Analysis of February's Hot Topics: Arbitrum's Technical Progress, Ecosystem Development, and Future Prospects

Summary

With the Federal Reserve slowing down interest rate hikes, a mini bull market emerged in the crypto market at the end of January, with Bitcoin breaking through $23,700, reaching a six-month high. Arbitrum injected new vitality into the crypto market thanks to the advantages of its layer-2 network. On one hand, Arbitrum underwent a technical upgrade in 2022 to meet the increasing frequency of trading demands. 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 trajectory of Arbitrum, analyzing its technological upgrades and future plans. It will also explore the success factors and development prospects of prominent DeFi and gaming projects in the ecosystem, such as GMX, which has shown outstanding performance in mechanism innovation and protocol revenue during the bear market. In addition, the anticipated token issuance of Arbitrum is expected to continuously bring positive news to the market.

Overview

At the beginning of 2023, Layer 2 became the most eye-catching track, which also confirmed the predictions of many institutions and industry insiders. The token prices of the Optimism, Polygon, and Arbitrum ecosystems all performed well, with $OP reaching a high of $3.17 in February, and $MATIC also climbing to $1.32 at one point. After new public chains like Terra and Solana faced a crisis of trust, Ethereum once again became the main battlefield, and the competition between Layer 2 and new public chains will become even more intense. With the market warming up, Arbitrum performed particularly well in February.

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 occupying 49.51% of the TVL share in L2. Arbitrum Rollup is essentially an off-chain protocol managed by Ethereum smart contracts, which submits off-chain transaction data to the Ethereum mainnet through compression algorithms. This approach effectively alleviates congestion on the Ethereum network, achieving advantages such as fast transactions, low gas fees, security guarantees, and a good user experience.

Chapter One: Technology Upgrade

In 2022, Arbitrum made frequent moves in terms of technological upgrades. In addition to the highly anticipated Odyssey event, it also launched the Arbitrum Nova and Arbitrum One dual-chain architecture, as well as a new programming environment called Stylus. Below is a detailed introduction to these technological innovations.

Arbitrum Nova - AnyTrust Chain

On July 12, 2022, Arbitrum announced the launch of a new chain "Arbitrum Nova". This chain is built on AnyTrust technology and is designed for cost-sensitive scenarios such as gaming and social applications. AnyTrust technology ensures minimal trust assumptions through a data availability committee, responsible for managing off-chain transaction data and providing batch support. This allows Nova to eliminate the 7-day withdrawal wait time for users, enhancing user experience. Key technical features include:

• Sign data availability certificates for batch transactions and publish them.
• Restore to the Arbitrum aggregation protocol when the committee cannot reach a consensus.
• Data execution takes place on the L2 chain, and the new state is confirmed on Ethereum after a challenge period.

Nitro

At the end of August 2022, Arbitrum One successfully upgraded to the Nitro version, significantly improving network speed and reducing transaction costs. The Nitro upgrade mainly included the following technical enhancements:

• Modify the AVM architecture and ArbOS
• Adopt WebAssembly (WASM) architecture to replace the old AVM architecture
• Use Geth instead of a customized EVM simulator
• Rewrite and optimize ArbOS using Go to enhance transaction batch processing and compression efficiency.

The core of Arbitrum Nitro is the new prover that can perform interactive fraud proofs on WASM code. This allows for 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 announced the launch of a next-generation programming environment called Stylus for Arbitrum One and Nova. Stylus allows developers to deploy applications using languages such as Rust, C, and C++ through WebAssembly smart contract capabilities, enabling collaboration with EVM programs on Arbitrum. Stylus significantly enhances speed, reduces costs, and is fully interoperable with the Ethereum Virtual Machine (EVM). Offchain Labs refers to Stylus as EVM+, but it will not replace EVM.

Chapter Two Ecological Cooperation

In the past year, Arbitrum's market share has significantly increased, mainly due to three factors: the continued optimism towards Layer 2; the anticipation of the Arb token issuance; and the growth of ecological applications, especially the growth of native applications. Since the launch of the Arbitrum One mainnet last September, leading DeFi protocols on Ethereum Layer 1 such as Uniswap, Sushiswap, and Curve have deployed on Arbitrum One, and well-known cross-chain protocols like Synapse and StarGate have also been attracted. The influx of these applications also reflects developers' recognition of 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 the first week. The main reason for the pause was the network congestion in the second week, which caused gas fees to surge, even exceeding those of the Ethereum mainnet. This also clearly indicates that at that time, Arbitrum's capacity could not meet such a large-scale user activity.

Although the Odyssey event was held for only a week, it still attracted widespread attention. Arbitrum combined NFTs to hold weekly activities, stimulating user participation and helping users understand the Arbitrum ecosystem, while simultaneously increasing the user base and bringing traffic to ecosystem projects. It also retained the expectation of future token issuance rather than hastily launching a token airdrop.

