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Read Ethereum two level project Arbitrum

HuoBi Research
03-22 12:41
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2023 will be the year Arbitrum continues to explode. It will likely continue the Odyssey project and strengthen the current DeFi and gaming projects, as well as feature native social and NFT projects. At the same time, with the launch of the long-awaited


Arbitrum Read Ethereum tier 2 project
Original article by Stefanie Huobi Research Institute


1. Project introduction    

  1.1 Technical scheme and Characteristics    

2. Arbitrum status    

3. Technology upgrade  

4. Ecological Cooperation    

5. Analysis of Popular Projects    

  5.1 Defi  

  5.2 Games    

6. Future Development of Layer2  

   6.1 Bottlenecks and Prospects of Rollup Scheme  

  6.2 Arbitrum's Continued Burst in 2023  

Reference material

      1. Project introduction

1.1 技术方案及特点   

Arbitrum program is proposed and created by Offchain Labs. It is a pure research-oriented academic project at the beginning, and gradually turned into practice after continuous optimization and improvement. This scheme is also a solution based on Optimistic Rollup, which maintains security through the game model of economic incentives and maintains the validity of transactions through fraud proof. The main difference lies in the challenge mechanism and implementation form. Optimism can be judged only by ordering and verifier performing a fraud proof interaction, while Arbitrum believes that an interaction may lead to fraud proof containing a large number of transactions beyond the gas limit, and proposes that fraud proof is due to the abnormal execution of a single instruction, without executing all instructions. Therefore, Arbitrum will fraud proof is divided into multiple rounds of steps, only need to prove that the sort in the execution of a certain instruction abnormal, can prove that the sort of evil, save costs.

Arbitrum's plan is consistent with the main characteristics of Optimism Rollup. We will not repeat it, but focus on the changes brought by the change of fraud proof mechanism.

1. Multiple rounds of fraud proof interaction.

Arbitrum uses multiple rounds of fraud proof to verify the validity of the transaction, reduce the gas required to consume a single challenge, and do not have to worry about gas costs beyond the limit.

2. Better compatibility with EVMs.

Although Team Optimism's OVM is compatible with EVM, it is not 100% compatible; existing projects migrating from one tier still require code changes; Team Arbitrun's solution is almost 100% compatible.

Multi-step transactions may have security issues. The validity verification of Arbitrum transaction requires multiple rounds of interaction, and the built-in VM needs to support the asynchronous mechanism, which is more complex and has a larger amount of code, and may have security problems.

2. Arbitrum current situation


2023 年初表现最亮眼的赛道莫过于 Layer2,这也符合大部分机构和影响力人物的预测。在币价上,Optimism, Polygon 以及 Arbitrum 上的生态币也都表现不错,比如Token$OP 在 2 月最高$3.17,$MATIC 最高也达到$1.32。在 Terra 和 Solana 这类新公链在熊市的暴雷事件影响下,未来还将是以太坊的主场,可以说更多是新公链和 Layer2 的竞争。随着加密行情出现的小高潮,在 2 月 Arbitrum 一马当先,创造了瞩目的成果。

Figure 1. TVL in all chains


目前,Arbitrum 是以太坊二层扩容方案中 TVL 最大的项目,达到 3.85B,占所有网络的 3.63% TVL 份额,在 L2 中还拥有 55.97% 的 TVL 份额,尤其是空投之后,增长了 21.29%。Arbitrum Rollup 是一种由链上以太坊合约管理的链下协议,所以准确地说 Arbitrum 并不是一条区块链,而是把链下交易通过压缩算法上传到以太坊主网。这种方式能够部分解决以太坊面临的拥堵问题,以达到快速交易、低 gas fee、安全性保证、用户体验好等优势。


Figure 2. Overview of the Layer2 project

On March 16, 2023, Arbitrum announced its Token$ARB, which is the DAO governance Token for the Arbitrum One and Arbitrum Nova networks. Arbitrum Token $ARB Initial total supply of 10 billion pieces with inflation of up to 2% per year. In terms of Token airdrop, 11.62% of the initial total supply will be airdropped to Arbitrum users, and 1.13% will be airdropped to DAO vault built in Arbitrum construction application. The specific Token allocation is as follows:

42.78% (4.278 billion pieces) Arbitrum DAO vault;

26.94% (2.694 billion) to Offchain Labs teams/future teams and consultants;

17.53% (1.753 billion) to Offchain Labs investors;

11.62% (1.162 billion) were allocated to Arbitrum users by air drop;

1.13% (113 million) were allocated to DAOs (via airdrop) building applications on Arbitrum.


