Deconstructing February's Hot Topics: Arbitrum's Technology, Ecosystem, and Future Development

Summary

At the end of January 2023, the crypto market experienced a slight rebound, with Bitcoin breaking through $23,700, setting a new high for the past six months. The Ethereum Layer 2 network Arbitrum performed particularly well, injecting new vitality into the entire market. Arbitrum underwent several technical upgrades in 2022 to meet the growing demand for transactions. At the same time, its ecosystem projects gained significant attention due to the Odyssey event.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future plans. In terms of ecology, we will explore the success factors and development prospects of the booming DeFi and gaming projects, such as the outstanding performance of innovative mechanism projects like GMX during the bear market. Additionally, the potential token issuance expectations of Arbitrum will continue to bring positive news to the market.

Overview

At the beginning of 2023, the Layer 2 sector performed exceptionally well, meeting the expectations of most institutions and industry opinion leaders. In terms of tokens, Layer 2 ecosystem coins such as $OP and $MATIC also showed impressive performance. After new public chains like Terra and Solana faced a crisis of trust, the Ethereum ecosystem once again became the market focus, and the competition between Layer 2 and new public chains will be more intense. In February, Arbitrum led the way, achieving remarkable 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 49.51% of the TVL share 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 approach 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 technologically, launching several important upgrades in addition to the Odyssey event, including the launch of the Arbitrum Nova and Arbitrum One dual chains and the introduction of the new programming environment, Stylus. Below are the core contents of these technological upgrades and the problems they address.

Arbitrum Nova --- AnyTrust Chain

On July 12, 2022, Arbitrum 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 relies on a data availability committee to ensure minimal trust assumptions. The committee is responsible for managing off-chain transaction data and providing support. AnyTrust eliminates the 7-day withdrawal period, enhancing the user experience. The main technical features include:

• Sign data availability certificates for bulk transactions and publish them.
• When the committee cannot reach a consensus, revert to the Arbitrum aggregation protocol.
• Data execution is carried out 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. The main technical upgrades of Nitro include:

• Modify the AVM architecture and ArbOS
• Replacing the old AVM architecture with WebAssembly (WASM) architecture.
• Use Geth to replace the custom EVM simulator
• ArbOS has been downsized and rewritten in Go, optimizing transaction batching and compression systems.

Nitro Core is a new prover that enables interactive fraud proofs on Arbitrum with WASM code, supporting compilation using standard languages and tools. At the same time, Gethcore is directly compiled into Arbitrum, improving EVM compatibility.

Stylus

The Arbitrum development team announced the launch of a next-generation programming environment called Stylus for Arbitrum One and Nova. Stylus allows users 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 is 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 EVM.

Chapter Two Ecological Cooperation

In the past year, Arbitrum's market share has grown significantly, mainly due to: 1. Continued optimism for Layer 2; 2. Expectations for Arbitrum's token issuance; 3. Growth of ecosystem applications, especially native applications. Since the launch of Arbitrum One mainnet last September, leading DeFi protocols on the Ethereum mainnet such as Uniswap, Sushiswap, and Curve have all deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications indicates developers' recognition of Arbitrum's scaling solution.

In June 2022, the Odyssey event selected 14 of the most active projects on Arbitrum, covering cross-chain bridges, DeFi, NFTs, games, and more. The event was originally planned to last for 8 weeks, but it was actually paused after just the first week. The reason for the pause was network congestion in the second week, leading to excessively high gas fees, even surpassing those on the Ethereum mainnet. This also reflected the difficulty Arbitrum faced at that time in accommodating such a large number of users.

Although the Odyssey lasted only a week, it still attracted a lot of attention. Arbitrum combines NFTs with event weeks to stimulate user participation enthusiasm, helping users to understand the Arbitrum ecosystem, while increasing the user base and bringing traffic to ecosystem projects. At the same time, it keeps the expectation of future token issuance, rather than rushing into 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, there were 55,000 new addresses added in a single day, setting a record for the highest number of new addresses in one day, highlighting the success of the Odyssey event.

After the Odyssey event, Arbitrum has been technically advancing continuously, with innovative mechanism projects emerging 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, up 51.2% from September. Arbitrum's trading volume and user numbers have also correspondingly increased.

Chapter 3 Analysis of Popular Projects

In the past two months, Arbitrum's native ecosystem projects have gained widespread attention in the crypto market. The following outlines some of the standout projects, which still have a gap in market capitalization compared to similar projects on other public chains and are in an undervalued state. With Arbitrum's token launch and future development, these projects are expected to have significant room for growth.

3.1 DeFi Category

Well-known projects with multi-chain deployment on Arbitrum include Uniswap and AAVE. However, native projects on Arbitrum have shown remarkable explosive growth, such as the perpetual contract exchange GMX and the yield aggregator Jones DAO. Currently, Arbitrum has formed a sustainable profit model: derivative protocols are similar to casinos, generating continuous business income; yield aggregators attract funds using strategies to expand returns; more participants bring in greater liquidity, leading to a continuous increase in 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. The operation is more complex compared to centralized exchanges and requires the use of oracles for price feeds. GMX utilizes Keeper( to perform opening and closing operations in a crowdsourcing-like manner.

