Decentralized Finance (DeFi) has emerged as a transformative force in the world of blockchain technology, enabling individuals to engage in financial activities without relying on traditional intermediaries. Among the various platforms facilitating DeFi, Arbitrum has garnered significant attention for its scalability and efficiency.
Built on the Ethereum network, Arbitrum offers a layer 2 solution that enhances transaction speed and reduces costs. In this guide, we will explore the top DeFi projects on Arbitrum, highlighting their innovative features and potential impact on the decentralized finance ecosystem.
What is Arbitrum?
Arbitrum is a novel solution for Ethereum’s Layer 2, fashioned to accelerate transaction times, augment scalability, and strengthen the network’s confidentiality. The essential principle underpinning Arbitrum allows the off-network execution of transactions, followed by verification and grouping before they are finally committed back onto the primary Ethereum network.
The brainchild of Offchain Labs, a blockchain R&D enterprise, Arbitrum’s inception dates back to 2018. The co-founders, Ed Felten, Steven Goldfeder, and Harry Kalodner, presented the theoretical groundwork for Arbitrum through a detailed whitepaper at Princeton University.
After a thorough cycle of beta tests in the mid-2020, the first iteration of Arbitrum was launched on the Ethereum mainnet in August 2021. With an overwhelming response and adoption from renowned crypto projects such as Uniswap, Chainlink, and Aave, Arbitrum swiftly gained prominence in the Ethereum ecosystem.
Understanding the Mechanism Underlying Arbitrum
Arbitrum leverages the power of smart contracts to make Ethereum’s blockchain more user-friendly and efficient. This is accomplished by facilitating the transmission of transaction information between the mainchain and the sidechain using a technology known as “optimistic rollup”.
A rollup is essentially a scalability solution that capitalizes on the robust security of Ethereum, thereby enabling the deployment of pre-existing mainnet smart contracts with negligible modifications. It extracts the most useful characteristics from both Layer 2 channels and sidechains.
Optimistic rollups function by running transactions off Ethereum and recording the transaction data to the mainnet. The term ‘optimistic’ is employed as these rollups presuppose the validity of off-chain transactions without needing to post proofs for transaction batches verification on-chain.
Validation of these transactions is ensured via a timed fraud-proving system that identifies miscalculated transactions. Any network verifier can dispute the rollup transaction results by submitting a fraud proof.
Upon successful fraud proofing, the incorrectly executed transaction’s rollup batch gets re-executed and the system is updated accordingly, while the sequencer at fault is penalized. If the fraud proof fails and the challenge period passes, the transaction rollup batch is deemed valid on the Ethereum mainnet.
Additionally, Arbitrum has a proprietary virtual machine, known as the Arbitrum Virtual Machine (AVM). Positioned above the cross-chain EthBridge, AVM serves as the execution environment for compatible smart contracts.
Distinctive Characteristics of Arbitrum
The factors distinguishing Arbitrum from other Layer 2 solutions and making it attractive to users and developers alike are numerous:
Scalability: Arbitrum markedly improves transaction throughput over Ethereum’s main chain, effectively relieving network congestion and reducing costs.
Interoperability: Being a Layer 2 scaling solution for Ethereum, Arbitrum is compatible with all Ethereum smart contracts and tokens, without necessitating any code alterations. This ease of migration has increased its popularity among developers.
Security: Despite functioning on a separate Layer 2, Arbitrum retains the security of Ethereum’s main chain, hence, it’s secured by Ethereum’s decentralized network of miners or validators.
Decentralization: Arbitrum’s design ensures decentralization, unlike some scaling solutions dependent on a limited group of validators, which enhances the system’s security and trust.
Significant TVL: Ascending rapidly to become the 4th largest chain by Total Value Locked (TVL), Arbitrum currently has over $2.3 billion in assets staked on its network. This substantial figure indicates stakeholders’ confidence in Arbitrum’s potential, thereby driving its popularity upwards.
As we move forward, we’ll delve into some of the top DeFi projects that have chosen Arbitrum as their Layer 2 solution, exploring their features and why they chose Arbitrum over other solutions.
Top projects on Arbitrum
As we delve deeper into the Arbitrum ecosystem, we uncover a range of notable projects leveraging this platform’s unique capabilities. Here, we’ll explore some of the top DeFi initiatives making waves on Arbitrum.
Topping the list of projects thriving on Arbitrum is GMX, a decentralized perpetual exchange deeply ingrained into Arbitrum’s ecosystem. GMX effortlessly enables on-chain, permissionless trading for an array of tokens including BTC, ETH, AVAX, and UNI.
It has rapidly climbed the ladder to become Arbitrum’s most popular DeFi exchange with a cumulative trading volume exceeding $100 billion, serving a strong user base of more than 224,000.
Here are the main features of GMX:
- Reduce Liquidation Risks: GMX employs an aggregate of high-quality price feeds to determine when liquidations occur, ensuring that positions remain secure even during temporary wicks.
