Deconstructing the Main Narrative of February: Arbitrum's Technology, Ecosystem, Popular Projects, and Future

Summary

With the Federal Reserve's interest rate hikes slowing down, the cryptocurrency market experienced a minor bull run at the end of January, with Bitcoin rising to a six-month high, breaking through $23,700. Due to the frequent good news surrounding Ethereum Layer 2, Arbitrum has brought new vitality to the entire cryptocurrency market. On one hand, Arbitrum updated its technology in 2022 to cope with more frequent trading activities. On the other hand, the popularity of the Odyssey event in its first week has garnered significant attention for Arbitrum's ecosystem projects.

This article will focus on the development of Arbitrum, analyzing its technical upgrades and future roadmap. At the same time, we will also explore the success factors and future developments of the booming DeFi and gaming projects in the ecosystem, such as GMX, which has innovative mechanisms and has performed well in terms of protocol revenue during the bear market. The expectation of Arbitrum's token issuance will also continue to bring positive news.

Overview

At the beginning of 2023, Layer2 became the most outstanding sector, which aligns with the predictions of most institutions and influential figures. In terms of coin prices, the ecosystem tokens on Optimism, Polygon, and Arbitrum have performed well. After new public chains like Terra and Solana faced setbacks during the bear market, Ethereum remains the main battlefield, with more competition expected between new public chains and Layer2 in the future. With a slight resurgence in the crypto market, Arbitrum stood out in February, achieving remarkable results.

Currently, Arbitrum is the largest project in terms of TVL among Ethereum's Layer 2 scaling solutions, reaching 2.98B, accounting for 3.01% of the total TVL across all networks, and holding 49.51% of the TVL in L2. Arbitrum Rollup is an off-chain protocol managed by on-chain Ethereum contracts, which uploads off-chain transactions to the Ethereum mainnet through compression algorithms. This method can partially alleviate the congestion issues faced by Ethereum, achieving advantages such as fast transactions, low gas fees, security guarantees, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum continuously introduced innovations in technical upgrades, including the launch of the Arbitrum Nova and Arbitrum One dual chains, and the introduction of a new programming environment called Stylus. Below are the core technologies and the problems they address.

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 use cases that are more cost-sensitive. The AnyTrust technology is based on a minimal trust assumption ensured by a data availability committee. This committee is responsible for managing off-chain transaction data and providing data support batches. Therefore, AnyTrust eliminates the 7-day withdrawal waiting period for users, enhancing the user experience. The main technical core includes:

• Sign data availability certificates for batch transactions 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 challenging period, the new aggregated state will be 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. Major technical upgrades include:

• Modify the previous AVM architecture and ArbOS
• Adopt the popular WebAssembly (WASM) architecture to replace the old AVM architecture
• Use Geth to replace the custom EVM simulator
• ArbOS has been resized and rewritten in Go 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 enables building and compiling using standard languages and tools. At the same time, Gethcore is directly compiled into Arbitrum, making it more compatible with EVM.

Stylus

The Arbitrum development team Offchain Labs announced the launch of the next-generation programming environment Stylus for Arbitrum One and Arbitrum Nova. Stylus enables users to deploy applications using programming languages such as Rust, C, and C++ through WebAssembly smart contract capabilities, allowing them to run 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. Continued optimism for Layer 2; 2. Expectations for Arb's token issuance; 3. Growth of ecological applications, especially the increase in 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 been integrated and deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications indicates developers' optimism toward Arbitrum's scaling solutions.

In June 2022, the Odyssey event selected 14 of the most active projects on Arbitrum, including cross-chain bridges, DeFi, NFTs, and games. The event was originally planned to last 8 weeks, but it was actually paused after just the first week. The main reason for the pause was network congestion in the second week, which led to excessively high gas fees, even exceeding those on the Ethereum mainnet. This clearly indicated that Arbitrum was unable to accommodate such a large number of users at that time.

Although the Odyssey event only lasted a week, it still attracted a lot of attention. Arbitrum combined NFTs in the form of an event week, which sparked user engagement and helped users understand the Arbitrum ecosystem. While increasing the number of users, it also brought traffic to its ecosystem projects. At the same time, it preserved future expectations for token issuance, rather than hastily issuing tokens for airdrops.

