DeFi total value locked (TVL) saw a return to ETH-centric ecosystems as the bear market deepened, and capital sought refuge in tested projects with reliable and well-funded development teams. In contrast to the Ethereum Mainnet, Ethereum layer 2 (L2) solutions were therefore at the forefront since they provided much-reduced transaction costs, a less crowded network, cutting-edge protocols, and new incentives. The successful Merge was followed by the development of sharding, which will increase Ethereum's capacity for data storage and access. The foundation layer will become more scalable as a result, and L2 rollups will be able to accomplish 100,000 transactions per second, making L2s even more scalable and cost-efficient. The optimistic rollup technology-based L2s Optimism and Arbitrum have received the majority of attention thus far.

The two chains are now securely ranked in the top 10 TVL rankings of DeFi Llama, with Optimism placing 7th as of October 25 and Arbitrum placing 6th. Although the introduction of Optimism Summer brought back memories of DeFi summer, Arbitrum has recently been luring more TVL than Optimism, even without a continuous incentive scheme. We believe this is caused by both the excellent organic innovation that outperformed its rivals as well as the implicit monetary incentives provided by Arbitrum Odyssey.

top chain by TVL

We will first go through the specifics of what Arbitrum provides and how it varies from L2 peers in the technological stack. The impact of prior ecosystem incentive campaigns, such as Optimism Summer and Avalanche Rush, will then be examined to determine what could occur when Arbitrum restarts Odyssey and introduces its own incentive campaign. The article will conclude with assessments of recently developed and forthcoming Arbitrum-native protocols that, from our perspective, have introduced intriguing new features to the realm of decentralized apps (dApps).

Arbitrum versus its competitors

Arbitrum is a Layer 2 designed to help Ethereum scale. It does this through the use of optimistic rollup technology. The rollups operate by performing transactions on a Layer 2 rollup chain while a node known as a sequencer rolls up and then sends transaction status data to the Mainnet. By aggregating many transactions in one rollup batch, this technique of executing transactions has the benefit of compressing the data uploaded to Mainnet while simultaneously lowering the cost of sending transactions to layer 1. Here is a quick comparison of Ethereum scaling solutions

Arbitrum varies from Optimism in numerous key ways, despite the fact that both use the optimistic rollup tech method. Arbitrum does multi-round off-chain fraud verification as opposed to Optimism's single-round L1 fraud verification. Arbitrum's technique is supposedly more efficient and hence less expensive. Arbitrum also has its own Arbitrum Virtual Machine (AVM), which supports the Solidity language as well as all other EVM-built languages like Yul and Vyper. Optimism, on the other hand, utilizes Ethereum's EVM and so only offers a Solidity compiler. Arbitrum is now much more adaptable.

Arbitrum One was updated to Arbitrum Nitro on August 31, 2022, in order to enhance efficiency and accelerate Ethereum scaling. Arbitrum Nitro is a seamless integrated, comprehensive L2 optimistic rollup system with architectural enhancements such as fraud proofs, enhanced call data compressing, and Geth tracing over the pre-upgrade version. Arbitrum Nitro was able to remove the network's constraints, resulting in greatly increased transaction capacity. Following the change, the average block time on Arbitrum was cut in half, while the average block count doubled.

Advanced call data compression is an important enhancement that helped condense transaction data delivered back to the Mainnet for confirmation, thus cutting Arbitrum transaction fees. While Arbitrum now has rates that are 90 to 95% cheaper than Mainnet, estimates suggest that the Nitro update might cut prices by another 27% by removing zero bytes. Arbitrum charges the lowest costs for transferring ETH and the second lowest fees for swaps among many other Layer 2.

Arbitrum Autumn: the history is likely to repeat

There were Optimism Summer and Avalanche Rush in the past due to their incentive program. Will there be an Arbitrum Autumn when Arbitrum releases its governance token? Well, let’s take a look at the past.

Optimism Summer

The debut of Optimism Summer was a huge success. After initially plunging post-airdrop, the Optimism token (OP) rose 400% from its lows on July 13, 2022. The value of Optimism TVL increased from $281.4m at the commencement of the incentives campaign to $1.21b in mid-August.

