Arbitrum Ecosystem - A gamechanger for Ethereum’s scalability

Since the Ethereum Network is facing numerous technical challenges (congestion, scalability, high transaction fee,...), multiple Layer-2 solutions have been put forward to address the scalability of the largest smart contract platform.

This article will introduce the overview of Arbitrum and dig deeper into the ecosystem to find potential opportunities. So let’s explore the potential of the L2 scaling solution, Arbitrum!

Arbitrum Overview

Arbitrum is the Layer 2 Optimistic Rollup built to empower Ethereum with scalability, increasing the performance of the previous blockchain platform generation. In short, it inherits all the strong attributes of Ethereum, including security and decentralization. Additionally, Arbitrum enhances the ability to handle more transactions with fairly low fees.

Currently, Arbitrum is one of the most expected L2 solutions to bridge the gap between Ethereum and scalability. Despite the imminent release of Ethereum 2.0, L2 solutions are still acting as the key drivers to solve the current Ethereum shortcomings at least in the short-medium term.

Website: https://arbitrum.io

Arbitrum Highlights

• EVM Compatibility: Like other L2 solutions on top of Ethereum, Arbitrum is highly EVM-compatible at the based code level. Crypto builders on Arbitrum only need to migrate the code with a little modification to seamlessly operate on the Optimistic Rollups.
• Many major adoptions: Uniswap, SushiSwap, Aave, Curve, and other many-used protocols on Ethereum are integrating Arbitrum to their platforms. This is a transparent signal that it’s getting embraced by many core players on Ethereum.
• Permissionless and Security: Arbitrum maintains the inherited security of the Ethereum network with a high level of decentralization. It brings users the same but better experience than on the Ethereum network.
• Yet to release Arbitrum native token: Polygon released its native token MATIC, getting lots of traction from the Ethereum community. Arbitrum decided to take a different approach since it has yet to announce the native token release.  Arbitrum, with a well-flourished ecosystem, has captured tons of value for ETH.

Arbitrum Highlight Numbers 

(updated: Feb 11th, 2022)

• Main Currency: ETH;
• Arbitrum Unique Addresses: 383,000;
• Avg Transactions/Day: 40,000-70,000, ATH transaction: 267,608 (Sep 12, 2021);
• Avg Transaction Per Month: 1.2M;
• Stablecoin supply value (USDT + USDC + DAI): ~$140,000,000;

Roadmap and Development Progress

• May 2021: Beta Mainnet.
• August 2021: Mainnet.
• Q1 2022: Sidechain Support.

At the moment, the scaling solution Arbitrum is now operating without interruption, and the ecosystem is well-built, with over 80 Dapps running on the mainnet. The number is still growing fast since the L2 adoption is inevitable for the Ethereum network. We’d expect many crypto-native builders to start high-quality protocols and ideas on Arbitrum.

Every new smart contract ecosystem always contains tons of new ideas and underlying opportunities for both crypto veterans and new entrants. Notably, Arbitrum is now in its maturity stage, giving out lots of investment opportunities for institutional as well as retail investors. 

Investors and Partners

Offchain Labs is the main development contractor of Arbitrum, which was invested in a total of $123.7M in 3 investment rounds in 2019 and 2021.

• Seed Round in 2019 - $3.7M led by Pantera Capital and other investors (Compound VC, Raphael Ouzan of Blocknation, Jake Seid, and unnamed ones).
• Series A in April 2021 - $20M (updating…).
• Series B in August 2021 - $100M led by Lightspeed Venture Partners and other new investors (Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research, and Mark Cuban).

The investments were settled for Offchain Labs’ Layer-2 project, Arbitrum, to have an evaluation of $1.2B+. This number shows the vision of all investors and the potential market share of all L2 chains.

The token release in the future is viable since all venture capitals will find a way to earn from their investments. Following the steps of Polygon with MATIC, we can see how big Arbitrum will be if it releases the native token with utilities.

In this ideal scenario, cash flow will flood more directly into Arbitrum through its native token instead of bridging tokens among chains.

Arbitrum Ecosystem

Since the official mainnet in Q3 2021, Arbitrum has been quickly adopted by numerous protocols, and countless developers jumped into the ecosystem, starting to build up a new decentralized kingdom.

The TVL on Arbitrum is going in a stable range of $2B, indicating that the cash flow is either going out or flowing in the ecosystem. SushiSwap is the biggest protocol in terms of TVL holding.

