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

Summary

At the beginning of 2023, as the Federal Reserve slowed down interest rate hikes, a small bull market emerged in the crypto market. Bitcoin's price reached a six-month high, breaking through $23,700. The Ethereum Layer 2 network frequently received positive news, especially Arbitrum, which injected new vitality into the entire crypto market. On one hand, Arbitrum underwent a technical upgrade in 2022 to meet the growing demand for transactions. On the other hand, the explosive performance of the Odyssey event in the first week attracted widespread attention to the Arbitrum ecosystem projects.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future plans. At the same time, we will also explore the success factors and development prospects of popular DeFi and gaming projects in the ecosystem, such as GMX, which has innovative mechanisms and impressive protocol revenue performance during the bear market. Additionally, the anticipated token issuance of Arbitrum is expected to bring further benefits.

Overview

At the beginning of 2023, the Layer 2 sector performed the best, which aligns with the predictions of most institutions and industry insiders. In terms of price performance, the ecosystem tokens of Optimism, Polygon, and Arbitrum all performed well. For example, $OP reached a peak of $3.17 in February, and $MATIC reached a high of $1.32. After new public chains like Terra and Solana were severely impacted during the bear market, the future market will focus more on the Ethereum ecosystem, with the main competition occurring between new public chains and Layer 2. As the crypto market slightly warms up, Arbitrum stood out in February, achieving remarkable results.

Currently, Arbitrum is the largest project in terms of total locked value (TVL) among Ethereum's Layer 2 scaling solutions, reaching $2.98B, accounting for 3.01% of the total TVL across all networks, and capturing 49.51% of the TVL share within Layer 2. Arbitrum Rollup is an off-chain protocol managed by on-chain Ethereum contracts, which uploads off-chain transaction data 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, security guarantees, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum made significant breakthroughs in technology. In addition to hosting the Odyssey event, it also launched several technological innovations, including the introduction of the Arbitrum Nova and Arbitrum One dual-chain architecture and the release of a new programming environment called Stylus. Below is a detailed introduction to the core of these technologies 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 and is specifically designed for gaming, social applications, and cost-sensitive scenarios. AnyTrust technology is based on minimal trust assumptions ensured by a data availability committee. The committee is responsible for managing off-chain transaction data and providing data support for batches. As a result, AnyTrust eliminates the 7-day withdrawal waiting period for users, enhancing the user experience. Key technical features include:

• Sign the data availability certificate )DACerts### for batch trading and publish it;
• 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 included the following technical improvements:

• 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 scale down ArbOS using Go to provide a more optimized batch processing and compression system for transactions.

The core of Arbitrum Nitro technology is a new prover (, which enables interactive fraud proofs for 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, improving compatibility with EVM.

) Stylus

The Arbitrum development team Offchain Labs has announced the launch of a new generation programming environment called Stylus for Arbitrum One and Arbitrum Nova. Stylus allows users to deploy applications using familiar programming languages such as Rust, C, and C++ through WebAssembly smart contract functionality, enabling collaboration with EVM programs on Arbitrum. Stylus offers faster speeds and lower fees while being fully interoperable with the Ethereum Virtual Machine (EVM). Offchain Labs refers to Stylus as EVM+, but Stylus will not replace EVM.

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Chapter Two Ecological Cooperation

In the past year, Arbitrum's market share has significantly increased, mainly due to the following three factors: 1. Layer 2 continues to be favored; 2. Expectations for Arbitrum token issuance; 3. Growth of ecological applications, especially the rapid development of native applications. Since the launch of the Arbitrum One mainnet last September, leading DeFi protocols on the Ethereum Layer 1 mainnet such as Uniswap, Sushiswap, and Curve have all been deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications reflects developers' confidence in 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 just the first week. The main reason for the pause was network congestion during the second week, which led to excessively high gas fees, even exceeding those of the Ethereum mainnet. This clearly demonstrated 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 significant attention. Arbitrum combined NFTs in the form of an event week to stimulate user engagement, helping users understand the Arbitrum ecosystem. While increasing the user base, it also brought traffic to ecosystem projects. At the same time, the event retained expectations for future token issuance, rather than rushing to issue tokens for airdrops.

According to browser 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 new addresses reached 55,000, setting a record for the most new addresses in a single day.

