Deconstructing the Mainline of the February Crypto Market: The Technology, Ecology, and Future Prospects of Arbitrum

Abstract

At the end of January, the crypto market welcomed a small bull run, with Bitcoin breaking through $23,700 to reach a six-month high. The frequent good news from Arbitrum has injected new vitality into the entire market. In 2022, Arbitrum underwent significant technical updates to cope with the increasingly frequent trading demands. Meanwhile, due to the popularity of the first week of the Odyssey event, Arbitrum's ecosystem projects have gained immense attention.

This article will focus on the development history of Arbitrum, analyzing its technological upgrades and future roadmap. In terms of ecosystem, we delve into the success factors and development prospects of the booming DeFi and gaming projects, such as GMX, which have innovative mechanisms and outstanding protocol revenue performance during the bear market. In addition, the expectation of Arbitrum's token issuance will continue to bring positive news to the market.

Overview

At the beginning of 2023, Layer 2 became the most outstanding sector, aligning with the predictions of most institutions and industry insiders. The prices of eco-coins such as Optimism, Polygon, and Arbitrum generally rose, with OP and MATIC reaching new highs of $3.17 and $1.32 respectively. After new public chains like Terra and Solana faced a crisis of trust, Ethereum regained the spotlight, and the competition between Layer 2 and new public chains became increasingly fierce. Since February, Arbitrum has performed particularly well, achieving remarkable results.

Arbitrum is currently the largest project in terms of TVL in Ethereum's Layer 2 scaling solutions, reaching 2.98B, accounting for 3.01% of the total TVL across all networks, and as high as 49.51% in L2. Arbitrum uses Rollup technology to upload off-chain transaction compression algorithms to the Ethereum mainnet, effectively alleviating Ethereum's congestion issues, achieving advantages such as fast transactions, low gas fees, high security, and a good user experience.

Chapter One Technical Upgrade

In 2022, Arbitrum continued to innovate technologically, with major upgrades including the launch of the Arbitrum Nova and Arbitrum One dual chains, and the introduction of a new programming environment, Stylus.

Arbitrum Nova - AnyTrust Chain

In July 2022, Arbitrum launched a new chain called "Arbitrum Nova". This chain is based on AnyTrust technology and is designed for cost-sensitive scenarios such as gaming and social applications. The AnyTrust technology ensures minimal trust assumptions through a data availability committee, which is responsible for managing off-chain transaction data and providing batch support. This design eliminates the 7-day withdrawal waiting period for users, significantly enhancing the user experience.

Nitro Upgrade

At the end of August 2022, Arbitrum One successfully upgraded to the Nitro version. Nitro significantly increased network speed and reduced transaction costs. The main technical upgrades include:

1. Optimize the AVM architecture and ArbOS
2. Adopt WebAssembly (WASM) architecture to replace the old AVM architecture
3. Use Geth instead of a custom EVM simulator
4. Rewrite ArbOS in Go, optimizing transaction batching and compression system.

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

Stylus programming environment

The Arbitrum development team Offchain Labs announced the launch of the next-generation programming environment Stylus for Arbitrum One and Nova. Stylus supports WebAssembly smart contracts, allowing developers to deploy applications using languages such as Rust, C, and C++, and is compatible with EVM programs on Arbitrum. Stylus offers faster speeds and lower costs, referred to as EVM+, but will not replace EVM.

Chapter Two Ecological Cooperation

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

1. The Layer 2 track continues to be promising.
2. Arbitrum Token Issuance Expectations
3. Growth of ecological applications, especially native applications

Since the launch of Arbitrum One mainnet last September, leading DeFi protocols on Ethereum Layer 1 such as Uniswap, Sushiswap, and Curve have successively deployed on Arbitrum One, with well-known cross-chain protocols like Synapse and StarGate joining as well. This reflects the confidence developers have in the Arbitrum scaling solution.

In June 2022, Arbitrum held the Odyssey event, selecting 14 of the most active projects to participate, covering areas such as cross-chain bridges, DeFi, NFTs, and gaming. Although the event was paused after just one week due to network congestion, it still attracted significant attention. During the event, Arbitrum added 207,000 new addresses, with a single-day record of 55,000 new addresses on June 27, setting a historical high.

After the Odyssey event, Arbitrum has been making continuous efforts in technology and ecology, launching innovative mechanism projects that have generated high expectations in the recent mini bull market. Currently, the average monthly active addresses for Arbitrum from October 2022 to January 2023 is 608,000, an increase of 51.2% compared to September, with trading volume and user numbers also rising correspondingly.

