Analysis of February Hotspots: Arbitrum's Technical Progress, Ecological Development, and Future Prospects

Summary

With the Federal Reserve slowing down its interest rate hikes, the cryptocurrency market saw a slight bull run at the end of January, with Bitcoin breaking through $23,700, reaching a new six-month high. Arbitrum, as a representative project of the Ethereum Layer 2 network, has injected new vitality into the entire cryptocurrency market. This is thanks to the technological upgrades that Arbitrum underwent in 2022 to cope with more frequent trading activities, as well as the significant attention its ecological projects received during the first week of the Odyssey event.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future roadmap. At the same time, we will also explore outstanding DeFi and gaming projects in the Arbitrum ecosystem, such as the impressive performance of innovative mechanism protocols like GMX during the bear market. In addition, the anticipation of Arbitrum's upcoming token issuance will continue to bring positive news to the market.

Overview

At the beginning of 2023, the Layer2 track performed the best, which aligns with the predictions of most institutions and industry opinion leaders. In terms of coin prices, Optimism, Polygon, and Arbitrum ecosystem coins all performed well. Against the backdrop of new public chains like Terra and Solana facing setbacks in the bear market, the future market landscape is likely to be dominated by Ethereum, with new public chains competing with Layer2. With the arrival of a small surge in the crypto market, Arbitrum performed particularly well in February, achieving remarkable success.

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 possessing 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 method can alleviate Ethereum's congestion to a certain extent, achieving advantages such as fast transactions, low gas fees, security assurance, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum made many technological innovations. In addition to hosting the Odyssey event, it also launched several technical upgrades, including the launch of the Arbitrum Nova and Arbitrum One dual chains, as well as the introduction of the new programming environment, Stylus. Below is a detailed introduction to these technological cores 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, based on AnyTrust technology, is designed specifically for gaming, social applications, and cost-sensitive use cases. 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. AnyTrust eliminates the 7-day withdrawal waiting period that users had to endure, enhancing the user experience. Key technical features include:

• Sign data availability certificates for batch transactions and publish them.
• 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 the challenge period, the new aggregated state is confirmed on Ethereum.

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 underwent the following technical upgrades:

• Modify the AVM architecture and ArbOS
• Replace the old AVM architecture with the WebAssembly (WASM) 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. This enables building and compiling 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 multiple programming languages, including Rust, C, and C++, through WebAssembly smart contract functionality, enabling them to run alongside EVM programs on Arbitrum. Stylus is an order of magnitude faster, can reduce fees, 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 three factors: the continued optimism for Layer 2, the anticipation of Arb's token issuance, and the growth of ecological applications, especially the increase in native applications. Since the launch of the Arbitrum One mainnet in September last year, leading DeFi protocols on the Ethereum Layer 1 mainnet such as Uniswap, Sushiswap, and Curve have integrated and deployed on Arbitrum One, along with some well-known cross-chain protocols like Synapse and StarGate. The influx of these applications indicates developers' confidence in Arbitrum's scaling solution.

In June 2022, 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 the network congestion in the second week, which led to excessively high gas fees, even exceeding those of the Ethereum mainnet. This clearly indicates that Arbitrum's state at that time was unable to support such a large number of users.

Although the Odyssey event only lasted a week, it still attracted a lot of attention. Arbitrum combined NFTs in the form of an event week, stimulating user participation enthusiasm, helping users understand the Arbitrum ecosystem, and bringing traffic to ecological projects while increasing the user base. At the same time, it preserved the expectation of future token issuance, rather than hastily issuing 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 number of new addresses reached 55,000 in a single day, setting a record for the most new addresses in a single day.

After the Odyssey event, Arbitrum has been technically advancing continuously, with innovative projects being launched within its ecosystem, making it highly anticipated in the small bull market at the end of January. Currently, the average number of monthly active addresses for Arbitrum from October 2022 to January 2023 is 608,365, an increase of 51.2% compared to September. The trading volume and user count for Arbitrum have also risen accordingly.

