Analyzing the Mainstream Narrative of February: Arbitrum's Technical Progress, Ecological Development, and Future Outlook

Summary

At the end of January 2023, the cryptocurrency market showed signs of a minor bull market, with Bitcoin breaking through $23,700 to reach a new six-month high. Arbitrum performed exceptionally well during this round of market activity, injecting new vitality into the entire cryptocurrency market. On one hand, Arbitrum underwent several technical upgrades in 2022 to meet the growing demand for transactions. On the other hand, the popularity of the first week of the Odyssey event brought significant attention to Arbitrum's 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 outstanding DeFi and gaming projects within the Arbitrum ecosystem, analyzing their success factors and development prospects. In addition, the potential expectations for token issuance in Arbitrum are also expected to bring benefits.

Overview

At the beginning of 2023, the Layer 2 sector performed the most impressively, aligning with the predictions of most institutions and industry insiders. In terms of currency prices, Optimism, Polygon, and Arbitrum ecosystem tokens all showed remarkable performance. For example, $OP peaked at $3.17 in February, while $MATIC reached a high of $1.32. After new public chains like Terra and Solana faced a crisis of trust, the advantages of Ethereum and its Layer 2 solutions became even more pronounced. In February, Arbitrum stood out, achieving outstanding 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 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 effectively alleviates the congestion problem of Ethereum, 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 technical advancements. In addition to hosting the Odyssey event, it also launched several technical upgrades, including the launch of the Arbitrum Nova and Arbitrum One dual-chain, as well as the introduction of a new programming environment called Stylus.

Arbitrum Nova --- AnyTrust Chain

On July 12, 2022, Arbitrum announced the construction of a new chain called "Arbitrum Nova." This chain is based on AnyTrust technology and is designed specifically for gaming, social applications, and cost-sensitive scenarios. The AnyTrust technology ensures minimal trust assumptions through a data availability committee, which is responsible for managing off-chain transaction data and providing data support. This design eliminates the 7-day withdrawal waiting period for users, enhancing the user experience.

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. The main technical upgrades include:

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

The core of Arbitrum Nitro technology is a new prover that enables interactive fraud proofs for Arbitrum on WASM code. This allows developers to build and compile 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 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 WebAssembly smart contract capabilities, enabling cooperative operation with EVM programs on Arbitrum. Stylus improves running speed by an order of magnitude while reducing costs, 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

Over the past year, Arbitrum's market share has significantly increased, primarily due to the following factors:

1. Continued optimism for Layer2
2. The Expected Coin Issuance of Arbitrum
3. The growth of ecological applications, especially the rise of native applications.

Since the launch of the Arbitrum One mainnet in September last year, leading DeFi protocols on Ethereum Layer 1 such as Uniswap, Sushiswap, and Curve have successively deployed on Arbitrum One. In addition, some well-known cross-chain protocols like Synapse and StarGate have also joined in. The influx of these applications reflects developers' confidence in the Arbitrum scalability solution.

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

After the Odyssey event, Arbitrum continues to make technical advancements, with innovative mechanism projects emerging within its ecosystem, making it highly anticipated during the small bull market at the end of January. Currently, the average monthly active addresses on Arbitrum from October 2022 to January 2023 is 608,000, a 51.2% increase compared to September. The trading volume and user numbers of Arbitrum are also on the rise.

Chapter 3 Analysis of Popular Projects

In the past two months, Arbitrum's native ecological projects have attracted attention from the entire crypto market. Below are some of the standout projects that still have a certain gap in market value compared to similar projects on other public chains, remaining undervalued. With the issuance of Arbitrum's tokens and future developments, these projects are expected to have significant room for growth.

3.1 DeFi Category

There are well-known projects deployed on multiple chains on Arbitrum such as Uniswap and AAVE, as well as native projects showing amazing explosive growth, such as the perpetual contract exchange GMX and the yield aggregator Jones DAO. Currently, Arbitrum has formed a sustainable profit-making ecosystem: derivatives protocols are similar to casinos, continuously generating business income; various yield aggregators attract funds and expand returns through their own strategies; an increase in participants brings more abundant liquidity, thereby generating more income.

