Deconstructing the February narrative: Arbitrum's technology, ecosystem, popular projects, and future.

Original Title: "Arbitrum Explodes as Expected"

Original Author: Huobi Research

摘要

translates to

Summary

in English.

With the slowdown of the Federal Reserve's interest rate hikes, the cryptocurrency market saw a small bull market at the end of January, with Bitcoin rising to a new high in six months, breaking through $23,700. Due to frequent positive news about Ethereum's Layer 2, Arbitrum has brought new vitality to the entire cryptocurrency market. Firstly, Arbitrum updated its technology in 2022 to cope with more frequent trading activities. Secondly, due to the popularity of the Odyssey event in the first week, Arbitrum's ecological projects have received tremendous attention.

This week, we will focus on the development of Arbitrum and analyze its technical upgrades and future roadmap. At the same time, in terms of ecology, we analyze the reasons for the success and future development of popular Defi and gaming projects, such as GMX, which has innovative mechanisms and impressive protocol revenue performance in bear markets. Based on this, the expected launch of Arbitrum's token will continue to bring positive news.

Overview

The most eye-catching track in early 2023 is undoubtedly Layer2, which is also in line with the predictions of most institutions and influential figures. In terms of coin prices, the ecological coins on Optimism, Polygon, and Arbitrum have also performed well, such as Token $OP reaching a high of $3.17 in February, and $MATIC reaching a high of $1.32. Under the impact of the bear market's explosion events of new public chains like Terra and Solana, the future will still be Ethereum's home court, and it can be said that there will be more competition between new public chains and Layer2. With the small climax of the cryptocurrency market, Arbitrum took the lead in February and created remarkable achievements.

Currently, Arbitrum is the project with the largest TVL in Ethereum's layer 2 scaling solutions, reaching 2.98B and accounting for 3.01% of all networks' TVL share. In L2, it also holds 49.51% of the TVL share. Arbitrum Rollup is a protocol managed by on-chain Ethereum contracts off-chain, so technically Arbitrum is not a blockchain, but rather uploads off-chain transactions to the Ethereum mainnet through compression algorithms. This approach can partially solve Ethereum's congestion problems, achieving advantages such as fast transactions, low gas fees, security guarantees, and good user experience.

Chapter 1 Technology Upgrade

In 2022, Arbitrum has been making frequent moves. In addition to the Odyssey event, it has also been constantly upgrading its technology, including launching the dual-chain Arbitrum Nova and Arbitrum One, and introducing a new programming environment called Stylus. Below, we will introduce these technological 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 called "Arbitrum Nova". This chain is built on the AnyTrust technology and is designed specifically for gaming, social applications, and use cases that are more cost-sensitive. The AnyTrust technology is based on the minimum trust assumption ensured through a data availability committee. This committee will be responsible for managing transaction data on the chain and providing support for batches of that data. Therefore, AnyTrust eliminates the 7-day withdrawal period that users would normally have to wait for, improving the user experience. The main technical core includes the following points: [Note: ZKS, STARK, SCROLL are not translated as they are proper nouns in the industry.]

Sign data availability certificates (DACerts) for batch transactions and publish them; if the committee cannot reach consensus, the chain will revert to the Arbitrum aggregator protocol; data execution will be performed on the L2 chain, and after a challenging period, the new aggregated state will be confirmed on Ethereum.

Nitro

By 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, Nitro mainly made the following technical upgrades:

Some modifications have been made to the previous AVM architecture and ArbOS. The popular WebAssembly (WASM) architecture will replace the old custom-designed AVM architecture. The custom EVM simulator has been replaced by Geth. ArbOS will be downsized and rewritten in Go, providing more optimized batch processing and compression systems for transactions.

Arbitrum Nitro's core technology is a new prover that can perform interactive fraud proofs on WASM code for Arbitrum. This allows for the use of standard languages and tools for building and compiling. Additionally, Gethcore is also directly compiled into Arbitrum, making it more compatible with EVM.

Stylus

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 favorite programming languages, including Rust, C, and C++, through WebAssembly smart contract functionality, to run alongside EVM programs on Arbitrum.

Stylus has increased its speed by an order of magnitude, and can reduce costs, while fully interoperating with the Ethereum Virtual Machine (EVM). Offchain Labs refers to Stylus as EVM+, but Stylus will not replace the EVM.