3. Technology upgrade

In 2022, Arbitrum moves frequently, in addition to the Odyssey activities, its technology upgrade is also constantly innovate, including the launch of Arbitrum Nova and Arbitrum One double chain, launched a new programming environment Stylus. Let's take a look at the core of these technologies and the problems they solve.


(1) Arbitrum Nova - AnyTrust chain

On July 12, 2022, Arbitrum Network announced the construction of a new chain "Arbitrum Nova". This chain is built on AnyTrust technology and is designed for games, social applications, and more cost-conscious use cases. AnyTrust technology is based on the assumption of minimum trust ensured through the Data Availability Committee. This committee will be responsible for managing the off-chain transaction data and providing that data to support batches. Therefore, AnyTrust eliminates the 7-day waiting period for users to withdraw money and improves user experience. The main technical cores are as follows:

l Sign Data Availability Certificates (DACerts) for volume transactions and publish these dacerTs;

If the committee cannot reach a consensus, the chain will revert to Arbitrum summary protocol;

l Data execution will be performed on the L2 chain, and after a challenging period, the new summary state will be confirmed on Ethereum.


(2) Nitro

By the end of August 2022. Arbitrum One successfully upgraded to Nitro version. The Nitro upgrade greatly improves network speed and reduces transaction costs. Overall, Nitro has made the following major technical upgrades:

l Some modifications to the previous AVM architecture and ArbOS;

l The popular WebAssembly (WASM) architecture will replace the old, custom designed AVM architecture.

l Custom EVM emulator replaced by Geth;

l ArbOS will be downsized and rewritten with 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 can perform Arbitrum's interactive fraud proof on WASM code. This allows you to build and compile using standard languages and tools. At the same time, Gethcore compiles directly into Arbitrum, making it more EVM-compatible.


(3) Stylus

Arbitrum 开发团队 Offchain Labs 宣布将为 Arbitrum One 和 Arbitrum Nova 推出下一代编程环境 Stylus,Stylus 通过 WebAssembly 智能合约功能,允许用户使用他们最喜欢的编程语言(包括 Rust、C 和 C++)部署应用程序,以便与 Arbitrum 上的 EVM 程序一起运行。Stylus 的速度快了一个数量级,并且能够降低费用,并且与以太坊虚拟机(EVM)完全互操作。Offchain Labs 将 Stylus 称之为 EVM+,但是,Stylus 不会取代 EVM。


4. Ecological cooperation

在过去一年,Arbitrum 市场份额大幅增长,这种增长来源于:1. Layer2 的持续看好;2. Arb 的发币预期;3. 生态应用的增长,尤其是原生应用的增长。自去年 9 月主网 Arbitrum One 上线以来,以太坊 Layer1 主网上的头部 DeFi 协议 Uniswap、Sushiswap、Curve 等应用纷纷在 Arbitrum One 上集成部署,还有一些知名的跨链协议。例如 Synapse 和 Stargate。这些应用的涌入也表明了开发者对 Arbitrum 扩容方案的看好。

In June 2022, Odyssey Event organizers selected 14 of the most active projects on Arbitrum, including cross-chain Bridge, DeFi, NFT, Games. It was supposed to last eight weeks, but was suspended after only the first week. The root cause of Odyssey's suspension was that during the second week, the network was congested and the gas fee was too high. At that time, it has exceeded the gas fee of the main network of Ethereum. In fact, this has fully explained that Arbitrum's state at that time could not carry so many users.