Chapter Three Analysis of Popular Projects

In the past two months, native ecological projects on Arbitrum have gained the attention of the entire cryptocurrency market. Below is a summary of some standout projects, which still have a certain gap in market capitalization compared to similar projects on other public chains, remaining in an undervalued state. With the issuance of tokens and future developments on Arbitrum, these projects have significant room for improvement.

3.1 DeFi category

On Arbitrum, there are well-known projects deployed across multiple chains such as Uniswap and AAVE, as well as native projects that have shown remarkable explosive growth, such as the perpetual contract exchange GMX, yield aggregators, and the liquidity pool project Jones DAO. Currently, Arbitrum has formed a sustainable profit-making ecosystem: derivative protocols are like casinos, generating continuous business income; various yield aggregators utilize their strategies to continuously attract funds and expand yields; more people participate in yield aggregators, leading to increased liquidity and subsequently higher 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. Compared to centralized exchanges, GMX operations are more complex and require the use of an oracle for price feeds. GMX completes opening and closing operations with the help of Keepers (similar to crowdsourcing).

When users close positions on GMX, it is divided into two parts: the user sends the transaction and executes the operation. The execution of the operation is completed by the GMX Keeper. In addition to paying the Gas fee for sending the transaction, the user also needs to pay the Gas fee for the Keeper to execute the operation.

GMX's TVL 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% against the USD 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 a DEX of the Uniswap V2+Curve type, incorporating features such as a Launchpad, customizable trading fees, the combination of LP and NFTs, and allowing project parties 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 trading fees, allowing project parties to set trading commission rates based on market conditions.
• Provide income and incentives through NFTs, where users provide liquidity to obtain spNFTs representing their staked positions.
• The protocol is permissionless, and project teams can set incentive measures through Nitro Pools.
• With Launchpad functionality, project parties can use it to raise funds and guide liquidity.

In comparison, the similar project Velodrome on OP has a TVL of 77.14 million USD, surpassing 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. Relative to Camelot, Velodrome has a higher TVL but a lower valuation.

Hot Project Three: RDNT

RDNT is a lending protocol on Arbitrum with two innovations: utilizing LayerZero for multi-chain lending; and the ability to cycle loans (currently not available). It is currently a leader on Arbitrum, with a TVL exceeding the Arb version of Aave V3, but long-term competition remains fierce.

As a full-chain lending protocol, users can deposit any major asset on any major chain and borrow various supported assets across chains. 50% of the platform's revenue goes to lenders, while the remaining 50% is allocated to locked RNDT as rewards. The protocol is currently in V1 version, and the V2 version will undergo the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC, with subsequent assets chosen by Radiant DAO votes.
• Shift the protocol fees towards LPs to increase 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, particularly three popular projects: Treasure DAO, The Beacon, and Trident DAO. Currently, the GameFi ecosystem on Arbitrum is relatively leading compared to other chains, but future development still needs to be observed.

Treasure DAO

Treasure aims to build a "decentralized Nintendo" that includes 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 center of the Treasure ecosystem, serving as the marketplace for in-game assets and Treasure NFT collectibles. The most popular series includes Smol Brains (the foundation of Smolverse) and another NFT series, The Lost Donkeys.

Trident DAO

The project "Trident" on Arbitrum has proposed a sustainable GameFi economic model called "Risk To Earn," attracting the attention of players and the community. After its token public sale, it quickly became the hottest project in the Arbitrum ecosystem.

PSI is the official utility token of Trident, which will be used in various games in its future versions, for purchasing items, exchanging NFTs, and betting between players. Trident will charge a fee from each successful bet and permanently destroy it. Once the Risk To Earn integration is completed, the supply of PSI will exhibit a deflationary trend.

![Deconstructing the Main Narrative of February: Arbitrum's Technology, Ecosystem, Hot Projects, and Future](