After the Odyssey event, Arbitrum has been technically making strides, continuously launching innovative mechanism projects in its ecosystem, making it highly anticipated in the small bull market at the end of January. Currently, the average monthly active addresses for Arbitrum from October 2022 to January 2023 is 608,365, a 51.2% increase from September. The trading volume and user numbers for Arbitrum have also correspondingly increased.

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Chapter Three Popular Project Analysis

In the past two months, Arbitrum's native ecological projects have attracted attention from the entire cryptocurrency market. The following outlines some outstanding projects, which still have a certain gap in market capitalization compared to similar projects on other public chains, remaining in an undervalued state. With Arbitrum's token issuance and future development, these projects are expected to have significant growth potential.

) 3.1 DeFi Category

On Arbitrum, there are well-known projects with multi-chain deployments like Uniswap and AAVE, as well as native projects that demonstrate incredible explosive power, such as the perpetual contract exchange GMX, derivative yield aggregators, and the gunpool project Jones DAO. Currently, Arbitrum has formed a sustainable profit-generating virtuous cycle: derivatives protocols are similar to casinos, with continuous business income; various yield aggregators attract funds continuously using their own strategies and expand yields; more people participate in yield aggregators, liquidity becomes more ample, and income continues to increase.

(# Hot Project One: GMX

GMX is a decentralized perpetual contract exchange. Users can trade perpetual contracts for ETH, BTC, LINK, and UNI with up to 30x leverage on a decentralized platform, without the need to use leverage to short or long through centralized exchanges like Binance or FTX.

In operation, GMX is more complex than centralized exchanges, requiring the use of an oracle for price feeding. It completes opening and closing positions with the help of Keepers (similar to crowd-sourcing). When users close positions on GMX, it is divided into two parts: sending the transaction and executing the operation, the latter being carried out by GMX Keeper.

In addition to paying the Gas fee for sending transactions, users also need to pay the Gas fee for the Keeper to execute operations to ensure that the transactions are executed properly.

GMX TVL reached $543 million, accounting for 31.46% of the total DeFi protocol TVL 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.

)# Hot Project 2: Camelot

Camelot, as the native DEX of Arbitrum, completed its token sale in December 2022. It is based on the conventional Uniswap V2 + Curve type DEX, adding features such as a Launchpad, customizable trading fees, integration of LPs with NFTs, and allowing project teams to set incentive measures. Key features include:

• An AMM DEX similar to Uniswap V2, with liquidity distributed across the entire range from zero to infinity;
• Stablecoin swap trading pairs similar to Curve;
• Supports dynamic directional transaction fees, allowing project parties to set transaction fee ratios based on market conditions and protocol circumstances;
• Provide income and incentives through NFTs, users provide liquidity to obtain spNFTs representing staked positions;
• Permissionless protocol, projects can set up incentives through Nitro Pools;
• Equipped with Launchpad functionality, project parties can raise funds and guide liquidity.

Hot Project Three: RDNT

The lending protocol RDNT on Arbitrum has two innovations: using LayerZero for multi-chain lending; and circular lending (currently unavailable). It currently leads on Arbitrum, with a TVL exceeding the Arbitrum version of Aave V3, but long-term competition remains fierce.

As a full-chain lending protocol, users can deposit major assets on any major chain and borrow various supported assets across chains. Lenders deposit assets, and borrowers can borrow, with the generated fees (platform revenue) being distributed 50% to lenders and the remaining 50% to locked RNDT as rewards. Currently, this protocol is in V1 version, and the V2 version will undergo the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC, with more assets to be selected later by voting from the Radiant DAO;
• 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.

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3.2 Game Category

Arbitrum has a rapidly developing GameFi ecosystem, especially three popular projects: Treasure DAO, The Beacon, and Trident DAO. Currently, Arbitrum's GameFi ecosystem does not have an absolute advantage like its derivatives track, but is relatively leading, and future development still needs to be observed.

(# Treasure DAO

Treasure aims to build a "decentralized Nintendo," which is a series of on-chain games. These games are 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 a marketplace for in-game assets and Treasure NFT collectibles. The most popular series include Smol Brains (the foundation of Smolverse) and another NFT series called The Lost Donkeys, which has its own game of the same name.

)# Trident DAO

The project "Trident" on Arbitrum proposed "Risk To