The Arbitrum ecosystem is well-constructed since every necessary component is ready for operation and is just waiting for future incentives to reach its full potential. The participation of leading Ethereum-based protocols to Arbitrum creates both positive and non-positive impacts on the ecosystem. To make the ecosystem digestible, let’s break down every niche to get the overview insights.

DEX

The following protocols adopted the Arbitrum scaling solution: Uniswap, SushiSwap, O3 Swap, Saddle Finance, Dododex, Curve Finance, Balancer, Swapr, Unidex,...

SushiSwap, with a TVL of $650M+ (increase by 75% in January 2022), is the leading DEX on Abitrum, surpassing others'. Even though there are some significant changes in the Sushi team, the total TVL of Abitrum on Sushi has been enormously increasing since the beginning of 2022.

Curve, Uniswap, and Balancer also adopted Abitrum in the scaling expansion of their protocols. The free big DEX players contribute over $150M TVL to the ecosystem. However, the potential TVL on those protocols is massive and needs more incentives to migrate to Arbitrum.

In general, the DEX market share on Arbitrum is taken over by big protocols migrating from Ethereum to the ecosystem. As a result, there is a slim chance for small DEXs on Abitrum to outperform those veterans. 

⇒ The opportunities are limited in investing in project tokens of those well-built projects, so we should expect a decent rate of return on investment.

DEX Aggregator

We have a list of DEX aggregators that have integrated the Arbitrum solution:

• 1Inch on Arbitrum has connected to SushiSwap, Curve V2, Uniswap V3, Balancer V2, DODO, DODOv2, and Swapr to deliver the best trading rate for its users.
• Dodo is famous for an innovative AMM mechanism which is PMM - Proactive Market Making. The platform is a competitive player to 1Inch Exchange on Arbitrum since it has well-performing stats. At the moment, it supports 75 trading pairs with 71 pools, and the TVL is not drastically decreasing.
• Wardenswap Finance, an AI swapping route implementation, is a new DEX aggregator coming to the Aribitrum ecosystem. The platform shows a good swapping rate with the ETH/SUSHI pair while we experienced it.
• OpenOcean, a DEX aggregator, has connected to Uniswap V3, SushiSwap, and Swapr, which has fewer DEX links compared to 1Inch Exchange (6 protocols). The moat of OpenOcean is the widespread exposure, which means it’s available on most EVM-compatible platforms. 

⇒ As the DEX lego on Arbitrum is in operation, the DEX aggregators are getting along for the ride. The best benefit we can get from them is to get the best trading rate. And the direct investment opportunities are quite scarce, only project tokens and staking programs that have been around for a long time. 

In this category on Arbitrum, there is no particularly strong and dominating DEX Aggregator. All of them share the same market with mutual connection for users' benefits. Currently, since the dearth of innovations, we expect the trading rates to be more optimized with a faster routing speed. 

Derivatives

• MCDEX (MCB), a decentralized perpetual contract with up to 15x leverage, is running on Binance Smart Chain and Arbitrum. Like dYdX, the platform started a trading mining program incentivizing users to stake $MCB and trading to earn scores that can be converted to rewards. The derivatives market generates about $1M trading volume per day on both BSC and Arbitrum.
• Futureswap (FTS) V4, a perpetual protocol running completely on Arbitrum, went live with 2 pairs (ETH-USDC and WBTC-ETH) which have liquidity linked with Uniswap V3. The TVL on the protocol is about $6.5M, a competitive number to other similar projects on Arbitrum.
• SynFutures launched its beta version on Arbitrum for users to join trying out derivatives trading. The project was invested in $14M in a Series A funding round led by Polychain Capital and other venture capitals in June 2021.

• GMX, a Spot and Perpetual trading platform with fairly low fee and price impact by using GPL pool, went mainnet on Arbitrum and Avalanche in September 2021. It is the newest competitor to top lead derivatives trading platforms such as Perpetual Protocol and dYdX.

• Tracer is building a perpetual trading platform that had an earth-shaking launch on Arbitrum in late 2021. However, as time goes on, the platform is losing most of its TVL. However, we believe the best metric to assess a derivatives platform is the trading volume which is yet to be public by the team.

⇒ In this derivatives niche, we have both big protocols and new players joining the game, diversifying to create a more competitive and healthy growth of the ecosystem. Derivatives platforms always come later than DEXs. MCDEX is the player from other blockchain platforms coming to Arbitrum, but the performance of the trading platform does not surpass other Arbitrum-native derivatives markets.

