Analysis of February Hot Topics: Arbitrum's Technology, Ecosystem, and Future Outlook

Summary

With the Federal Reserve slowing down the pace of interest rate hikes, the cryptocurrency market saw a slight rebound at the end of January, with Bitcoin breaking through $23,700 to reach a six-month high. Positive news from Ethereum's Layer 2 network has injected new vitality into the entire crypto industry, with Arbitrum standing out particularly. On one hand, Arbitrum underwent a technical upgrade in 2022 to meet the growing demand for transactions. On the other hand, the popularity of the first week of the Odyssey event garnered significant attention for Arbitrum's ecosystem projects.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future roadmap. It will also explore the success factors and prospects of popular DeFi and gaming projects in the ecosystem, such as GMX, which has innovative mechanisms and outstanding protocol revenue performance during bear markets. In addition, the expectation of Arbitrum's token issuance will continue to bring positive effects.

Overview

In early 2023, the Layer 2 sector performed the most impressively, which aligns with the predictions of most institutions and industry insiders. In terms of token prices, Optimism, Polygon, and Arbitrum ecosystem tokens all performed well, with $OP peaking at $3.17 in February, and $MATIC also reaching $1.32 at one point. After new public chains like Terra and Solana faced a crisis of trust, Ethereum re-emerged as the main player, and in the future, the competition will be more between new public chains and Layer 2. Arbitrum's performance in February was particularly remarkable, achieving impressive results.

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 a staggering 49.51% share within L2. Arbitrum Rollup is an off-chain protocol managed by Ethereum smart contracts, which uploads off-chain transactions to the Ethereum mainnet using compression algorithms. This method can partially alleviate Ethereum's congestion issues, achieving advantages such as fast transactions, low gas fees, security guarantees, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum continued to innovate on a technical level, primarily including the launch of the Arbitrum Nova and Arbitrum One dual chains, and the introduction of the new programming environment Stylus. Below is a detailed introduction to these technical cores and the problems they solve.

Arbitrum Nova --- AnyTrust Chain

On July 12, 2022, the Arbitrum network announced the construction of a new chain "Arbitrum Nova". This chain is based on AnyTrust technology and is designed for cost-sensitive scenarios such as gaming and social applications. The AnyTrust technology ensures minimal trust assumptions through a data availability committee, which is responsible for managing off-chain transaction data and providing batch support. This allows Nova users to avoid a 7-day withdrawal waiting period, greatly enhancing user experience. Key technical features include:

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

Nitro

At the end of August 2022, Arbitrum One successfully upgraded to the Nitro version, significantly improving network speed and reducing transaction costs. Nitro mainly underwent the following technical upgrades:

• Modify the AVM architecture and ArbOS
• Adopt WebAssembly (WASM) architecture to replace the old AVM architecture.
• Replace custom EVM simulator with Geth
• Rewrite ArbOS in Go, optimizing transaction batching and compression system

The core of Nitro is a new prover that enables interactive fraud proofs for Arbitrum on WASM code, supporting the construction and compilation with standard languages and tools. Meanwhile, Gethcore is directly compiled into Arbitrum, enhancing EVM compatibility.

Stylus

The Arbitrum development team Offchain Labs has announced the launch of a next-generation programming environment called Stylus for Arbitrum One and Arbitrum Nova. Stylus allows developers to deploy applications using languages such as Rust, C, and C++ through WebAssembly smart contract capabilities, running in conjunction with EVM programs on Arbitrum. Stylus offers faster speeds and lower costs, and is fully interoperable with the Ethereum Virtual Machine. Offchain Labs refers to Stylus as EVM+, but it will not replace 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 token issuance; 3. Growth in ecological applications, especially the growth of native applications. Since the launch of Arbitrum One mainnet in September last year, leading DeFi protocols on Ethereum Layer 1 such as Uniswap, Sushiswap, and Curve have successively deployed on Arbitrum One, along with well-known cross-chain protocols like Synapse and StarGate. The influx of these applications also reflects developers' recognition of Arbitrum's scaling solution.