But even though the Odyssey has only been running for a week, the event has attracted plenty of attention. Arbitrum combined with NFT in the form of activity week, which aroused the enthusiasm of users to participate in Arbitrum, and also helped users to understand the ecology of Arbitrum, which not only increased the number of users, but also brought traffic to its ecological projects. At the same time, it retains the expectation of issuing coins in the future, rather than issuing coins in a hurry to drop the way.

According to the data on the browser, Arbitrum added 20.7 million addresses from the beginning of the Odyssey on June 21 to the end of the first week. On June 27, 55,000 new addresses were added in a single day, the largest number ever added in a single day. This shows the success of the Odyssey.

Figure 3. Change of unique address number on the Arbitrum chain

After the Odyssey activity, Arbitrum continued to make efforts in technology and launched innovative projects in ecology, which made its small bull market expectations at the end of January. Currently, Arbitrum's average monthly active address number from October 2022 to January 2023 was 608.365k, up 51.2% from September. Arbitrum trading volume and the number of users also have a corresponding rise.


Figure 4. Monthly Active Address number for Arbitrum (dune, @springzhang)


5. Analysis of popular projects

Nearly 2 months, Arbitrum's original ecological project has gained the attention of the entire encryption market. Here is a review of some outstanding projects, the market value of these projects and other public chain of the same type of projects there is a certain gap, or in a state of low valuation. With Arbitrum coin and future development, there will be a lot of room for improvement.


Table 2. Arbitrum ecological quality project information summary
(Source: Huobi Research)

5.1 Defi

Arbitrum has multi-chain deployment of well-known projects, such as Uniswap and AAVE. However, Arbitrum's original projects, such as GMX, a perpetual contract trading platform, derived revenue aggregator, and Jones DAO, a machine gun pool project, have shown amazing explosive power. Currently Arbitrum has run through a can continue to make money on the flywheel: derivatives agreements similar to casinos, have continued business revenue; All kinds of income aggregators use their own strategies to continuously attract funds and expand their returns; More people participate in income aggregators, more liquidity, and more revenue.

图 5. Arbitrum TVL 排名前十的项目(来源:Defillama)


(1) Hot Project 1: GMX

GMX 是一个去中心化永续合约 交易平台 。其允许用户在一个去中心化的平台上进行高达 30 倍杠杆的 ETH、BTC、LINK 和 UNI 永续合约交易,而不是通过 Binance 或 FTX 等中心化交易平台使用杠杆来进行做空或做多。

In execution, it is more complex than a centralised trading platform and requires the use of prognosers to feed prices. So, it needs to use external forces to perform the opening and closing operations, and GMX uses Keeper (similar to crowdsourcing) to do this work.

When a user performs a liquidation operation on GMX, it is divided into two parts: the user sends the trade, and the other part executes the operation, which is completed by GMX Keeper. The user not only needs to pay the Gas fee for sending the transaction, but also needs to pay the Gas fee for the Keeper operation in order to ensure the normal execution of the transaction.

GMX TVL 达 4.96 亿美元,占 Arbitrum 所有 DeFi 协议 TVL 的 27.53%(2023 年 3 月 20 日数据)。该协议在过去一年中产生了 3390 万美元的收入,使 GMX Token成为在动荡的 2022 年表现最佳的资产之一,对美元和 ETH 的回报率分别为 84.0% 和 428.5%。


(2) Hot project 2: Camelot

Camelot, as Arbitrum's native DEX, has completed Token sales in December 2022 and is still a regular Uniswap V2+Curve type DEX overall, Add Launchpad, custom transaction fees, LP and NFT, and allow project owners to set incentives. Its features and features are summarized below:

l AMM DEX, like Uniswap V2, with liquidity spread over the entire interval from zero to infinity;

l Stablecoin swap pairs similar to Curve;

l Support dynamic directional transaction costs. Camelot allows the project operator to set transaction fee rates based on market conditions and the specific conditions of the agreement.

l Provide revenue and incentives through NFT. The user provides liquidity to obtain spNFT representing the pledged position;

l Agreements are license-free and project parties can set incentives through Nitro Pools. This is an extra bonus pool.