The derivatives race on Arbitrum is now fair for all participants. For now, there is still no winner taking up most of the derivatives market share. Futureswap V4 has a good amount of trading volume, SynFutures received a huge grant, and Tracer seems to be behind the game now.

As speculators, we can bet on project tokens of the derivatives trading platforms which are the potential winners. Besides investing in tokens, projects incentivize users to trade to increase the contributed trading volume to earn token rewards.

Options

• Premia, an AMM options protocol, has been growing steadily since the mainnet on Arbitrum. Even though the TVL and trading volume on Premia are quite small, Premia implements a capital-efficient mechanism for liquidity to persuade the current user base to go around the platform. As a result, it has been keeping on a stable growth for months.

• Pods Finance allows users to trade options and earn on the platform. TVL on the platform is about $160k, which is relatively low compared to other operating options trading platforms. Users can still earn interest on Aave while depositing collaterals on Pods Finance, containing a risk of liquidation.
• Auctus (AUC) went live on Arbitrum in April 2021 and the AUC token was live on Arbitrum in September 2021. The platform gained traction when launched with the initial TVL of over $7M. The number has been going down with no sign of the cash flow back to options protocol.

• Dopex (DPX) is undoubtedly the go-to trading options platform on Arbitrum. Its TVL on Arbitrum has been oscillating in a stable range of $80M. We can see the TVL created spikes, meaning that after the expiration date, users purchase options creating the inflow of TVL.

Instead of buying options directly like other platforms, Dopex creates Sing Staking Option Vaults for users to deposit liquidity to purchase options and earn rewards at the same time. This mechanism helps the DPX price have a staggering growth even in the market correction.

The options market on Arbitrum is being dominated by Dopex as the leading player with an $80M TVL and the largest trading volume. Premia and Pods Finance are too small compared to Dopex, and Auctus is losing its collaterals (a very important metric to options trading). Whether there is a paper-thin chance for them to flip Dopex?

Lending/Borrowing

Lending will allow users in the Arbitrum ecosystem to maximize their capital for returns, especially resonating with other capital-utilizing applications such as Yield Farming and Leveraged Trading.

We can put forward lending protocols with concurrent TVL numbers:

• WePiggy has $60M deposited and $24M borrowed on the protocol. It plans to go mainnet on major chains, including Polygon, BSC, Solana, Cosmos-based chains as well as Polkadot-based parachains.
• dForce has $46M deposited, $15M borrowed, and $1.2M USX minted on the protocol. Over 80% of the deposit comes from stablecoin USX, USDT, and USDC. The total supply of dForce on Arbitrum is relatively equal to that on other chains such as Ethereum and BSC, bigger than on Optimism. It means Arbitrum users play a major role in the dForce governance.
• Amy Finance provides lending, farming and NFT minting services, which attracted lots of traction at the launching time. On the flip side, after a few months, the TVL is being drained out of the Amy protocol (current value is close to zero, $38,126). In January 2022, the team announced that the protocol was going to be live on Emerald and come to Oasis Protocol. Amy Finance sailed another way.

• Aave, in January 2022, officially announced plans to deploy Aave V3 on Arbitrum One after a community vote with 99.99% approval. At the moment, it supports Polygon and Avalanche, adding up the TVL to over $30B, making Aave the top-leading lending protocol in crypto. We can expect the upcoming future release of Aave V3 on Arbitrum will uplift the TVL of the L2 solution.

• CREAM Finance is a notable example in crypto that we need to distribute our portfolio, not all in any protocol, even though it was secured by large blockchain auditing companies. The project announced to stop operating due to a vulnerable exploit in October 2021 that hackers took about $130M in various crypto assets. As a result, all the plans, including Arbitrum adoption of Cream Finance, have been canceled. 

⇒ In general, the Lending/Borrowing niche on Abitrum consists of many crypto players ranging from Arbitrum native startups to well-built protocols. Arbitrum is now having CREAM Finance and Amy Finance on the edge of ongoing decommission. Other native protocols on Abitrum seem to have little deposit (total $100M deposit), which is small compared to the total TVL of $3.

Yield and Yield Aggregator

Yield

• TreasuryDAO (MAGIC) is leading the way with the high growth of the TVL. The reason it is in this niche is that the platform has MAGIC-ETH SLP, MAGIC-gOHM SLP, and MAGIC Bonds at Olympus Pro. Users invest in with their MAGIC tokens to earn rewards with 
• Visor Finance merged with Gamma Strategies to integrate the Uniswap V3 liquidity for active management.
• Impermax, a yield aggregator with leverages, has a TVL of $6.6M and 17 vaults across DeFi protocols. A notable feature of the platform is to offer up to x10 leverage (20x with stablecoins) with yield farming to get multiplied APYs, containing risks of potential liquidation.