Following that, we examine how top Optimism protocols performed throughout Optimism Summer. For this case study, Velodrome, an Optimism native AMM protocol, will be employed. It revealed that token incentive or liquidity programs might significantly aid in the bootstrapping (and, to some degree, maintenance) total value locked of protocols. As part of the Optimism Summer incentives, Velodrome received 3m OP tokens. Velodrome TVL increased by 455% from $24.59m on 13 July 2022 to $136.63m on 31 July 2022. However, the TVL has plummeted dramatically since then owing to market circumstances and an exploit on August 4, 2022, which led to a loss of $350,000 in operational money. Meanwhile, Velodrome's token, VELO, increased by 482% from $0.012 on 13 July 2022 to $0.073 on 31 July 2022, though it has subsequently decreased, particularly following the mentioned exploit.

velodrome tvl

Source: Defi Llama

VELO follows the veToken model, which is comparable to Curve's. In addition to securing veVELO to vote on gauge weights for LPs, veVELO voters earn all fees and bribes for the liquidity pairings for which they voted. The novel VELO value accrual method, together with 750,000 OP incentives (out of 3M), led to the TVL growth. 1.75M OP incentives were also utilized for bribe, vote enhancements, and partner token liquidity maintenance.

Other protocols, such as Rubicon and Thales, released incentives two days following Velodrome. All of the TVL bootstrapping shown above was accomplished despite various problems surrounding Optimism as a result of a faulty airdrop. Immediately following the airdrop, the price of the OP token fell from US$4.50 to US$1.20. Users stated that certain claimants were capable of front-running the airdrop ahead to its introduction, and a part was given to airdrop hunters who utilized numerous wallets to build synthetic OP ecosystem interactions before dumping the token.

The OP airdrop debacle may have prompted the Arbitrum team to delay their own incentive scheme and airdrop since the system's projects had excellent organic TVL rise even without the incentives program.

Avax Rush

The price of Avalanche native token (AVAX), which completely dominated the L1 warfare, increased by 600% between July and November 2021. The increase was sparked by both strong interests in the Avalanche projects and favorable macroeconomic conditions.

Avalanche Rush (AR) is a $180m incentive scheme for liquidity mining that seeks to diversify the ecosystem by adding new tools and resources. When the incentive scheme was made public on August 18, 2021, AVAX's TVL increased from $285m to $12.15b in just four months. Top DeFi protocols including Aave and Curve were part of AR Phase 1. With AVAX as user incentive, other protocols including BENQi, StakeDAO, and Avalanche Bridge were also crowdfunded.

Avax TVL

Source: Defi Llama

Despite the protocol not previously being a part of AR, TraderJoe, Avalanche's largest native DEX, had its TVL increase by 1800% in just 10 days after the incentive program was revealed. When TraderJoe later joined AR, its TVL increased, even more, reaching a peak of $2.55B from $1.23B in less than a month. The native token of the protocol (JOE) increased from $0.03 to an ATH of $4.61.

The incentive program also prompted the TVL and token price of other projects in the Avalanche ecosystem to rise, attracting a ton of new users and funding.

The inherent value of the native token airdropped to users is the primary difference between Avalanche Rush and Optimism Summer. The native token of the Avalanche blockchain, or AVAX, serves to pay for gas fees, protect the network through staking, and act as a fundamental unit of account amongst Avalanche's many subnetworks. Additionally, Avalanche includes a system that burns all fees, enabling it to lessen the total supply. Since the mainnet's inception in 2021, more than 1.99m AVAX tokens have been destroyed. Since the AR's creation in August 2021, the total rate of burn for AVAX has been rising, indicating the growing use of the avalanche chain before Terra's crash.

In contrast, the Optimism OP token only confers participation rights in the Optimism Collective, which comprises both governing houses (Token House and Citizen House). By redeploying sequencer profits, building a value ecosystem, and boosting blockspace demand, OP provides value. Unlike Avalanche, though, Optimism lacks a method for burning fees. Moreover, OP is not the native gas token of the Optimism network.

