A year ago, Ethereum L2 was seen as a gamble. Today, L2 has become a reality, and the question of who will dominate L2 has become the proposition.
Now is the season of L2
Currently, Layer 2 is one of the fastest-growing areas in the crypto community, with TVL, user base, and transaction volume skyrocketing in 2022, all denominated in ETH.
Overall, L2 is now processing more transactions than L1 and is starting to demonstrate its competitiveness as Ethereum's main scaling solution.
One of the L2 solutions driving this growth is Arbitrum (an optimistic rollup). In the increasingly competitive world of rollup solutions, Arbitrum is emerging as the leading L2 DeFi infrastructure with a large number of innovative applications and a strong community.
📈 1. Arbitrum's KPI#
1.1 DeFi TVL#
Arbitrum's TVL is $1.1B, ranking fifth among all L1 and L2 networks and accounting for 2.5% of the total TVL in all networks. At the same time, Arbitrum holds 62% of the TVL in L2.
Arbitrum's market share has grown significantly in the past year, surpassing the growth of all chains by 1 point. The growth may be attributed to the thriving application ecosystem on the network, such as the perpetual contract exchange GMX (which will be discussed in detail later). It is worth noting that Arbitrum's growth did not use a network-wide incentive program as it does not have a native token. However, it is possible to use a certain proportion of liquidity on the network for retroactive airdrop rewards (which will also be discussed in detail later).
1.2 Active addresses#
Arbitrum's average monthly active addresses (MAA) in Q4 were 614,279, with a Q/Q growth of 81.3% and a Y/Y growth of 728.7%. This number is expected to be surpassed in January 2023, with an estimated MAA of 631,633.
The surge in user numbers is related to the growth of liquidity within the Arbitrum ecosystem and the Nitro upgrade in August 2022. However, some of the growth after the Nitro upgrade may be attributed to token airdrops due to the decrease in gas costs.
1.3 Transaction volume#
Arbitrum's transaction volume has grown along with the number of active addresses, with a Q4 growth of 199.6% and a Y/Y growth of 1904.2%. Similar to the active addresses, there has been a significant increase in transaction volume after the deployment of Nitro in August 2022, which may be partially attributed to airdrop mining. Since October 2022, Arbitrum has processed 52.7% of the transactions verified on Ethereum L1 during the same period.
🔦 2. Notable Arbitrum Projects#
Now that we have discussed some of Arbitrum's KPIs, let's take a look at some notable dapps on Arbitrum.
Arbitrum is quickly becoming a hotbed for DeFi, unlocking new types of applications with enhanced scalability through rollups and leveraging the composability provided by general L2 to create a broad and interconnected ecosystem. Many of these protocols and applications are foundational, with great communities, but currently have limited influence in the VC space.
2.1 GMX#
GMX, a decentralized perpetual contract exchange, has become the bridge to Arbitrum DeFi. GMX allows traders to take long and short positions with leverage of up to 50x by borrowing from a basket of assets called GLP, with GLP acting as the counterparty. GLP receives 70% of all trading fees, while GMX token stakers earn the remaining 30%.
GMX has a TVL of $440.7 million, accounting for 37.6% of all DeFi locked on Arbitrum. GMX has generated $33.9 million in revenue in the past year, making the GMX token one of the best-performing assets in 2022, with returns of 84.0% and 428.5% against the US dollar and Ethereum, respectively.
Due to GMX's success, more and more DeFi protocols on Arbitrum are using GMX as a liquidity source. Many protocols are building minimal-increment treasuries on top of GLP, such as Rage Trade, Jones DAO, GMD, and Umami Finance. The decentralized options protocol Dopex is integrating Atlantic Options to provide liquidation protection for traders. Other protocols are also building on top of the DEX, such as STFX and Lyra. GLP is also being used as collateral in lending protocols like Vesta and Tender.Fi, integrating the token into their products.
2.2 Some Perpetuals#
GMX is not the only perpetual contract platform on Arbitrum. Following closely behind is the notable disruptor Gains Network. Gains, originally from Polygon, has a model similar to GMX, using the DAI treasury as the counterparty and liquidity source for DEX trades.
