Robinhood Markets' (NASDAQ: HOOD) two-month-old blockchain that runs on technology licensed from Arbitrum (CRYPTO: ARB) is now out-earning every other network in crypto on a daily basis. Arbitrum's coin jumped by 30% on Sept. 1 as the market realized that it captures a slice of the fees flowing toward Robinhood Chain. Then, on Sept. 2, Robinhood's users paid $3.7 million in fees, whereas Solana (CRYPTO: SOL) only brought in $899,773 in the same period, and Ethereum (CRYPTO: ETH) only $314,988.
What's more, Robinhood is successfully competing in the exact segments that both of those networks are relying on for growth. It's eating their lunch, and it's just getting started -- so what's the best move for investors to profit from the market's new entrant and its powerful debut?
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Robinhood marketed its new network as a trading infrastructure for tokenized stocks, which is crypto that represents ownership of shares.
But its vast user base had other plans about how to engage with the new platform. In short, customers seem to want to use the chain as yet another place to gamble or speculate on extremely risky and worthless meme coins.
For example, Pons, Robinhood Chain's largest meme coin launchpad application, lets anyone mint and trade a new meme coin in seconds; comparable projects have long existed on Solana and Ethereum. It collected more than $4.5 million in fees on Sept. 2 alone, per data from DefiLlama.
In other words, a project dedicated to helping people gamble on new coin launches brought in more revenue for itself than its network did in the same period. That suggests a high degree of concentration of Robinhood Chain's economic value into an ultimately frivolous corner of the crypto world. During the 30 days ended Sept. 2, though, Solana still collected $22.3 million in chain fees against Robinhood Chain's $10.3 million, and $331.58 million across all its applications.
The trouble with having a successful on-chain casino is that money that flows in for gambling tends to flow out just as fast. And that's especially true when market conditions worsen; unlike projects or businesses performing more useful economic activities, meme coin launchpads tend to see their revenue dry up when their chain's native token is struggling, compounding the problem.
More broadly, Robinhood Chain is now competing directly with Solana to capture the capital from those speculators; Ethereum has been less of a venue for speculation during the past few years, so it isn't as highly exposed.
Robinhood can advertise the chain directly to its huge user base and utilize the data it has about its users, as well as the app on their phones, to onboard them to its network. Solana, on the other hand, is still trying to shake the poor reputation it acquired during the past couple of years, when pump-and-dump scams extracted millions from the same cohort of retail investors who are the most likely to be Robinhood's customers.
Just buying Robinhood's stock is probably not the most efficient way to capture upside from its crypto rollout. The company's top line of $1.3 billion in Q2 is so large that the growth of its crypto division might not matter much in terms of the proportional growth it could deliver, and it pays away a share of the chain's profit to Arbitrum.
Chains built on Arbitrum's tech stack pay it 10% of the profit they generate, with 8% going to its official treasury, and 2% to a developer group. That treasury received $531,641 in the month of August, and it's a distinct (and bigger) sum than the $365,036 in transaction fees Arbitrum received during the same period. When paired with the sharp recent increase in its coin's price, Arbitrum looks like best -- although indirect -- way to gain exposure to the success of Robinhood's chain.
It's also technically true that Ethereum stands to benefit here, as Robinhood Chain settles transactions onto it, which means it collects a fixed data-posting fee rather than a share of the revenue like Arbitrum. But the data posting fee is so small that Ethereum doesn't stand to gain much, even if Arbitrum ends up getting a tremendous amount of activity.
Don't sell your Solana or Ethereum just yet, even if you do decide to buy some Arbitrum due to its income from Robinhood.
Unlike Robinhood Chain, both of those other networks have real ecosystems of economically productive projects, with real capital seeking investment opportunities, and multiple growth segments lined up that have nothing to do with gambling.
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Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.
Watch Out, Solana and Ethereum. Robinhood's Blockchain Is Eating Your Lunch. was originally published by The Motley Fool