⇒ In short, projects in this category will utilize your capital more efficiently via the compounding mechanism and some offer leverages.

Yield Aggregator

• Yearn Finance, in Q4 2021, initially raised a topic asking whether they would deploy their platform on L2 solutions such as Optimism and Arbitrum.  However, as time goes on, the platform is still available on Ethereum and Fantom. It gained more traction and TVL on Fantom, casting storms in the DeFi space on the ecosystem with an innovative stablecoin-utilization model.
• BadgerDAO had a TVL of $9M and 9 vaults with boosted APYs on Arbitrum. A note for the platform is that the TVL on BSC was being drained out of the protocol, declining from billions of dollars to a few grand, raising lots of skepticism.
• Pickle Finance in the yield aggregator niche has the largest TVL on Arbitrum with $48M. To participate, users need to zap ETH or CRV into ETH/yvBOOST SLP, auto-depositing their funds to Pickle farm.
• Beefy Finance has a TVL of $26M and 14 vaults (with no boosting feature) on Arbitrum. The most notable pair is MAGIC-ETH LP with a TVL of $8M and 400% APY. The BIFI token has been performing well since the protocol captured lots of value to the token to maintain stability and keep growing 110% in the correction of the crypto market.

Yield aggregator platforms are the next layer of yield farming platforms that will lift your capital to the next level of utilization. The main goal is to deliver users the comparison of yield farming across DeFi protocols. Additionally, some platforms also provide leveraged yield farming to users to earn boosted returns.

⇒ Beefy Finance, Pickle Finance, and BadgerDAO are each other's competitors that picked out different strategies to attract the token flow deposited on their protocol. The leading is now Pickle Finance and Beefy Finance while BadgerDAO seems to be behind the race.

Overall, the APYs across the yield aggregators protocol are relatively similar, depending on the pair user deposit. Pickle Finance has the boosted feature and Beefy Finance doesn’t. On the flip side, Beefy Finance offers vaults (14 vaults) less than Pickle Finance (30 jars).

Statistically, on Arbitrum, Pickle Finance is having a particularly stronger moat than Beefy Finance, resulting in the larger TVL of the salted cucumber.

Bridge

Talking about blockchain bridge, it’s extremely important for every blockchain, especially L2 chains since it’s the gateway for money to flood into the ecosystem. As interoperability is the new meta for blockchains to archive, bridges play as the key driver to realize the interconnected blockchain vision.

• Abitrum Bridge has over $1.6B in crypto assets locked (45% of the TVL of Abitrum bridges)
• 3rd-party Bridge: Across, Anyswap, BoringDAO, Celer Cbridge, Composable Finance, Connext, Hopprotocol, Pnetwork, Renbridge, Rubic, and Synapse Protocol.

In practice, the crypto bridging from Ethereum to Abitrum and also vice versa takes about 6-20 minutes, depending on the concurrent congestion. In particular, Arbitrum Bridge takes at least 1 week to bridge from Abitrum to Ethereum due to the “fraud-proof” mechanism of the scaling solution.

• On-ramp support: Binance, Bybit, Crypto.com, FTX, Huobi Global, Banxa, Transak, MEXC Exchange.

Currently, Abitrum is being adopted by most major CEX in crypto, facilitating customers to deposit and withdraw assets in a blink of an eye. As we know the story about Polygon, after it was getting adopted by many on-ramp exchanges, the team released MATIC as the native token of Polygon. Whether the same story will happen on Abitrum?

In comparison to other L2 scaling solutions for Ethereum, Arbitrum bridges’ TVL is only behind Polygon which has recently released MATIC as the native token. Until today, there is no exploit that takes place on Arbitrum. 

⇒ On the other hand, when bridging crypto assets to the other blockchain, users should be aware of the potential exploits and hacks. To reiterate, cash flow is remaining in the Abitrum ecosystem.

NFT & NFT Marketplace

TreasuryDAO (MAGIC) with Treasure NFT Marketplace is emerging as an NFT phenomenal since the TVL on the protocol skyrocketed 50% to $600M in a week. The MAGIC token is deposited to get yields on many protocols (Impermax, Pickle Finance, and Beefy Finance,...). The project goal is to bridge the gap between NFT and DeFi, meaning that NFT will have more and more DeFi utilities to solve the illiquid issue.