Data shows that 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 reached 55,000 in a single day, making it the day with the highest number of new addresses, showcasing the success of the Odyssey event.

After the Odyssey event, Arbitrum has continued to make technical advancements and launched innovative mechanism projects in its ecosystem, raising expectations for a small bull market at the end of January. Currently, the average number of monthly active addresses for Arbitrum from October 2022 to January 2023 is 608,365, an increase of 51.2% compared to September. Arbitrum's trading volume and user numbers have also seen corresponding increases.

Chapter 3 Popular Project Analysis

In the past two months, native ecological projects on Arbitrum have gained the attention of the entire cryptocurrency market. Below is a summary of some standout projects, which still have a certain gap in market capitalization compared to similar projects on other public chains, and are in an undervalued state. With the issuance of tokens on Arbitrum and its future development, there is significant room for improvement.

3.1 DeFi Category

There are well-known projects deployed on multiple chains on Arbitrum, such as Uniswap and AAVE. However, the native projects on Arbitrum demonstrate remarkable explosive potential, such as the perpetual contract exchange GMX, the derivative yield aggregator, and the liquidity pool project Jones DAO. Currently, Arbitrum has formed a sustainable profit model: derivative protocols are similar to casinos, generating continuous business income; various yield aggregators attract capital continuously through their strategies, expanding their earnings; more people participate in yield aggregators, providing more liquidity and generating increasing income.

GMX

GMX is a decentralized perpetual contract exchange. Users can trade perpetual contracts for ETH, BTC, LINK, and UNI with up to 30x leverage on this platform. Compared to centralized exchanges, the operations are more complex and require the use of an oracle for price feeding. GMX utilizes Keepers (similar to crowdsourcing) to execute opening and closing positions.

When users close a position on GMX, it is divided into two parts: sending the transaction and executing the operation. The execution of the operation is carried out by the GMX Keeper. In addition to paying the Gas fee for sending the transaction, users also need to pay a Gas fee for the Keeper to execute the operation.

GMX TVL reached $543 million, accounting for 31.46% of the total DeFi protocol TVL 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% against the dollar and 428.5% against ETH.

Camelot

Camelot, as the native DEX of Arbitrum, completed its token sale in December 2022. It is a DEX of the Uniswap V2 + Curve type, with added features such as a Launchpad, customizable trading fees, integration of LPs with NFTs, and allowing project parties to set incentive measures. Key features include:

• An 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
• Provide income and incentives through NFTs
• Permissionless protocol, project parties can set incentives through Nitro Pools.
• Equipped with Launchpad functionality

Compared to similar projects like Velodrome on OP, Camelot has a lower TVL but a higher valuation.

RDNT

The lending protocol RDNT on Arbitrum has two innovations: it utilizes LayerZero for multi-chain lending; it can perform loop lending (currently not available). It is currently a leader on Arbitrum, with a TVL exceeding that of the Arb version of Aave V3, but competition remains significant in the long term.

As a full-chain lending protocol, users can deposit any major asset on any major chain and borrow various supported assets across chains. The generated fees (platform revenue) are split 50% to the lender and the remaining 50% to the locked RNDT as a reward. Currently, this protocol is in version V1, and version V2 will make the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC
• 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 have an absolute advantage like its derivatives track; it is only relatively ahead, and future development still needs to be observed.

Treasure DAO

Treasure is committed 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. The most 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 include Smol Brains (the foundation of Smolverse) and another NFT series The Lost Donkeys.

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, and after its token public sale, it has become the hottest project in the Arbitrum ecosystem.

PSI is the official utility token of Trident, which will be used in various games in its future versions, for purchasing items, exchanging NFTs, and betting between players. Trident will charge a fee from each successful bet and permanently destroy it. Once the Risk To Earn integration is completed, the supply of PSI will trend towards deflation.

Chapter Four Future Development

The success of Arbitrum suggests that the Layer2 track could become the starting point of the next bull market. But before that, whether it's the Optimistic Rollup route or the zk Rollup route.