- Save on Costs: With GMX, users can enter and exit positions with minimal spread and zero price impact. This allows them to obtain the optimal price without incurring any additional costs.
- Simple Swaps: GMX offers a user-friendly swap interface that enables convenient position opening. Users can easily swap from any supported asset into the position of their choice.
What distinguishes GMX and propels its exponential growth is its intuitive interface, seamless user journey, and pioneering tokenomics, inclusive of GLP staking that offers rewards to token holders and stakers. Given these features, GMX is our top contender for the most promising Arbitrum investment for 2023.
Radiant positions itself as a DeFi platform on the Arbitrum network with the ambition to become the foremost omnichain money market. Users can deposit major assets from any prominent chain and borrow supported assets across various chains. Radiant’s key objective is to unify the scattered liquidity currently distributed across the top ten alternative layers.
Radiant employs the $RDNT token within its lending protocol, rewarding liquidity providers on the platform. Backed by audits from PeckShield and Solidity Finance, Radiant’s forthcoming version 2 will allow complete cross-chain borrowing/lending for assets such as BTC, ETH and USDC, with subsequent assets chosen through Radiant DAO’s voting.
Vesta Finance is a collateralized debt platform on Arbitrum that allows users to deposit collateral and generate Vesta’s stablecoin, VST, which is sent to their Ethereum address. The system ensures over-collateralization, and the value of 1 VST is algorithmically controlled to remain equivalent to $1 USD through a variable interest fee.
Here are the main features of Vesta Finance:
- Arbitrum-Native Stablecoin: Vesta Finance introduces VST, an Arbitrum-native over-collateralized stablecoin. Users can mint VST by depositing supported crypto assets and borrowing against them, providing stability within the Arbitrum ecosystem.
- Borrow on Demand: Vesta Finance provides users with the opportunity to borrow against their crypto holdings at the lowest interest rate available in the market. Users have the freedom to utilize their borrowed balance as they please and can repay it whenever they desire.
- Earn Risk-Minimized Yield: By providing liquidity on VST liquidity pools, users can earn a fair share of the protocol’s fees through various reward programs. Vesta Finance prioritizes risk minimization, allowing users to generate yields while maintaining a level of security.
Vesta Finance emerges as an attractive project and investment due to its capacity to offer stable and reliable collateralized debt positions via its stablecoin, VST.
Camelot (GRAIL) stands out as one of the most promising Arbitrum projects in 2023, driven by its commitment to a community-centric and ecosystem-focused approach to decentralized exchanges (DEX) and liquidity provision. Camelot offers high efficiency and customization, presenting a bespoke approach that prioritizes composability. It is a feature-rich Automated Market Maker (AMM), offering pool configurations highly tailored to specific trading pairs.
The innovative liquidity approach based on non-fungible staked positions adds another layer on top of traditional LP tokens, offering new features that benefit both users and protocols. Camelot’s permissionless strategy permits projects to directly interact with the protocol without requiring any team intervention, granting full control to incentivize and manage liquidity. With its dual token system, comprising the liquid native GRAIL and non-transferable governance token, xGRAIL, Camelot ensures long-term sustainability by exerting substantial control over market supply flow.
PlutusDAO is an innovative protocol that is native to the Arbitrum ecosystem. Its central focus lies in governance aggregation around its PLS token, while simultaneously striving to amplify liquidity and rewards for its users. Its ultimate ambition is to establish itself as the preeminent Layer-2 governance protocol for projects predicated on veTokens, or valueless governance tokens. To realize this ambition, PlutusDAO has embarked on fruitful collaborations with other protocols, spawning new governance products. The protocol is presently working on broadening its product portfolio by introducing Vaults.
At present, PlutusDAO’s offerings fall into two main categories: plsAssets and plvAssets. The former are associated with governance aggregation and are tailored to optimize liquidity and rewards for users. In contrast, plvAssets are vault products designed to maximize both rewards and user convenience, thus providing a compelling foundation for other protocols to build upon.
Currently, PlutusDAO boasts five plsAssets, namely:
With plsAssets, users can gain exposure to maximum locked-in rewards without having to commit their tokens. They can opt-out of their plsAsset position in exchange for the corresponding token at any given time, thanks to the liquid staking derivative. With an added layer of incentives on top of the max-locked veAsset yield, plsAssets consistently prove to be more profitable and liquid than the conventional option of max-locking an asset.
As the DeFi landscape continues to evolve, Arbitrum has positioned itself as a promising platform for developers and users alike. Its layer 2 solution offers scalability, cost-effectiveness, and enhanced transaction speeds, providing a robust infrastructure for the growth of DeFi projects. The top DeFi projects on Arbitrum showcased in this article represent a fraction of the innovation happening within the ecosystem. With ongoing advancements and increasing adoption, Arbitrum is poised to play a significant role in shaping the future of decentralized finance.