Treasure Marketplace displays many exclusive NFT collectibles such as Legion Auxiliary with the floor price of 1,249 MAGIC ~ $6,000, which is an impressive number. Other NFTs also have an equally similar floor price as the introduced NFT.

TofuNFT is an open multi-chain NFT marketplace for NFT creators. NFTs on the platform are having a good price and liquidity performance, as evidenced in the picture below. Training volume in 30 days ranges from $100k to $1.3M in top NFT collections.

⇒ Surprisingly, NFTs on Arbitrum are booming in floor prices and liquidity. We think it’s good to allocate a little amount of our fund to “ape” in NFTs. However, this is not investment advice, NFT can be extremely illiquid.

• Treasure NFT Marketplace wants to implement DeFi with NFTs -> price resonance (NFT hype and use cases).
• ToFu jumped into the Arbitrum ecosystem quite early -> the NFT marketplace dominator.

Supported Wallet

Arbitrum went mainnet in August 2021, following the beta mainnet in May 2021. Currently, the Arbitrum network is being supported by 23 wallet applications as shown in the two pictures. Its L2 competitor, Optimism, is only supported by 8 wallet applications. The number comparison favors Arbitrum to reach the largest crypto user base.

Investment Opportunities

Token investments

Since Arbitrum is adopted by many big DeFi protocols on Ethereum, we can invest in those token projects such as YFI, GOHM, BIFI, DPX, etc via trading platforms. However, the high growth potential tokens are now quite scarce on Arbitrum.

On the other hand, small-cap tokens contain a potential risk of high drawdown. It is still adequate room for startups to take advantage of the native project.

Staking/Yield Farm/Lending

As mentioned above in the Lending/Yielding/Yield Aggregator sector, we can deposit our crypto assets to earn yield with the APYs above the interest rate of 5%. Some projects even offer leveraged yield farming to get more multiplied APYs, exposing high rewards but high risks at the same time.

NFT

There are two NFT marketplaces (TreasuryDAO and ToFuNFT) with different business approaches. They barely are each other’s competitors, but share little in common which is NFT. The NFT trading on Arbitrum is reasonably high, as evidence that the floor price is always worth over hundreds of dollars.

Arbitrum Predictions

Generally speaking, the Arbitrum ecosystem is leading the Layer-2 race in every aspect. It had explosive growth in 2021 and many great DeFi protocol adoptions. Despite the arrival of top-tier protocols, Arbitrum-native projects also have competitive moats so as to not be dominated by them.

At the moment, Arbitrum is the second-largest L2 scaling solution for Ethereum by TVL. The next milestone for Arbitrum's TVL is the number of $20B of Polygon with MATIC tokens. In our opinion, this object will be viable for Arbitrum if more bridges, protocols, and CEXs adopt the scaling solution, especially a native token will be a massive boost.

To clarify the future landscape of Arbitrum, Coin98 Insights will put forward some predictions that possibly indicate the missing parts and the future of the ecosystem.

• A complete ecosystem: As broken down in the previous sections, almost one year after the mainnet, the Arbitrum ecosystem is now well-built with every essential DeFi component. We expect an incentivizing boost to accelerate the growth.
• More native protocols with bold ideas: This will attract most users coming to the ecosystem besides high growth potential opportunities. DeFi and NFT-related projects are the strong edges of Ethereum, boarding to Arbitrum will leverage the advantages of security and speed.
• New Metas: Crypto degens love playing metagames in crypto, bringing lots of new users to the ecosystem. Metaverse, GameFi, NFT, and DeFi are ideal niches to create meta with extremely bold ideas. This will make Arbitrum the next go-to ecosystem for investment opportunities.
• Arbitrum Native Token Release? A token release is indisputably important for the next step of Arbitrum to flip Polygon (MATIC). This token launch will fill in the missing part of Arbitrum, which might ignite the Layer-2 token release party.
• In the middle of the L2 battle: Arbitrum is the key player among L2 scaling solutions on Ethereum, including Polygon and Optimism, etc. We can assume more new investment parties (venture capital, institutional money, and more migrations) will come to the ecosystem, making it more abundant.

Conclusion

To conclude, that is all you need to know about Arbitrum and its well-constructed ecosystem. We hope you’ve gained valuable insights to understand the future potential and find opportunities in the crypto market, especially in the Arbitrum ecosystem.