Data shows that from the start of the Odyssey event on June 21 to the end of the first week's tasks, Arbitrum has added 207,000 new addresses. On June 27, the number of new addresses in a single day reached 55,000, setting a record for the highest number of new addresses in a single day. This fully reflects the success of the Odyssey event.

After the Odyssey event, Arbitrum has continued to make technical advancements, with innovative mechanism projects continuously emerging in its ecosystem, making it highly anticipated during the small bull market at the end of January. Currently, the average monthly active address count for Arbitrum from October 2022 to January 2023 is 608,000, an increase of 51.2% compared to September. The trading volume and user count for Arbitrum have also risen accordingly.

Chapter Three Popular Project Analysis

In the past two months, Arbitrum's native ecological projects have garnered significant market attention. Below is a summary of some standout projects. These projects still have a valuation gap compared to similar projects on other public chains and are currently undervalued. With the development of Arbitrum and the issuance of tokens, these projects still have considerable growth potential.

) 3.1 DeFi category

There are many well-known multi-chain deployment projects on Arbitrum, such as Uniswap and AAVE. However, Arbitrum's native projects demonstrate remarkable explosive growth, such as the perpetual contract exchange GMX and the yield aggregator Jones DAO. Currently, Arbitrum has formed a sustainable profit cycle: derivative protocols continuously generate revenue; yield aggregators attract funds and expand returns through strategies; more users participating in yield aggregation makes liquidity more abundant, further increasing revenue.

)# 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 feeding. It executes opening and closing operations through Keeper), similar to crowdsourcing###.

When users close positions on GMX, it is divided into two steps: sending the transaction and executing the operation. The execution of the operation is carried out by the GMX Keeper. In addition to paying the gas fee for sending the transaction, users also need to pay a gas fee for the Keeper to execute the operation to ensure the transaction is executed properly.

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% and 428.5% against the US dollar and ETH, respectively.

Hot Project Two: Camelot

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

• An AMM DEX similar to Uniswap V2, with liquidity distributed from 0 to infinity.
• Stablecoin swap trading pairs similar to Curve
• Supports dynamic directional trading fees, project parties can set the handling fee ratio.
• Provide income and incentives through NFTs, users provide liquidity to obtain spNFT
• Permissionless protocol, project parties can set incentives through Nitro Pools.
• Equipped with Launchpad functionality, supporting project financing and guiding liquidity

In comparison, Velodrome, the project with the highest TVL in the same category on OP, has a liquidity of 77.14 million USD, surpassing Uniswap V3's 44.87 million USD, but its FDV is only 9.46 million USD, giving an FDV/TVL ratio of 0.21. Velodrome's TVL is higher than Camelot's, but its valuation is lower.

(# Hot Project Three: RDNT

The lending protocol RDNT on Arbitrum has two major innovations: utilizing LayerZero for multi-chain lending; supporting revolving loans ) which are currently not open ###. It is currently leading 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 assets on any major chain and borrow various supported assets across chains. 50% of the platform's revenue is distributed to lenders, and 50% is given to locked RNDT as rewards. The V2 version will undergo the following upgrades:

• Allow full cross-chain lending for BTC, ETH, and USDC, with subsequent assets decided by Radiant DAO voting.
• Increase the proportion of protocol fees tilted towards LPs, enhance liquidity and reduce slippage.
• Introduce the "Dynamic Liquidity" mechanism to reward long-term investors.
• Exiting the liquidity pool will trigger a penalty mechanism

![Deconstructing the February Main Narrative: Arbitrum's Technology, Ecology, Popular Projects, and Future]###https://img-cdn.gateio.im/webp-social/moments-6653725502bbbd214d0374fbfba61a8c.webp(

) 3.2 Game category

Arbitrum has a rapidly developing GameFi ecosystem, especially with three popular projects: Treasure DAO, The beacon, and Trident DAO. Currently, Arbitrum's GameFi ecosystem is relatively leading, but it has not yet formed an absolute advantage, and its future development still needs to be observed.

(# Treasure DAO

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

Trident DAO

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

PSI is the official functional token of Trident, which will be used in various games in future versions. It can be used to purchase items, exchange NFTs, and for betting between players, among other things. Trident will collect fees from each successful bet and permanently destroy them. Once the Risk To Earn model is fully integrated, the supply of PSI will show a deflationary trend.

Chapter Four Future Development

The success of Arbitrum suggests that the Layer 2 space may become the starting point of the next bull market. However, before that, whether it's the Optimistic Rollup or zk Rollup route, there are still some technical issues that need to be addressed. In the future, Arbitrum will focus on three areas: ###1( continuous technical upgrades.