Analysis of February Hotspots: Arbitrum's Technology, Ecology, and Prospects

Abstract

With the Federal Reserve slowing down interest rate hikes, the crypto market saw a minor bull run at the end of January, with Bitcoin breaking through $23,700 to hit a six-month high. Arbitrum has injected new vitality into the crypto market with frequent positive news. On one hand, Arbitrum underwent a technical upgrade in 2022 to cope with the increasingly busy trading activities. On the other hand, the popularity of the first week of the Odyssey event has garnered significant attention for Arbitrum's ecosystem projects.

This article will focus on the development history of Arbitrum, analyzing its technical upgrades and future roadmap. It will also explore the success factors and growth prospects of the booming DeFi and gaming projects in the ecosystem, such as GMX, which has innovative mechanisms and has shown impressive protocol revenue performance during the bear market. Based on this, the expectation for Arbitrum's token issuance will continue to bring positive outcomes.

Overview

The most outstanding sector at the beginning of 2023 is undoubtedly Layer 2, which aligns with the predictions of most institutions and industry insiders. In terms of token prices, the ecosystem tokens on Optimism, Polygon, and Arbitrum have generally performed well. Against the backdrop of new public chains like Terra and Solana suffering heavy losses in the bear market, the future market will still be dominated by Ethereum, with more competition between new public chains and Layer 2. With the emergence of a small boom in the crypto market, Arbitrum stood out in February, achieving remarkable accomplishments.

Currently, Arbitrum is the project with the largest TVL in Ethereum's Layer 2 scaling solutions, reaching 2.98B, accounting for 3.01% of the total TVL across all networks, and occupying 49.51% of the TVL in L2. Arbitrum Rollup is an off-chain protocol managed by on-chain Ethereum contracts. Strictly speaking, Arbitrum is not an independent blockchain, but rather uploads off-chain transactions to the Ethereum mainnet using compression algorithms. This approach can partially alleviate the congestion problem faced by Ethereum, achieving advantages such as fast transactions, low gas fees, security guarantees, and a good user experience.

Chapter 1 Technology Upgrade

In 2022, Arbitrum was very active. In addition to the Odyssey event, it continuously introduced innovations in technological upgrades, including the launch of the Arbitrum Nova and Arbitrum One dual chains, and the introduction of the new programming environment, Stylus. The following will introduce these technical cores and the problems they solve one by one.

Arbitrum Nova - AnyTrust Chain

On July 12, 2022, the Arbitrum network announced the construction of a new chain "Arbitrum Nova". This chain is built on AnyTrust technology and is designed specifically for gaming, social applications, and cost-sensitive use cases. AnyTrust technology is based on a minimum trust assumption ensured by a data availability committee. The committee is responsible for managing off-chain transaction data and providing data support batches. As a result, AnyTrust eliminates the 7-day withdrawal period that users need to wait for, enhancing the user experience. The main technical core includes:

• Sign data availability certificates for batch transactions (DACerts) and publish
• If the committee cannot reach a consensus, the chain will revert to the Arbitrum aggregation protocol.
• Data execution takes place on the L2 chain, and after a challenge period, the new aggregated state is confirmed on Ethereum.

Nitro

At the end of August 2022, Arbitrum One successfully upgraded to the Nitro version. The Nitro upgrade significantly improved network speed and reduced transaction costs. Overall, the Nitro upgrade focused on the following technical enhancements:

• Modify the previous AVM architecture and ArbOS
• Adopt the popular WebAssembly (WASM) architecture to replace the old AVM architecture.
• Use Geth instead of a custom EVM simulator
• Rewrite ArbOS in Go and scale down to provide a more optimized batch processing and compression system for transactions.

The core of Arbitrum Nitro technology is a new prover that can perform interactive fraud proofs for Arbitrum on WASM code. This allows for building and compiling using standard languages and tools. Meanwhile, Gethcore is directly compiled into Arbitrum, enhancing compatibility with EVM.

Stylus

The Arbitrum development team Offchain Labs has announced the launch of the next-generation programming environment Stylus for Arbitrum One and Arbitrum Nova. Stylus allows users to deploy applications using languages such as Rust, C, and C++ through WebAssembly smart contract functionality, running alongside EVM programs on Arbitrum. Stylus is an order of magnitude faster, reduces costs, and is fully interoperable with the Ethereum Virtual Machine (EVM). Offchain Labs refers to Stylus as EVM+, but Stylus will not replace the EVM.

Chapter Two Ecological Cooperation

In the past year, Arbitrum's market share has significantly increased, mainly due to: 1. The continued optimism for Layer 2; 2. The expectation of Arb's token issuance; 3. The growth of ecological applications, especially the growth of native applications. Since the launch of the Arbitrum One mainnet in September last year, leading DeFi protocols on the Ethereum Layer 1 mainnet, such as Uniswap, Sushiswap, Curve, etc., have all been integrated and deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications also reflects developers' recognition of Arbitrum's scaling solutions.

In June 2022, the organizers of the Odyssey event selected 14 of the most active projects on Arbitrum, covering cross-chain bridges, DeFi, NFTs, and gaming. The event was originally planned to last for 8 weeks, but it was actually paused after just the first week. The main reason for the pause was the network congestion in the second week, which led to excessively high gas fees, even exceeding those of the Ethereum mainnet. This clearly indicated that Arbitrum's state at that time could not accommodate such a large number of users.

Although the Odyssey event was only held for a week, it still attracted a lot of attention. Arbitrum combined NFTs in the form of an event week to stimulate user participation enthusiasm, helping users understand the Arbitrum ecosystem, while bringing traffic to ecological projects as the user base grows. At the same time, it preserved the expectation of future token issuance, rather than hastily launching token airdrops.