Hot Project One: GMX

GMX is a decentralized perpetual contract exchange that allows users to trade perpetual contracts for ETH, BTC, LINK, and UNI with up to 30x leverage on a decentralized platform. GMX completes opening and closing operations through Keepers (similar to crowdsourcing), and users need to pay the Gas fees for sending transactions and the Gas fees for Keeper execution.

GMX's 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% against the US dollar 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, and has added features such as a Launchpad, custom trading fees, and the combination of LPs and NFTs. The main functions and features of Camelot include:

1. AMM DEX similar to Uniswap V2
2. Stablecoin swap trading pairs similar to Curve
3. Support for dynamic directional trading fees
4. Provide income and incentives through NFTs
5. Permissionless protocols allow project parties to set incentive measures.
6. Equipped with Launchpad functionality

Hot Project Three: RDNT

RDNT is a lending protocol on Arbitrum, known for its innovation in utilizing LayerZero for multi-chain lending and looping loan functionalities (not yet available). Currently, the TVL on Arbitrum has surpassed the Arb version of Aave V3. The features of RDNT include:

1. Full-Chain Lending Protocol
2. The platform's earnings are distributed 50% to the lender and 50% to the locked RNDT as rewards.
3. The V2 version will allow for complete cross-chain lending of BTC, ETH, and USDC.
4. Introduce the "Dynamic Liquidity" mechanism to reward long-term investors.
5. Exiting the liquidity pool will trigger a penalty mechanism.

3.2 Game Category

Arbitrum has a rapidly developing GameFi ecosystem, especially with three popular projects: Treasure DAO, The Beacon, and Trident DAO. Although Arbitrum's GameFi ecosystem does not have a clear advantage like its derivatives track, it is still relatively ahead, and its future development is worth looking forward to.

Treasure DAO

Treasure is committed to building a "decentralized Nintendo", which is a series of on-chain games interconnected through in-game asset interoperability and the native token MAGIC. 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 via Trove, which is the hub of the Treasure ecosystem and a marketplace for in-game assets and NFT collectibles.

Trident DAO

Trident has proposed a sustainable GameFi economic model called "Risk To Earn," which has attracted the attention of players and the community. Its official token PSI will be used in various games in future versions, allowing for the purchase of items, exchange of 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 show a deflationary trend.

Chapter Four Future Development

The success of Arbitrum indicates that the Layer 2 sector may become the starting point of the next bull market. However, whether it's the Optimistic Rollup or zk Rollup approach, there are still some technical issues to be resolved. In the future, the Arbitrum project will continue to develop in three areas:

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

In terms of technology, the Optimistic Rollup technology still faces doubts about centralized sequencers. Arbitrum currently has centralized sequencers and whitelist proof verification, as well as upgradable contracts. Although there have been no security issues so far, there are still risks of censorship and loss of user funds. Therefore, decentralized sequencers and permissionless proof verification are the inevitable direction of development. Offchain Labs has provided the corresponding technical roadmap:

1. Continue to lower costs and improve TPS
2. Push into the decentralization process
3. Decentralize the management and authorization of software upgrades
4. Validator Decentralization
5. Decentralized Sorter

In terms of ecology, the main areas of focus for Arbitrum are currently DeFi, cross-chain, and gaming applications. In the future, as the number of developers and users grows, more new applications will be deployed on this platform, with social and NFT projects being the most anticipated. At the same time, considering the success of Treasure and the growth potential of Arbitrum Nova, the Nova chain is expected to be truly applied, positioning Arbitrum advantageously in the gaming sector.

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

1. Token Distribution Plan
2. Airdrop and Ecological Incentive Program
3. Governance Plan

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

In summary, 2023 is expected to be a year of continued growth for Arbitrum. It may continue to advance the Odyssey project, strengthen existing DeFi and gaming projects, while also launching distinctive native social and NFT projects. Furthermore, Arbitrum may introduce the highly anticipated token and reward users and protocols. The official launch of the Nova chain and protocol deployment will also be significant milestones.

![Deconstructing the February Main Narrative: Arbitrum