Chapter 2: Ecological Cooperation

Over the past year, Arbitrum's market share has grown significantly, driven by: 1. Continued optimism for Layer2; 2. Expectations for the release of Arb; 3. Growth in ecosystem applications, particularly native applications. Since the launch of the mainnet Arbitrum One in September of last year, top DeFi protocols on the Ethereum Layer1 mainnet, such as Uniswap, Sushiswap, and Curve, have integrated and deployed on Arbitrum One, as well as some well-known cross-chain protocols, such as Synapse and Stargate. The influx of these applications also demonstrates developers' optimism for Arbitrum's scaling solution.

In June 2022, the organizers of the Odyssey event selected the 14 most active projects on Arbitrum, including cross-chain bridges, DeFi, NFT, and games. The event was originally planned to last for 8 weeks, but was suspended after only the first week. The root cause of the suspension was network congestion in the second week, which resulted in high gas fees. At that time, gas fees had already exceeded those of the Ethereum mainnet. This fully demonstrates that Arbitrum was unable to handle so many users at that time.

However, although Odyssey only lasted for a week, the event still attracted enough attention. Arbitrum combined NFTs in the form of an activity week, which stimulated users' enthusiasm for participation and helped them understand the ecosystem of Arbitrum. While increasing the number of users, it also brought traffic to its ecosystem projects. At the same time, it retained expectations for future coin issuance, rather than hastily airdropping coins.

According to the data displayed on the browser, the number of new addresses on Arbitrum reached 207,000 from the start of the Odyssey event on June 21st until the end of the first week's tasks. On June 27th alone, there were 55,000 new addresses added, making it the day with the most new addresses added. This demonstrates the success of the Odyssey event.

After the Odyssey event, Arbitrum has been continuously improving its technology and launching innovative projects in its ecosystem, which has led to high expectations during the small bull market at the end of January. Currently, the average monthly active address of Arbitrum from October 2022 to January 2023 is 608.365k, which has increased by 51.2% compared to September. The trading volume and number of users on Arbitrum have also correspondingly increased.

Chapter 3: Popular Project Analysis

In the past 2 months, native ecosystem projects on Arbitrum have gained attention from the entire crypto market. Here are some of the outstanding projects, whose market value still has a certain gap compared to similar projects on other public chains, and are still undervalued. With the issuance and future development of Arbitrum, there will be great room for improvement.

3.1 Defi Class

There are well-known projects with multiple chain deployments on Arbitrum, such as Uniswap and AAVE. However, the native projects on Arbitrum have shown amazing explosiveness, such as the perpetual contract trading platform GMX, derivative yield aggregator and machine gun pool project Jones DAO, etc. Currently, Arbitrum has run a sustainable flywheel: derivative protocols similar to casinos have continuous business income; various yield aggregators use their own strategies to continuously attract funds and expand income; more people participate in yield aggregators, liquidity is more abundant, and income is increasing.

Hot Project One: GMX

GMX is a decentralized perpetual contract trading platform. It allows users to trade perpetual contracts for ETH, BTC, LINK, and UNI with leverage of up to 30x on a decentralized platform, rather than using leverage to short or long through centralized trading platforms such as Binance or FTX.

In terms of execution, it is more complex than centralized trading platforms and requires the use of oracles for price feeding. Therefore, it needs to rely on external forces to execute opening and closing operations, and GMX relies on Keeper (similar to crowdsourcing) to complete this task.

When users close their positions on GMX, the process is divided into two parts: sending the transaction by the user and executing the operation by GMX Keeper.

Users not only need to pay Gas fees for sending transactions, but also need to pay Gas fees for Keepers to execute operations in order to ensure that transactions can be executed properly.

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

Hot Project 2: Camelot

As the native DEX of Arbitrum, Camelot has completed its token sale in December 2022. Overall, it is a conventional Uniswap V2+Curve type of DEX with added features such as Launchpad, custom transaction fees, LP and NFT integration, and the ability for project teams to set incentives. Its functions and characteristics can be summarized as follows:

Camelot is an AMM DEX similar to Uniswap V2, with liquidity spread across the entire range from zero to infinity. It also features stablecoin exchange pairs similar to Curve and supports dynamic directed trading fees. Camelot allows project teams to set transaction fee ratios based on market conditions and protocol specifics, and provides revenue and incentive measures through NFTs. Users can provide liquidity and receive spNFTs representing their staked positions. The protocol is permissionless, and project teams can set incentive measures through the Nitro Pools incentive pool. This is an additional reward pool. Camelot also has Launchpad functionality, allowing project teams to raise funds and guide liquidity.