A Launchpad capability that allows project parties to raise funds and channel liquidity.


Velodrome has the highest TVL of its type on OP, with $77.14 million in liquidity. This was even higher than Uniswap V3's $44.87 million, but only $9.46 million for FDV and 0.21 for FDV/TVL. Velodrome's TVL is higher than Camelot's, but at a lower valuation. Camelot's TVL also saw a 57% increase to $98.79 million.


(3) Hot item 3: RDNT

Arbitrum's loan agreement RDNT has two innovations: using LayerZero for multi-chain lending; You can borrow on a revolving basis. At present, it is the leader in Arbitrum, TVL exceeds the Arb version of aave V3, but the competition is still very, very big in the long run.

Because it is a full-chain lending agreement, users can deposit any major asset on any major chain and borrow a variety of supported assets across the chain. The lender deposits the asset, and he/she can borrow, with 50% of the resulting fees (platform proceeds) going to the lender and the remaining 50% to the lock up RNDT as an incentive. The protocol is currently version V1, but version V2 will make the following upgrades:

l will allow full cross-chain lending to BTC, ETH and USDC, followed by more assets voted for by Radiant DAO.

l will tilt the agreement fee toward LP, thereby improving liquidity and reducing slip point;

l Introduce "Dynamic Liquidity" mechanism to reward long-term investors;

l Exit from the liquidity pool triggers a penalty mechanism.



Arbitrum has a fast-growing GameFi ecosystem, especially three popular projects: Treasure DAO, The beacon, and Trident DAO. At present Arbitrum GameFi ecology is not like its derivative track has and other chain than the absolute advantage, just relative lead, everything needs to see the follow-up development.

(1) Treasure DAO

Treasure wants to build a "decentralized Nintendo," a series of on-chain games that are connected to each other through the interoperability of in-game assets and Treasure's native Token MAGIC as a shared currency. Some of The most popular of these games include role-playing games such as strategy games Bridgeworld, The Beacon and Smolverse, as well as resource management and strategy game Realm.

这些游戏可以通过 Trove 访问。Trove 是宝藏生态系统的中心,是游戏内资产和宝藏 NFT 收藏品的市场。这些系列中最受欢迎的是 Smol Brains(Smolverse 的基础)和另一个 NFT 系列 The Lost Donkeys,它有自己的同名游戏。


(2) Trident DAO

Arbitrum 上一个项目「Trident」提出了「Risk To Earn」的可持续 GameFi 经济模型,引起了玩家和社群的关注,并在其 Token 公售后飙升为 Arbitrum 生态热度最高的项目。

PSI 是 Trident 的官方实用 Token,将使用于其未来版本中的各种游戏,可用于购买物品、兑换 NFT,玩家之间的投注等,并且 Trident 将从每次成功的下注中收取费用然后将其永久销毁,一旦 Risk To Earn 集成完成,PSI 的供应就会通货紧缩。


6. Future development of Layer2

    6.1 a Rollup scheme bottlenecks and prospect & have spent  

Rollup 是被寄予厚望的扩容解决方案,其交易消耗的 gas 相比于以太坊主网大大减少。根据实际统计,Optimism 和 Arbitrum 的费用只有以太坊主网的 10%-30%,而 ZK rollups 的费用还不到以太坊的 5%。一方面减少了链上资源的消耗,一方面又能保持数据的可用性,也就是以太坊主网能够查看并保证任何人都不能篡改链下的交易,Rollup 可以继承以太坊的去中心化和安全性,成为了 Layer 2 的主流技术方案[1].

At present, there are some weaknesses in Rollup technology, which prevent it from large-scale development. These weaknesses include the following points:

1. Poor user experience

(1) There is a challenge period for the withdrawal of OP. At present, the waiting period for the withdrawal of the official cross-chain bridge of the four major ops is 7 days; (2) Low interoperability between Rollup and limited asset types supported by some cross-chain Bridges; (3) OP lacks cost advantage. According to l2fees data, the ETH transfer, Token transfer and Token exchange fees of OP are all higher than $1; (4) The recharge procedure is tedious.