According to browser data, from the start of the Odyssey event on June 21 to the end of the first week's tasks, Arbitrum added 207,000 new addresses. On June 27, the number of new addresses in a single day reached 55,000, setting a record for the most new addresses in a single day, highlighting the success of the Odyssey event.

After the Odyssey event, Arbitrum continued to make technical advancements and launched innovative mechanism projects in its ecosystem, making it highly anticipated during the small bull market at the end of January. Currently, the average monthly active addresses for Arbitrum from October 2022 to January 2023 is 608,000, an increase of 51.2% compared to September. The trading volume and number of users for Arbitrum have also risen accordingly.

Chapter 3 Analysis of Popular Projects

In the past two months, native ecological projects on Arbitrum have gained attention from the entire crypto market. Below is a summary of some standout projects. These projects' market capitalizations still have a certain gap compared to similar projects on other public chains, remaining in an undervalued state. With the issuance of tokens by Arbitrum and its future development, there will be significant room for growth.

3.1 DeFi category

There are well-known projects with multi-chain deployments on Arbitrum, such as Uniswap and AAVE. However, Arbitrum's native projects demonstrate astonishing explosive growth, such as the perpetual contract exchange GMX, derivative yield aggregators, and the gun pool project Jones DAO. Currently, Arbitrum has formed a sustainable profit model: derivative protocols operate like casinos, generating continuous business revenue; various yield aggregators continuously attract funds and expand returns using their own strategies; more people participating in yield aggregators lead to increased liquidity, which in turn increases income.

Hot Project 1: GMX

GMX is a decentralized perpetual contract exchange. Users can conduct perpetual contract trading of ETH, BTC, LINK, and UNI with leverage up to 30 times on a decentralized platform, without having to use leverage to go short or long through centralized exchanges like Binance or FTX.

In operation, GMX is more complex than centralized exchanges, requiring the use of an oracle for price feeding. It utilizes Keepers (similar to crowdsourcing) to execute opening and closing operations. When users close positions on GMX, it is divided into two parts: sending the transaction and executing the operation, the latter of which is completed by GMX Keepers.

In addition to paying the Gas fee for sending transactions, users also need to pay the Gas fee for the Keeper to execute operations, to ensure that the transaction is executed properly.

GMX's TVL reached $543 million, accounting for 31.46% of the total TVL of all DeFi protocols on Arbitrum. The protocol generated $33.9 million in revenue over the past year, making the GMX token one of the best-performing assets of 2022, with returns of 84.0% and 428.5% against the US dollar and ETH, respectively.

Hot Project 2: Camelot

Camelot, as the native DEX of Arbitrum, completed its token sale in December 2022. Overall, it is a DEX of the Uniswap V2 + Curve type, with additional features such as a Launchpad, customized trading fees, integration of LP and NFTs, and allowing project teams to set incentive measures. Its characteristics include:

• AMM DEX similar to Uniswap V2, with liquidity distributed across the entire range from zero to infinity.
• Stablecoin swap trading pairs similar to Curve
• Supports dynamic directional trading fees, allowing project parties to set transaction fee ratios based on market conditions.
• Provide income and incentives through NFTs, users provide liquidity to obtain spNFTs that represent their staked positions.
• Permissionless protocol, project parties can set additional incentives through Nitro Pools.
• With the Launchpad feature, project parties can use it to raise funds and guide liquidity.

In comparison, Velodrome, the highest TVL project on OP, has a liquidity of $77.14 million, surpassing Uniswap V3's $44.87 million, but with an FDV of only $9.46 million, giving it an FDV/TVL of 0.21. Velodrome has a higher TVL but a lower valuation.

Hot Project Three: RDNT

The lending protocol RDNT on Arbitrum has two innovations: utilizing LayerZero for multi-chain lending; and the ability to recycle loans (currently unavailable). It is currently the leader on Arbitrum, with TVL exceeding that of the Arb version of Aave V3, but long-term competition remains fierce.

As a full-chain lending protocol, users can deposit major assets on any major chain and cross-chain borrow various supported assets. Lenders deposit assets, and borrowers can borrow, generating a fee (platform revenue) where 50% goes to the lenders and the remaining 50% is locked in RNDT as a reward. Currently, this protocol is in V1 version, and the V2 version will undertake the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC, with more assets to be voted on by Radiant DAO in the future.
• Shift the protocol fees towards LPs to enhance liquidity and reduce slippage.
• Introduce the "Dynamic Liquidity" mechanism to reward long-term investors.
• Exiting the liquidity pool will trigger a penalty mechanism.

3.2 Game Category

Arbitrum has a rapidly developing GameFi ecosystem, particularly with three popular projects: Treasure DAO, The beacon, and Trident DAO. Currently, the GameFi ecosystem on Arbitrum does not possess an absolute advantage compared to other chains, it is only relatively ahead, and future development still needs to be observed.

Treasure DAO

Treasure is dedicated to building a "decentralized Nintendo", which is a collection of on-chain games. These games are interconnected through the interoperability of in-game assets and the native token MAGIC as a shared currency. Popular games include the strategy game Bridgeworld, the role-playing game The Beacon, and Smolverse, as well as the resource management and strategy game Realm.

These games can be accessed through Trove. Trove is the center of the Treasure ecosystem and serves as the marketplace for in-game assets and Treasure NFT collectibles. The most popular series includes Smol Brains (the foundation of Smolverse) and another NFT series The Lost Donkeys, which has its own game of the same name.

Trident DAO

The project "Trident" on Arbitrum has proposed a sustainable GameFi economic model called "Risk To Earn", which has attracted the attention of players and the community. After its token public sale, it quickly became the hottest project in the Arbitrum ecosystem.

PSI is Trident's