When users close their positions, it is divided into two parts: sending the transaction and executing the operation, the latter of which is completed by the GMX Keeper. Users need to pay the gas fee for sending the transaction and the gas fee for the Keeper to execute the operation.

GMX TVL reached $543 million, accounting for 31.46% of Arbitrum DeFi protocols' TVL. Over the past year, it generated $33.9 million in revenue, and the GMX token performed excellently in 2022, with returns of 84.0% against the dollar 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 primarily a DEX of the Uniswap V2 + Curve type, adding features such as a Launchpad, customizable trading fees, integration of LP and NFTs, and incentives set by project parties. Main features:

• An AMM DEX similar to Uniswap V2, with liquidity distributed across the entire range.
• Stablecoin swap trading pairs similar to Curve
• Supports dynamic directional trading fees, project parties can set the handling fee ratio.
• Provide income and incentives through NFTs, users provide liquidity to obtain spNFT
• No permission agreement required, project parties can set incentives through Nitro Pools.
• Equipped with Launchpad functionality, supporting project financing and guiding liquidity

The highest TVL for similar projects on OP is Velodrome, with a liquidity of 77.14 million USD, exceeding Uniswap V3's 44.87 million USD, but with an FDV of only 9.46 million USD, resulting in an FDV/TVL of 0.21. Compared to Camelot, Velodrome has a higher TVL but a lower valuation.

Hot Project Three: RDNT

The Arbitrum lending protocol RDNT has two major innovations: utilizing LayerZero for multi-chain lending; the revolving loan ### is currently unavailable (. It is currently leading on Arbitrum, with a TVL surpassing that of the Aave V3 Arb version, but the long-term competition remains fierce.

As a full-chain lending protocol, users can deposit assets on the main chain and borrow supported assets across chains. The platform allocates 50% of the revenue to lenders and 50% to locked RNDT as rewards. The V2 version will be upgraded:

• Allow BTC, ETH, and USDC to be fully cross-chain borrowed and lent, with subsequent assets selected by DAO voting.
• Increase LP yield share, enhance liquidity and reduce slippage.
• Introduce the "Dynamic Liquidity" mechanism to reward long-term investors
• Exiting the liquidity pool triggers a penalty mechanism

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) 3.2 Game Category

Arbitrum has a rapidly developing GameFi ecosystem, especially with three popular projects: Treasure DAO, The Beacon, and Trident DAO. Currently, the Arbitrum GameFi ecosystem is relatively leading, but it has not yet formed an absolute advantage, and its future development is worth paying attention to.

Treasure DAO

Treasure is committed to building a "decentralized Nintendo," creating a series of on-chain games. The games are interconnected through asset interoperability and the MAGIC token 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 strategy game Realm.

These games can be accessed through Trove. Trove is the Treasure ecosystem center, providing a marketplace for in-game assets and NFT collectibles. The most popular series include Smol Brains###, Smolverse Foundation(, and The Lost Donkeys NFT series.

)# Trident DAO

The Arbitrum project "Trident" proposes the "Risk To Earn" sustainable GameFi economic model, sparking interest among players and the community, and becoming the hottest project in the Arbitrum ecosystem after the public sale of its token.

PSI is the official utility token of Trident, used for purchasing items, exchanging NFTs, and player betting in future versions of the game. Trident will charge a fee from each successful bet and permanently destroy it, achieving deflation.

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Chapter Four Future Development

The success of Arbitrum indicates that the Layer 2 track may become the starting point of the next bull market. However, both the Optimistic Rollup and zk Rollup routes still have technical issues to resolve. In the future, Arbitrum will develop in three areas: )1( continuous technical upgrades; )2( supporting ecological projects; )3( attracting users through expectations of token issuance.

In terms of technology, Optimistic Rollup still faces the issue of centralized sequencers. Arbitrum currently has centralized sequencers, whitelisted proof verification, and upgradable contracts. Although no security issues have arisen, it increases the risks of censorship and fund loss. Decentralized sequencers and permissionless proof verification are inevitable trends. Offchain Labs' technical roadmap includes:

• Reduce costs, increase tps
• Achieve decentralization
• Manage and authorize software upgrades in a decentralized manner
• Decentralized Validator
• sequencer decentralization

In terms of ecology, currently DeFi, cross-chain, and gaming are the main applications of Arbitrum. In the future, with the growth of developers and users, more new applications will be deployed, and social and NFT projects are particularly worth looking forward to. Given the success of Treasure and the potential of Arbitrum Nova, the Nova chain is expected to be truly enabled, consolidating Arbitrum's advantages in the gaming sector.

In terms of economic models, the token launch is beneficial for Arbitrum.