In June 2022, the Odyssey event selected 14 of the most active projects on Arbitrum, covering areas such as cross-chain bridges, DeFi, NFTs, and gaming. The event was originally planned to last for 8 weeks, but it was only carried out for the first week before being suspended. The main reason for the suspension was network congestion in the second week, leading to excessively high gas fees, even surpassing those of the Ethereum mainnet. This clearly indicates that Arbitrum's state at that time could not accommodate such a large number of users.

Despite the fact that the Odyssey event lasted only a week, it still attracted a lot of attention. Arbitrum combined NFTs to stimulate user participation through a week-long event, helping users understand the Arbitrum ecosystem while also bringing traffic to ecological projects as the user base increased. At the same time, it preserved the expectations for future token issuance rather than hastily issuing 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 has added 207,000 new addresses. On June 27, the number of new addresses in a single day reached 55,000, setting a new record for the highest daily increase.

After the Odyssey event, Arbitrum continued to make technical advancements, continuously launching innovative mechanism projects within 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 user numbers of Arbitrum have also correspondingly increased.

Chapter 3 Popular Project Analysis

In the past two months, Arbitrum's native ecosystem projects have gained attention from the entire cryptocurrency market. Below is an overview of some standout projects, which still have a certain gap in market value compared to similar projects on other public chains, and are in an undervalued state. With the issuance of Arbitrum's tokens and future development, they all have significant potential for growth.

3.1 DeFi Category

On Arbitrum, there are well-known projects with multi-chain deployment such as Uniswap and AAVE, as well as native projects that exhibit astonishing explosive growth, such as the perpetual contract exchange GMX and the yield aggregator Jones DAO. Currently, Arbitrum has formed a sustainable profit loop: derivative protocols are similar to casinos, generating continuous business revenue; various yield aggregators attract funds and expand returns using strategies; more people participate in yield aggregators, increasing liquidity and income.

Hot Project One: GMX

GMX is a decentralized perpetual contract exchange that allows users to trade ETH, BTC, LINK, and UNI perpetual contracts with leverage of up to 30 times on a decentralized platform. Compared to centralized exchanges, its operation is more complex and requires the use of an oracle for pricing. GMX uses Keepers (similar to crowd-sourcing) to complete 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 the GMX Keeper. In addition to paying the Gas fee for sending the transaction, users also need to pay the Gas fee for the Keeper to execute the operation.

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 a return on investment of 84.0% against the dollar and 428.5% against ETH.

Hot Project Two: 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, custom 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 spread 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 the fee ratio based on market conditions.
• Provide returns and incentives through NFTs, allowing users to provide liquidity and obtain spNFTs that represent their staked positions.
• Permissionless protocol, project parties can set incentives through Nitro Pools.
• With Launchpad functionality, project parties can raise funds and guide liquidity.

In comparison, the similar project Velodrome on OP has a TVL of 77.14 million USD, exceeding Uniswap V3's 44.87 million USD, but its FDV is only 9.46 million USD, with an FDV/TVL ratio of 0.21. Compared to Camelot, Velodrome has a higher TVL but a lower valuation.

Hot Project Three: RDNT

RDNT is a lending protocol on Arbitrum with two innovations: utilizing LayerZero for multi-chain lending; and enabling circular borrowing (currently unavailable). It currently holds a leading position on Arbitrum, with a TVL exceeding that of Aave V3's Arb version, but long-term competition remains fierce.

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

• Allow complete cross-chain lending for BTC, ETH, and USDC, with more assets to be selected later by Radiant DAO voting.
• Shift the protocol fees towards LPs to increase 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 growing GameFi ecosystem, particularly with three popular projects: Treasure DAO, The beacon, and Trident DAO. Currently, Arbitrum's GameFi ecosystem is relatively leading, but it does not have an absolute advantage like its derivatives track, and future development still needs to be observed.

Treasure DAO

Treasure aims to build a "decentralized Nintendo" that includes a series 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 via Trove. Trove is the core of the Treasure ecosystem and serves as the marketplace for in-game assets and NFT collectibles. The most popular series include 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," attracting the attention of players and the community. After its token public sale, it quickly became 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 among players, etc. 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 indicates that the Layer 2 sector could become the starting point of the next bull market.