Another notable distinction between Avalanche and Optimism is that AVAX is restricted to validator staking. Verifying a subnet on Avalanche implies validating the C-Chain. Any validator must stake a minimum of 2000 AVAX. As new subnets are deployed, independent of their gas token, more AVAX will be staked. As additional subnets are opened and validator demand grows, more nodes will be spun up to fulfill that need, resulting in higher staked AVAX. 64.27 % of AVAX's total supply is staked at the time of writing.

avax staking ratio

Source: Stakingreward.com

Optimism, on the other hand, does not presently have a validator staking scheme. Because the token lacks a value accrual process, this calls into doubt its intrinsic worth.

At the outset of the incentive scheme, both Optimism and Avalanche had identical TVL. However, Avalanche obtained more than twice as much TVL as Optimism, which was likely due to a difference in macroeconomic conditions when the two incentive schemes were implemented. As a result, any estimate of Arbitrum's TVL trajectory following the commencement of its own incentive program must be evaluated in conjunction with market conditions at the time. Arbitrum owns $969m in TVL as of October 25, 2022. Arbitrum TVL might reach between $2b and $3b with the introduction of its incentive scheme. Arbitrum achieved an ATH TVL of US$2.58b in November 2021, as seen on DeFiLlama. Despite the fact that market conditions were significantly more favorable at the time, the Arbitrum ecosystem is far more developed now, with over 120 protocols, surpassing Optimism's 79 protocols. Furthermore, Arbitrum was able to achieve these TVL levels despite the lack of monetary incentives.

arbitrum tvl

Source: DeFi Llama

Therefore, when Arbitrum eventually releases its governance token and incentive program and if their market timing is right, the Arbitrum Autumn is inevitable. Considering the hype of Arbitrum, the effect of this Autumn can be compared to the previous DeFi summer.

Arbitrum notable gems

GMX, Radiant, and Plutus DAO are some of the protocols that Arbitrum is renowned for. But in this part, we'll focus on a few exciting new Arbitrum protocols that are only starting to gain traction.

Sperax

Sperax USD is a stablecoin issued by the Sperax system (USDs). USDs is fully backed by other stablecoins like USDC, DAI, VST, and FRAX. Users can create USDs by combining these four stablecoins with SPA, Sperax's governance token. While issuing new USDs burns SPA, redeeming USDs mints SPA and returns the stablecoin of the user's option. The intriguing characteristic of USDs, as opposed to FRAX, which uses a similar mint/burn method with assets and its governance token, is that USDs automatically create auto-compounded yield for their holders.

To create dependable and organic revenue, the Sperax team guarantees that collateral is only utilized in audited DeFi protocols. The team or the community can submit proposals, which are then voted on to decide on adoption. To receive veSPA (vote-escrowed SPA), which offers voting rights, users can stake and lock SPA for a set amount of time. The longer the lock-up time, the more veSPA and hence voting power the staker receives. All veSPA owners are also eligible for incentives such as yield share rewards, incentive rewards, and fee rewards.

As the TVL for collateral placed to mint USDs rises, more fees from the issuing of USDs are received, resulting in increased incentives for SPA stakers, motivating the purchase and staking of SPA to enjoy protocol revenue. With greater USD minting, more SPA tokens will be burned, resulting in deflationary tokenomics.

Single Trade Finance Exchange

Single Trade Finance Exchange (STFX) is a DeFi/SocialFi system that enables traders to communicate trading ideas using Single Trade Vaults (STVs).

STVs are the vaults where users may invest their money in order to replicate trade techniques. An STV can only carry out one pre-defined plan. The vault's investors will get 80% of the proceeds from transactions, with the remaining 15% and 5% going to the vault management and the protocol, respectively. No performance fees will be imposed for vaults that break even or lose money. STVs also do not have any management costs.

STFX token holders will get 80% of protocol revenue, with the remainder 20% going to the DAO treasury. Stakeholders will get weekly payouts in USDC. Before being re-liquid, staking will be limited to a one-week "cool down" period.

