Analysis of February's Focus Topics: Arbitrum's Technical Progress, Ecological Development, and Future Prospects

Abstract

At the end of January this year, the crypto market welcomed a small bull market, with Bitcoin breaking through $23,700 and reaching a new high in nearly six months. The Ethereum Layer 2 network has frequently reported good news, with Arbitrum injecting new vitality into the entire crypto market. Arbitrum underwent a technical upgrade in 2022 to cope with the increasingly busy trading activities. Meanwhile, due to the popularity of the first week of the Odyssey event, Arbitrum's ecosystem projects gained significant attention.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future roadmap. In terms of the ecosystem, we explore the success factors and development prospects of prominent DeFi and gaming projects, such as GMX, which have innovated in their mechanisms and performed well in terms of protocol revenue during the bear market. Furthermore, the anticipation of Arbitrum's token issuance is expected to continue bringing positive news.

Overview

At the beginning of 2023, Layer 2 showed the most remarkable performance, which aligns with the predictions of most institutions and industry professionals. The prices of ecosystem tokens on Optimism, Polygon, and Arbitrum performed well, with $OP reaching a peak of $3.17 in February and $MATIC also touching $1.32 at its highest. Against the backdrop of new public chains like Terra and Solana suffering heavy losses in the bear market, the future will still be dominated by Ethereum, and the competition between Layer 2 and new public chains will become more intense. As the crypto market experiences a small surge, Arbitrum stood out in February, achieving impressive 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 having a 49.51% share of TVL in Layer 2. 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 alleviate Ethereum's congestion issues to some extent, achieving advantages such as fast transactions, low gas fees, guaranteed security, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum continued to make efforts in technological upgrades, mainly 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 technological 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 built on AnyTrust technology, specifically designed 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. As a result, AnyTrust eliminates the 7-day withdrawal wait period for users, enhancing the user experience. The main technical core includes:

• Sign data availability certificates (DACerts) 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 challenge 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. Overall, the Nitro upgrade mainly involved the following technical enhancements:

• Modify the previous AVM architecture and ArbOS
• Replace the old, custom-designed AVM architecture with the popular WebAssembly(WASM) architecture.
• Replace the custom EVM simulator with Geth
• Rewrite and streamline ArbOS in Go to provide a more optimized batch processing and compression system for transactions.

The core of Arbitrum Nitro technology is a new prover (prover) that enables interactive fraud proofs of Arbitrum on WASM code. This allows for 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 has announced the launch of the next-generation programming environment Stylus for Arbitrum One and Arbitrum Nova. Stylus allows users to deploy applications using their preferred programming languages (including Rust, C, and C++) through WebAssembly smart contract capabilities, enabling them to run alongside EVM programs on Arbitrum. Stylus is an order of magnitude faster, capable of reducing fees, and is fully interoperable with the Ethereum Virtual Machine (EVM). Offchain Labs refers to Stylus as EVM+, but Stylus does not replace the EVM.

Chapter Two Ecological Cooperation

In the past year, Arbitrum's market share has significantly increased, mainly due to: 1. Continuous optimism for Layer 2; 2. Expectations for Arb's token issuance; 3. Growth of ecosystem applications, especially the growth of native applications. Since the mainnet Arbitrum One went live in September last year, leading DeFi protocols on Ethereum Layer 1, 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 also indicates developers' recognition of Arbitrum's scaling solution.

In June 2022, the organizers of 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 actually paused after the first week. The main reason for the pause was network congestion in the second week, which led to excessively high gas fees, even surpassing the gas fees on the Ethereum mainnet. This clearly indicated that Arbitrum's status at the time could not support such a large number of users.

Although the Odyssey event lasted only 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 increasing the user base and bringing traffic to its ecosystem projects. At the same time, it maintained the expectation of future token issuance, rather than hastily issuing tokens for airdrops.

According to the 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 single-day addition reached 55,000, setting a record for the most new addresses added in a single day. This shows that the Odyssey event has been a great success.

After the Odyssey event, Arbitrum has been technically strong and continuously 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 address count for Arbitrum from October 2022 to January 2023 is 608,365, an increase of 51.2% compared to September. The trading volume and user count for Arbitrum have also risen accordingly.

Chapter 3 Popular Project Analysis

In the past two months, native ecological projects on Arbitrum have attracted attention from 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 still in a undervalued state. With the issuance of tokens by Arbitrum and future developments, these projects have 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 incredible explosive power, 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-generating flywheel: derivative protocols are similar to casinos, with continuous business income; various yield aggregators attract funds continuously through their strategies and expand yields; more people participate in yield aggregators, resulting in more liquidity and continuously increasing 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 up to 30x leverage on a decentralized platform. Compared to centralized exchanges, GMX's operations are more complex and require the use of an oracle for price feeds. GMX utilizes Keepers (similar to crowdsourcing) to execute opening and closing positions.

When a user closes a position on GMX, it is divided into two parts: the user sends the transaction and the execution of the operation. The execution operation is completed by the GMX Keeper. In addition to paying the Gas fee for sending the transaction, the user also needs to pay the Gas fee for the Keeper to execute the operation to ensure that the transaction can be 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 in 2022, with returns of 84.0% against the USD and 428.5% against ETH.

Hot Project 2: 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, and it adds features such as a Launchpad, customizable trading fees, the combination of LP and NFTs, and allows project teams to set incentive measures. Its main 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 transaction fee ratios based on market conditions.
• Provide earnings and incentives through NFTs, where users offer liquidity to obtain spNFTs that represent their staked positions.
• Permissionless protocol, project parties can set up additional incentives through Nitro Pools.
• With Launchpad functionality, project parties can raise funds and guide liquidity.

In comparison, Velodrome, the top project on OP by TVL, has a liquidity of 77.14 million USD, surpassing Uniswap V3's 44.87 million USD, but its FDV is only 9.46 million USD, with an FDV/TVL of 0.21. Relative to Camelot, 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 cross-chain lending; it allows for loop lending (currently not available). At present, it is a leader on Arbitrum, with a TVL exceeding that of Aave V3's Arb version, but competition remains fierce 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. Lenders deposit assets, borrowers can lend and borrow, and the generated fees (platform revenue) are distributed 50% to lenders and the remaining 50% to locked RNDT as rewards. Currently, the protocol is in V1 version, and the V2 version will include the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC, with more assets to be voted on later by Radiant DAO.
• Shift 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 three noteworthy projects: Treasure DAO, The Beacon, and Trident DAO. Currently, the GameFi ecosystem on Arbitrum is relatively leading, but it does not possess an absolute advantage like its derivatives track, and its future development remains to be observed.

Treasure DAO

Treasure is committed to building a "decentralized Nintendo," which is a series of on-chain games interconnected through the interoperability of in-game assets and Treasure's 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 hub 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 others.