On OP, the project with the highest TVL among similar projects is Velodrome, with a liquidity of 77.14 million US dollars. This number even exceeds the 44.87 million US dollars of Uniswap V3, but the FDV is only 9.46 million US dollars, and the FDV/TVL ratio is 0.21. Compared to Camelot, Velodrome has a higher TVL but a lower valuation.

Hot Project Three: RDNT

The lending protocol RDNT on Arbitrum has two innovations: using LayerZero for cross-chain lending and enabling recursive borrowing (currently not available). Currently, it is a leader on Arbitrum with a TVL exceeding that of Aave V3's Arb version, but competition remains very intense in the long run.

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 and borrowers can borrow, with 50% of the resulting fees (platform revenue) going to the lender and the remaining 50% going to the RNDT lock-up as a reward. Currently, the protocol is in version 1, and version 2 will make the following upgrades:

Will allow for fully cross-chain borrowing and lending of BTC, ETH, and USDC, with more assets to be voted on by Radiant DAO. Protocol fees will be skewed towards LPs to increase liquidity and reduce slippage; introducing the "Dynamic Liquidity" mechanism to reward long-term investors; exiting liquidity pools will trigger a penalty mechanism.

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 GameFi ecosystem on Arbitrum does not have an absolute advantage compared to its derivatives and other chains, but it is relatively leading. Everything depends on future development.

Treasure DAO

Treasure wants to build a "decentralized Nintendo" consisting of a series of on-chain games that are interconnected through the interoperability of in-game assets and Treasure's native token, MAGIC. The most popular games in this collection include the strategy game Bridgeworld, the role-playing games 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 the marketplace for in-game assets and treasure NFT collectibles. The most popular series in these collections are Smol Brains (the foundation of Smolverse) and another NFT series, The Lost Donkeys, which has its own namesake game.

Trident DAO

Arbitrum's previous project "Trident" proposed a sustainable GameFi economic model called "Risk To Earn", which attracted the attention of players and the community, and soared to become the hottest project in the Arbitrum ecosystem after its token public sale.

PSI is the official utility token of Trident, which will be used in various games in its future versions. It can be used to purchase items, exchange NFTs, and place bets between players. Trident will also collect fees from each successful bet and permanently destroy them. Once the integration of Risk To Earn is completed, the supply of PSI will become deflationary.

Chapter 4 Future Development

The success of Arbitrum indicates that Layer2 will become the starting point of the next bull market. However, before that, there are still some technical issues that need to be solved, whether it is the Optimistic Rollup route or the zk Rollup route. In the future, the Arbitrum project will develop in three aspects: (1) continue to upgrade technology; (2) continuously support ecological projects; (3) attract users through the expectation of issuing coins.

First of all, technically, Optimistic Rollup technology is still criticized by slightly centralized sorters. Arbitrum currently has a centralized sorter and whitelist proof verification, as well as upgradable contracts. Although these have not yet posed security issues and are sufficient to protect user assets, they still increase the risk of scrutiny and loss of user funds. Therefore, decentralized sorters and permissionless proof verification are inevitable. Offchain Labs has also provided corresponding technical solutions to these issues:

Continuously reducing costs, improving TPS, upgrading management and authorization software to decentralization, decentralizing validators, and decentralizing sequencers.

Regarding the ecosystem, currently Defi, cross-chain, and gaming are the main applications that Arbitrum focuses on. However, as the number of developers and users continues to grow, more new applications will be deployed on the platform, and the most anticipated projects are social and NFT-related. Additionally, given the success of Treasure and the growth potential of Arbitrum Nova, the Arbitrum Nova chain will be truly utilized, putting Arbitrum in a favorable position in the gaming industry.

In terms of economic models, this is actually the most anticipated part. The launch of Token is crucial for the long-term success of Arbitrum, including: (1) Token distribution plan; (2) airdrop and incentive ecological plan; (3) governance plan. A good economic model will enable Arbitrum to develop in a more positive direction, attracting users and developers. Token distribution will also play an important role in determining the governance of L2 and the concentration of long-term power within the ecosystem. In addition, Token can also be used to decentralize key network functions, such as sorters - entities that sort, batch process, and submit transactions to L1.

From the above analysis, it can be seen that 2023 will be a year of continued growth for Arbitrum. It may continue the Odyssey project and strengthen the current DeFi and gaming projects, as well as launch unique native social and NFT projects. At the same time, it may launch the long-awaited Token and reward users and protocols. It will truly activate the Nova chain and begin deploying protocols.

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