Deconstructing the Main Narrative of February: Arbitrum's Technology, Ecosystem, and Future Development

Summary

With the Federal Reserve slowing down interest rate hikes, the cryptocurrency market saw a slight increase at the end of January, with Bitcoin breaking through $23,700, reaching a six-month high. The frequent positive news regarding Ethereum's layer-2 networks, especially the performance of Arbitrum, has injected new vitality into the entire market. Arbitrum underwent a technical upgrade in 2022 to cope with the increasingly frequent trading activities, while its ecological projects gained significant attention due to the popularity of the first week of the Odyssey event.

This article will focus on the development of Arbitrum, analyzing its technological upgrades and future roadmap. In terms of ecology, we will explore the success factors and development prospects of some popular DeFi and gaming projects, such as GMX, which has innovative mechanisms and has performed well in terms of protocol revenue during the bear market. In addition, the anticipation of Arbitrum's token issuance is expected to continue to bring positive benefits.

Overview

At the beginning of 2023, Layer 2 has become the most outstanding track, which aligns with the predictions of most institutions and influential figures in the industry. In terms of coin prices, the ecosystem tokens on Optimism, Polygon, and Arbitrum performed well. Against the backdrop of new public chains like Terra and Solana facing setbacks in the bear market, the Ethereum ecosystem will still dominate, with more competition expected between new public chains and Layer 2 in the future. As the crypto market shows a slight rebound, Arbitrum stood out in February, 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 holding 49.51% of the TVL 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 Technology Upgrade

In 2022, Arbitrum continuously innovated in technological upgrades, mainly including the launch of the Arbitrum Nova and Arbitrum One dual chains, and the introduction of a new programming environment called Stylus.

Arbitrum Nova --- AnyTrust Chain

In July 2022, the Arbitrum network launched a new chain called "Arbitrum Nova". This chain, built on AnyTrust technology, is designed specifically for gaming, social applications, and cost-sensitive use cases. The AnyTrust technology is based on a minimal trust assumption ensured by a data availability committee, which is responsible for managing off-chain transaction data and providing data support batches. This technology eliminates the 7-day withdrawal waiting period that users previously had to endure, enhancing the user experience.

Nitro

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

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

The core of Arbitrum Nitro technology is a new prover that can perform Arbitrum's interactive fraud proofs on WASM code, built and compiled using standard languages and tools. At the same time, Gethcore is directly compiled into Arbitrum, enhancing EVM compatibility.

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 languages such as Rust, C, and C++ through its WebAssembly smart contract functionality, running alongside EVM programs on Arbitrum. Stylus is an order of magnitude faster, capable of reducing costs, and fully interoperable with the Ethereum Virtual Machine (EVM).

Chapter Two Ecosystem Cooperation

In the past year, Arbitrum's market share has grown significantly, mainly due to:

1. Continued optimism for Layer 2
2. Expected Token Distribution of Arbitrum
3. Growth of ecological applications, especially the growth of native applications

Since the launch of the Arbitrum One mainnet in September 2022, leading DeFi protocols on the Ethereum Layer 1 mainnet, such as Uniswap, Sushiswap, and Curve, have successively deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications indicates developers' optimism about the Arbitrum scaling solution.

In June 2022, the Odyssey event selected 14 of the most active projects on Arbitrum, covering cross-chain bridges, DeFi, NFTs, and gaming. Although the event was paused after just the first week due to network congestion, it still attracted a lot of attention. During the event, Arbitrum added 207,000 new addresses, with a single-day addition of 55,000 on June 27, setting a record for the most new addresses added in a single day.

After the Odyssey event, Arbitrum has been technically advancing continuously, introducing innovative mechanism projects within its ecosystem, making it highly anticipated in the small bull market at the end of January. From October 2022 to January 2023, Arbitrum's average monthly active address count was 608,365, an increase of 51.2% compared to September. The trading volume and user count have also increased accordingly.

Chapter 3 Analysis of Popular Projects

In the past two months, native ecosystem projects on Arbitrum have gained attention from the entire cryptocurrency market. Below are some standout projects that still have a certain gap in market capitalization compared to similar projects on other public chains, placing them in an undervalued state. With the issuance of tokens on Arbitrum and future developments, these projects are expected to 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, the native projects on Arbitrum demonstrate astonishing explosive power, such as the perpetual contract exchange GMX, derivative yield aggregators, and the gun pool project Jones DAO. Currently, Arbitrum has formed a sustainable profit ecosystem: derivatives protocols are similar to casinos and have continuous business revenue; various yield aggregators attract funds continuously with their strategies, expanding returns; more people participating in yield aggregators leads to increased liquidity and consequently higher income.