Unlike GMX, Gains offers cryptocurrency, stock, and forex trading, providing leverage of up to 1000x for the latter. The protocol has gained widespread usage since its launch on December 30th, facilitating $1.2 billion in trading volume to date.
Another well-known DEX is Cap Finance. Cap has achieved $21.7 billion in trading volume in the past year and recently launched their V3.1, with their V4 in the works. Other upcoming teams include Vertex and Vela.
2.3 Some Options#
Perps are not the only popular derivative type on Arbitrum. There are many options protocols built on top of L2.
- The most famous options ecosystem on Arbitrum today is Dopex. Dopex offers a range of options products, including option treasuries through SSOV, interest rate option treasuries, and numerous products using Atlantic Options as a straddle product, as well as the GMX liquidation protection mentioned earlier. Dopex itself has become a primitive, with Jones DAO building option treasuries that run automated strategies on top of the protocol. Plutus is a meta-governance aggregator that has also built on top of Dopex, accumulating 54.6% of the veDPX supply, a voting-locked variant of the Dopex governance token DPX.
- Premia is another significant options protocol that has gained widespread attention. What sets Premia apart is that it is one of the few options protocols that offer American-style options, which can be exercised before expiration. The protocol recently released their V3 whitepaper, which will completely revamp their AMM by merging parts of the treasury and centralized liquidity while allowing for permissionless pools.
- Premia and Dopex are not the only options (pun intended) on Arbitrum. There are several other protocols, such as Nuemon, which offers perpetual options, and IVX, which is building an options AMM. Buffer Finance is another rapidly growing protocol that offers the ability to trade binary options, allowing traders to bet on the price direction of different assets within a short timeframe.
The above projects are native to Arbitrum. However, these protocols will soon face competition from migration projects, such as Lyra on Optimism, which also plans to deploy an AMM on top of GMX.
2.4 NFT-Fi#
Arbitrum's chain is not only home to DeFi applications but also to a rapidly growing GameFi ecosystem supported by Treasure DAO.
Treasure is building a decentralized Nintendo. As a collection of on-chain games, Treasure connects games through the interoperability of in-game assets and the native token MAGIC. The most popular games in this collection include the strategy game "Bridgeworld," the RPG 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 central hub of the entire game ecosystem, serving as a marketplace for in-game assets and NFTs. The most popular series in this collection are Smol Brains (based on Smolverse) and another NFT series called The Lost Donkeys (which has its own game).
👀 3. Future Outlook and Growth Opportunities#
While some of Arbitrum's liquidity and usage may have come from airdrops, overall, the number of active addresses, transaction volume, and share of DeFi TVL are increasing. Additionally, with the success of Treasure and the growth potential of Arbitrum Nova (L2 built for games using AnyTrust), Arbitrum is well-positioned to compete with other networks in the gaming space.
At the same time, Arbitrum can benefit from the network effects of the DeFi ecosystem, solidifying its position as a leader in L2 and even expanding its lead. This leadership advantage can be further strengthened through the introduction of a token and incentive programs that can bring billions of liquidity into the network, expand its user base, and attract developers and build communities. The token distribution will also determine the governance of L2 and the distribution of power within the long-term ecosystem.
Arbitrum currently has a centralized sequencer, whitelist-based proof validation, and upgradable contracts. While these provide some level of user protection, the centralized aspects pose the biggest risk to Arbitrum as they increase the risk of censorship and loss of user funds. According to an Arbitrum spokesperson, decentralized sequencers and permissionless proof access are in progress. However, significant security or censorship events during this period could severely impact the long-term growth prospects of Rollup.
In conclusion, despite the ongoing risk of centralization, Arbitrum appears poised to continue its growth trajectory based on its strong application foundation and is expected to maintain its growth in 2023.
Source: Bankless - Arbitrum is Mooning 🚀
https://newsletter.banklesshq.com/p/arbitrum-is-mooning
Author: Ben Giove