Chapter 3 Analysis of Popular Projects

In the past two months, Arbitrum's native ecosystem projects have received widespread attention from the market. Below are some projects that have performed exceptionally well. Their market capitalization still has room for growth compared to other similar projects on public chains, and it is expected to further increase with the development of Arbitrum.

3.1 DeFi projects

On Arbitrum, there are well-known projects with multi-chain deployments such as Uniswap and AAVE, as well as native projects like the perpetual contract exchange GMX and the yield aggregator Jones DAO, which have performed excellently. Arbitrum has formed a sustainable profit model: derivative protocols provide stable income, yield aggregators attract funds and expand returns, creating a virtuous cycle.

GMX

GMX is a decentralized perpetual contract exchange that supports up to 30x leverage for ETH, BTC, LINK, and UNI perpetual contract trading. Its features include:

• Execute opening and closing operations with Keeper (similar to crowdfunding)
• Users need to pay transaction Gas fees and Keeper execution fees.

GMX's current TVL has reached $543 million, accounting for 31.46% of Arbitrum DeFi protocol TVL. In the past year, it generated $33.9 million in revenue, and the GMX token had a return rate of 84.0% against the US dollar and 428.5% against ETH in 2022.

Camelot

Camelot is the native DEX of Arbitrum, and it completed its token sale in December 2022. Its main features include:

• AMM DEX similar to Uniswap V2
• Supports stablecoin swaps similar to Curve
• Dynamic directional trading fees
• Provide income and incentives through NFTs
• Permissionless protocols allow project parties to set incentive measures.
• Equipped with Launchpad functionality

Compared to similar projects like Velodrome on OP, Camelot has a lower TVL but a higher valuation.

RDNT

RDNT is a lending protocol on Arbitrum, with innovations including:

• Use LayerZero to achieve multi-chain lending
• Support for revolving loans (not yet enabled)

Currently, the TVL on Arbitrum exceeds the Aave V3 Arb version. The RDNT V2 version will launch the following upgrades:

• Support for complete cross-chain lending of BTC, ETH, and USDC
• Adjust the protocol fee distribution to enhance liquidity
• Introduce "Dynamic Liquidity" mechanism
• Implement a penalty mechanism for exiting liquidity pools

3.2 Game-related projects

Arbitrum has a rapidly growing GameFi ecosystem, with representative projects including:

Treasure DAO

Treasure is committed to creating a "decentralized Nintendo" by building a series of on-chain games that connect through in-game asset interoperability and the MAGIC token. Popular games include Bridgeworld, The Beacon, Smolverse, and Realm. Players can access in-game assets and NFT collectibles through the Trove marketplace.

Trident DAO

Trident proposed the "Risk To Earn" sustainable GameFi economic model, and its token PSI quickly became the hottest project in the Arbitrum ecosystem after the public sale. PSI can be used to purchase game items, exchange NFTs, and facilitate betting between players, and it implements deflation through a burning mechanism.

Chapter Four Future Development

The success of Arbitrum indicates that the Layer 2 track is likely to become the starting point of the next bull market. In the future, Arbitrum will continue to develop in three areas:

1. Technical Upgrade
2. Ecosystem Project Support
3. Attract users with expected token issuance

technical route

Arbitrum plans to carry out technical upgrades in the following areas:

• Continuously reduce costs and improve TPS
• Achieve decentralization
• Decentralized management and authorization of software upgrades
• Validator Decentralization
• Sequencer decentralization

ecological development

In addition to the existing DeFi, cross-chain, and gaming applications, more social and NFT projects are expected to emerge in the future. The Arbitrum Nova chain will also see more applications, solidifying Arbitrum's dominant position in the gaming sector.

Economic Model

Token issuance is crucial for the long-term success of Arbitrum, including:

1. Token Allocation Plan
2. Airdrop and Ecosystem Incentive Program
3. Governance Proposal

A reasonable economic model will attract more users and developers, promoting the healthy development of Arbitrum. Token distribution will also affect the governance and long-term power distribution of the L2 network, which can be used to decentralize key network functions such as sequencers.

In summary, Arbitrum is expected to continue its explosive growth in 2023. It may further advance the Odyssey project, strengthen DeFi and gaming projects, and launch distinctive social and NFT projects. Additionally, there may be the long-awaited token issuance to reward users and protocols. Furthermore, the official launch of the Nova chain and protocol deployment are also worth looking forward to.