is, at the end of the day, a business. Without making money off of their client base, they will not be able to stay in business or advance in any way. While Arbitrum and Optimism have adopted significantly different tactics to keep their user bases, the most important issue is whether or not the networks have been successful in keeping people who provide monetary value to their own ecosystems.It is essential to take into account the fact that the typical transaction costs on Arbitrum have been subject to shifts during the year 2022. With the update to Nitro that Arbitrum implemented, transaction costs were cut by around half. This modification also explains why the average monthly rates paid by users went down throughout the period of time spanning four to nine months.The overall fees paid concurrently degrade rather fast due to the concurrent decline in the size of the maintained user base that occurs over time. When it comes to customer retention over the near run, Optimism has produced greater value in terms of total fees per cohort than Arbitrum has.When looking at the average monthly costs per user for each cohort, the users that have the most value are those who have interacted with the ecosystem for a length of time that is more than nine months. The cohorts that have the most users quickly after they have their initial interaction with an application are responsible for the bulk of the overall costs. If each network could discover methods to keep customers for longer periods of time, they could be able to more than double the amount of cash that they collect from user fees.When it comes to the retention of users, Arbitrum and Optimism both have the potential to be more strategic. When it comes to the long-term health of both networks, the primary differential will be a mix of incentives that are only available for a limited time atop persistent applications.Some bottom linesOne may argue that Arbitrum has experienced a greater increase in the number of users via organic means. Even in the absence of a sustainable incentive campaign, consumers will continue to be lured to the ecosystem for the innovative and native apps it provides. The ambiguity surrounding token airdrops may also contribute to arbitrary use. The project has the opportunity to get insight into both Optimism's achievements and shortcomings in terms of token design and growth plans. It is possible that Arbitrum might earn a second-mover advantage for its future growth if it is able to effectively attract customers with an excellent user experience and novel applications.The incentive schemes offered by Optimism have been successful in accomplishing their primary goal, which was to encourage people to participate in the ecosystem. Optimism has just announced the beginning of the second OP airdrop season, which will definitely attract new users in addition to those who already use the platform. On the other hand, unless a cutting-edge application is deployed on Optimism, it is probable that the application-level retention rate will decrease if further incentivization is not provided.&nbsp;<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

Arbitrum and Optimism are experiencing a record-breaking year in terms of ecosystem development, despite a down market and many black swan occurrences. Each has approximately 3 million unique users, and transaction activity continues to shatter all-time highs.

Optimistic Rollups: The war for users between Optimism and Arbitrum