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. GMX utilizes Keepers (similar to crowdsourcing) to execute opening and closing operations. Users are required to pay the Gas fees for sending transactions and the Gas fees for Keeper operations.

The TVL of GMX has 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 returns of 84.0% and 428.5% against the US dollar and ETH, respectively.

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, featuring functionalities such as a Launchpad, customizable trading fees, integration of LPs with NFTs, and allowing project parties to set incentive measures. Its main features include:

• AMM DEX similar to Uniswap V2
• Stablecoin swap trading pairs similar to Curve
• Supports dynamic directional trading fees
• Provide income and incentives through NFTs
• Permissionless protocol, project parties can set incentive measures
• Equipped with Launchpad feature

RDNT

The lending protocol RDNT on Arbitrum has two innovations: utilizing LayerZero for multi-chain lending; and allowing for looping loans (currently not available). It is currently the leader on Arbitrum, with a TVL exceeding that of Aave V3's Arbitrum version. RDNT is a cross-chain lending protocol, allowing users to deposit any major asset on any major chain and borrow various supported assets across chains. 50% of the platform's revenue goes to lenders, and 50% is allocated to locked RNDT as rewards.

The V2 version of RDNT will undergo the following upgrades:

• Allow complete cross-chain lending for BTC, ETH, and USDC
• Shift the 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 growing 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 like its derivatives track; it is only relatively ahead, and its future development still needs to be observed.

Treasure DAO

Treasure is committed to building a "decentralized Nintendo," which 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. 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, which is the center of the Treasure ecosystem and the marketplace for in-game assets and NFT collectibles. The most popular NFT series include Smol Brains (the foundation of Smolverse) and The Lost Donkeys.

Trident DAO

Trident has introduced the "Risk To Earn" sustainable GameFi economic model, attracting the attention of players and the community. PSI is Trident's official utility token, 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 integration of Risk To Earn is completed, the supply of PSI will show a deflationary trend.

Chapter Four Future Development

The success of Arbitrum indicates that the Layer 2 track will be the starting point for the next bull market. However, before that, both the Optimistic Rollup and zk Rollup routes still have some technical issues that need to be addressed. In the future, the Arbitrum project will develop in three areas:

1. Continue technology upgrades
2. Continuously support ecological projects
3. Attract users to enter the market through the expectation of issuing tokens

On the technical side, Optimistic Rollup technology is still criticized for its somewhat centralized sequencers. Arbitrum currently has centralized sequencers and whitelisted proof validation, as well as upgradable contracts. Although there have been no security issues so far, it still increases the risk of censorship and loss of user funds. Therefore, decentralized sequencers and permissionless proof validation are the inevitable direction of development. Offchain Labs has provided the corresponding technical roadmap:

• Continue to reduce costs and improve TPS
• Decentralized
• Decentralize the management and authorization of software upgrades
• Validator Decentralization
• Sequencer Decentralization

In terms of ecology, the main applications of Arbitrum currently are DeFi, cross-chain, and gaming. In the future, as the number of developers and users continues to grow, it is expected that more new applications will be deployed on this platform, among which social and NFT projects are the most anticipated. At the same time, given the success of Treasure and the growth potential of Arbitrum Nova, the Nova chain is expected to be put to real use, allowing Arbitrum to gain a favorable position in the gaming field.

In terms of economic models, the launch of the token is crucial for the long-term success of Arbitrum, including:

1. Token Distribution Plan
2. Airdrop and Incentive Ecosystem Programs
3. Governance Plan

A good economic model will drive Arbitrum towards a more positive direction, attracting users and developers. Token distribution will also play an important role in determining the governance of L2 and the long-term power distribution within the ecosystem. In addition, the tokens can also be used to decentralize key network functions, such as the sequencer (an entity responsible for ordering, batching, and submitting transactions to L1).

In summary, 2023 is expected to be a year of continuous growth for Arbitrum. It may continue to develop the Odyssey project.