    Figure 6. Each major Rollup and public chain transfer nativeTokenThe handling fee.Source: l2fees, Blockchain Browsers, Huobi Research Institute


2. Low capital efficiency

(1) Liquidity fragmentation reduces capital efficiency, and different Rollup platforms and applications built on them will further fragment liquidity. (2) The challenge period of OP reduces capital efficiency.

3. Security risks exist

Layer 2 and Rollup are both cutting-edge technologies, and many users have doubts about their security, mainly reflected in the following aspects: (1) The vulnerability of the smart contract of Rollup itself leads to the theft of user funds; (2) The Rollup operator fails or intentionally does evil, resulting in the freezing of user funds; (3) The cross-chain bridge is attacked or the operator does evil, resulting in the theft of funds locked by users.


From the above three aspects, we can envision the future development focus of Rollup solution:

(1) To improve user experience, the wider adoption of fast cross-chain Bridges and more convenient transaction platform charging can reduce the impact of the waiting period for OP withdrawal, reduce the amount of uploaded data and improve the efficiency of off-chain processing to reduce costs.

(2) Improve capital efficiency, which can be improved by pooling liquidity.

(3) Improve security by promoting decentralized Rollup operation and setting mandatory withdrawal mechanism.


  6.2 Arbitrum's Continued Burst in 2023    

Arbitrum's success suggests that the Layer2 circuit will be the starting point for the next bull market. But before that, both Optimistic Rollup and zk Rollup routes still have some technical issues to work out. In the future, Arbitrum project will develop in three aspects: (1) Continue to upgrade technology; (2) Continuous support for ecological projects; (3) Attract users by issuing coins.

First, technically Optimistic Rollup technology is still criticized by somewhat centralized collators. Arbitrum currently has a centralized sorter and whitelist proof verification, while having scalable contracts. While these are not currently a security issue, they are sufficient to protect user assets. But it still increases the risk of censorship and loss of user funds. So, decentralized collators and permissionless proofs are the way to go. offchain labs also provides corresponding technical routes on these issues:

l Continue to reduce costs and improve tps

l Decentralization

l Decentralize management and licensing software upgrades

l Decentralization of verifiers

l sequencer Decentralizes

在生态方面,目前 Defi、跨链和游戏类是 Arbitrum 主打应用。但未来随着开发者和用户的不断增长,会有更多的新应用部署在该平台,而最值得期待的是社交类和 NFT 类的项目。同时,鉴于 Treasure 的成功和 Arbitrum Nova 的增长潜力,Arbitrum Nova 链将会真正用起来,让 Arbitrum 在游戏领域处于有利地位。

This is actually the most anticipated part of the economic model. The launch of the Token is critical to Arbitrum's long-term success and includes:

(1) Token allocation scheme;

(2) airdrop and incentive ecological programs;

(3) Governance plan. Good economic model will allow Arbitrum to develop in a more positive direction to attract users and developers. Token allocation will also play an important role in determining L2 governance and the long-term concentration of power within the ecosystem. In addition, tokens can be used to decentralize key network functions, such as collators -- entities that sort, batch, and submit transactions to L1.

From the above analysis can be seen, 2023 will be Arbitrum continued outbreak of the year. It will likely continue the Odyssey project and strengthen the current DeFi and gaming projects, as well as feature native social and NFT projects. At the same time, with the launch of the long-awaited Token economy model for rewarding users and protocols, the late true commissioning of the Nova chain, and the beginning of the deployment of protocols, these are all good news for Arbitrum.

[1]  On a Rollup technology development can be further reading Huobi Research Research report: https://research.huobi.com/#/ArticleDetails?id=265   

   Reference material
5.Optimism Bedrock VS Arbitrum Nitro - PANews (panewslab.com)

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