In DeFi, STFX introduces a new financial primitive. It is disruptively creative because it enters the copy-trading industry and democratizes a component of the asset management sector. Prospective traders and strategists may profit from their ideas and intellectual property, while investors have greater access to techniques that were previously too hard or time-consuming to create on their own.

Nftperp

The nftperp is a perpetual futures exchange for NFTs (as the name would imply). Traders have the option of going long or short on a given NFT project's floor price. Trading requires using ETH as collateral and offers up to 5 leverage. The floor price feeds are offered by Nftperp in collaboration with Chainlink and Upshot, a company that offers NFT analytics. There are currently just blue chip NFTs available. A modified version of Perpetual Protocol's virtual Automated Market Maker (vAMM) architecture is used by Nftperp. The x*y=k constant product equation is used by vAMM, which does not require liquidity providers. The vAMM just functions as a standalone settlement market, with all gains and losses being immediately resolved in the collateral vault. One trader's profit is also another trader's loss. Nftperp also intends to deploy its token before the end of this year, however, no specifics on how the token would be utilized have been revealed. NFT perpetual trading allows the NFT markets to be further securitized. The perp may be used by collectors to hedge their market beta, while speculators can engage in a capital-efficient manner. Furthermore, the pricing of unique features is now able to be implemented: buying a rare BAYC NFT that is greater than the floor price owing to rare features, while shorting that NFT. Of course, the NFT perps market may face the same liquidity and oracle exploitation issues as its predecessors, but the invention offers a massive potential market.

The future of Arbitrum

Arbitrum Nova

Arbitrum presently has two chains: Arbitrum rollup chain "Arbitrum One" and the Anytrust Chain "Arbitrum Nova." Because data is maintained off-chain in Anytrust while always uploaded to the L1 in the Arbitrum rollup chain, an Anytrust chain provides reduced costs at the tradeoff of trustlessness. Arbitrum Nova is a chain that is particularly suited for various gaming and social applications where speed trumps security. We feel that Arbitrum's architecture increases the ecosystem's interoperability prospects and puts it ahead of its rivals in this regard.

Are ZK rollups a threat to Arbitrum?

As previously said, ZK-rollup is another ETH scaling option, however, most chains that choose this technological path still lack in terms of ecosystem development. Let's take Immutable X (IMX), an NFT-focused L2 that employs StarkEx ZK-rollup technology, as an illustration, the trading volume of the top ten NFT collections on IMX does not even reach $500m. Meanwhile, Loopring, an L2 that uses ZK-rollups to provide high-throughput, low-cost trade on Ethereum, had only handled roughly 8.54m transactions in its 190-day existence.

Just in Q3 2022, Arbitrum and Optimism executed 12m and 13m transactions, respectively. Admittedly, some ZK-rollup chains have had greater acceptance than others. One such chain is dYdX, which employs StarkEx ZK-rollup technology When compared to optimistic rollups, ZK-rollup technology is less compatible with EVM due to its complexity, which restrains the development of the developer community to some extent. We will be able to identify which ecosystems will grow more organic by looking at incentive schemes for ZK-rollup chains that have substantial venture capital backing, but it is highly probable that Arbitrum will lead the market due to its compatibility for mass adoption.

Conclusion

To summarize our views on the Arbitrum Autumn, we feel the chain is on the right road in terms of both technology and ecology. On the technological level, Arbitrum's architecture of one roll-up plus one Anytrust chain enables future interoperability inside its ecosystem, as developers, particularly from GameFi/Metaverse, may capitalize on the specific design. Arbitrum has created an outstanding roster of TVL behemoths on the application layer without a structured incentive scheme - organic development of a developer community and investment from early supporters (Arbitrum maxi) are crucial to an ecosystem's sustained expansion.

We are already seeing spontaneous creativity blossoming from Arbitrum communities, as seen by emerging and forthcoming initiatives, in contrast to some other newer L1 and L2 rivals that are still reliant on VC funding to recruit mercenary talent. On top of the ecosystem's present organic development, an incentive program may possibly accelerate it to the critical mass of being a permanent rival in the DeFi and blockchain market. And that will be when Arbitrum Autumn arrives.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Arbitrum Autumn is coming