As the Ethereum blockchain continues to reach mass adoption, challenges such as network congestion and high transaction fees are amplified and getting worse. To solve this, a number of Layer 2 (L2) solutions have emerged, building on top of the existing Ethereum blockchain.
Arbitrum is a L2 solution which utilizes a technology known as optimistic rollup. This enables Ethereum smart contracts to scale by transferring messages between smart contracts on Ethereum and Arbitrum, with the bulk of transaction processing completed on the L2 chain. This is said to dramatically improve the overall performance of Ethereum.
Arbitrum was created by the team at Offchain Labs in 2018. With a TVL of $2.31 billion, it is currently the most dominant L2 solution on Ethereum.
Using Uniwhales’s bridge tracker, we can also see a large influx of deposits over the past few weeks with 67% of the assets in ETH and USDC. With so much inflow of funds, let’s explore the protocols that these funds can potentially enter.
In this article, we will be going through a brief summary of 5 interesting protocols built on Arbitrum: Dopex ($DPX), Jones DAO ($JONES), Vesta Finance ($VESTA), GMX ($GMX) and Treasure DAO ($MAGIC).
Dopex is a decentralized options protocol which aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers. With a current market capitalization of $227.43 million, Dopex ranks 3rd on Arbitrum with a TVL of $474.31 million.
Dopex offers option structures such as calls and puts at fixed strikes ranging from near to far out of the money with rewards to boost user yield. Option pools allow users to earn a yield passively by providing base asset and quote asset liquidity for users who wish to purchase call and put options respectively.
Option pools within the protocol may have weekly or monthly epochs, with different levels of token incentives for liquidity provision considering the varying wait times to epoch expiries.
At the end of an epoch, the total profit and loss (P&L) is calculated based on the total number of tokens collected from option purchases along with option exercises. If the P&L for the epoch is in loss, users will be rebated a percentage of their losses with $rDPX tokens.
Single Staking Options Vaults (SSOVs)
Dopex has added Single Staking Options Vaults (SSOVs) that allow users to lock up tokens for a specified period of time and earn yield on their staked assets. Users will be able to deposit assets into a contract which then sells your deposits as call or put options to buyers at fixed strike prices. To summarise for each SSOV:
1) Strikes are set for the start of an epoch
2) Depositors lock assets into SSOV and select strikes for covered calls / puts
3) User deposits earn yield from the staking pool and also from selling covered calls / puts
Dopex uses two tokens for the protocol to work in a synergistic manner. These vaults make use of $DPX and $rDPX, to ensure covered call writers don’t lose dollar value when their sold options are exercised.
- $DPX - governance and protocol fee accrual token
- $rDPX - rebate token for protocol usage
$DPX is a governance token that gives holders the power to decide the weights of $DPX rewards for each pool, the rebate amounts in $rDPX for each pool, and strike thresholds for option chains in pools. This incentivizes delegators to buy and stake $DPX while being able to quote price multipliers that result in fair pricing for purchasers.
$rDPX is distributed as rebate tokens to the option pool participants in case losses incurred by the pool. Rebate tokens are minted based on the current TWAP of $rDPX on Uniswap equivalent to 30% of all losses incurred by the pool.
Users can also stake $DPX which gives them $veDPX. In addition to its base structure, $veDPX has value accrual through pro rata allocations of protocol fee collection, staking rewards, margin collateral, and synthetical collateral.
If SSOVs do not get enough usage for a token, close to expiry calls will be so cheap that it will incentivize large buy orders close to expiries. As a result, buyers will likely attempt to front-run each other by buying calls up beforehand at high premiums. Resulting in more yield generated for depositors.
While SSOV depositors users will not be at risk of losing any notional USD value by staking their assets, they could lose potential upside in the event that the token increases rapidly. If call buyers are in net profit at the end of the epoch, depositors will lose their staked tokens but will make a profit in USD notional.
Jones DAO is a yield optimizing protocol for options with 1-click access to options strategies, similar to Ribbon protocol. With a current market capitalization of $8.9 million, Jones ranks 18th on Arbitrum with a TVL of $19.79 million.
Jones aims to add locked funds to Dopex via three primary user groups:
- Users who don’t want to actively manage their options strategies and/or would like to utilize JonesDao option strategists’ expertise.
- Users who would prefer not to lock their assets in Dopex SSOVs for a whole epoch and would like to keep their deposits liquid.
- Protocols who want to earn additional yield on their treasury assets without employing treasury management experts.
Jones DAO offers vaults for multiple assets and risk profiles. Jones will generate yield through options strategies deployed on the assets deposited in Jones Vaults. Users will be able to access the best yields with actively managed and optimized hedged options strategies.
jAssets are fully composable yield-bearing asset tokens that unlock liquidity and capital efficiency for assets locked in options strategies. When a deposit is made to the primary Jones Vault for an asset, a jAsset token is minted to represent the deposit. Upon withdrawal, the jAsset token is burned and the deposit along with the yield is received back by the depositor.
jAssets are useful because they allow for a variety of activities mid-epoch. It effectively converts the European style options issued by Dopex into American style options. By selling the jAsset, you’re able to ‘exercise’ the option and claim profits.
$JONES accrues value in a few different ways. Most directly, $JONES claims a 2% annual fee on total TVL, as well as a 20% performance fee on yield generated. In addition to this, locked $JONES will be converted into $veJONES.
$veJONES holders can vote on gauge weights for Jones Vaults and jAsset pools. This aligns usage with long term holders and creates efficiency by allocating farming resources to the most used pools. Locked JONES also receives a portion of protocol fees and JONES emissions.
Jones seems like an incredible derivative opportunity of Dopex. Jones will be a crucial part of the Dopex future by allowing for investor flexibility.
The indicative ROI/APY is not guaranteed and is subject to market risk. The strategies are not risk-free, and some epochs may result in a negative return.
GMX is a decentralized spot and perpetual exchange with low swap fees on Arbitrum and Avalanche. With a current market capitalization of $189.77 million GMX ranks 4th on Arbitrum with a TVL of $401.55 million and over $16.3 billion of trading volume from 1st Sep 2021.
Users can execute trades by placing a market order or limit order on the GMX trading platform. Trading is supported by a unique multi-asset pool with up to 30x leverage for users to trade on their assets. Dynamic pricing is supported by Chainlink Oracles along with TWAP pricing from leading volume DEXs.
$GLP consists of an index of assets used for swaps and leverage trading. Assets on Arbitrum include, $ETH, $BTC, $LINK, $UNI, and a bunch of stablecoins. It can be minted and burnt with any index asset. $GLP holders make a profit when leverage traders make a loss and vice versa while providing liquidity for leverage trading.
The protocol balances the weightage of an asset through $GLP minting fees. It does not auto rebalance which means that there is no standard impermanent loss.
If an asset is above its targeted weight, the cost to mint $GLP with that asset would be higher. Likewise if an asset is below its targeted weight, the cost to mint $GLP would be lower or even free.
$GMX is a utility and governance token, that also accrues 30% of fees generated from swaps and leveraged trades.
$GLP is the liquidity provider token of GMX, that accrues 70% of all generated fees on the platform.
The fees are collected and added to the distribution contract. Rewards are unlocked after every block and paid through platform fees collected from the previous week. Both $GMX stakers and $GLP holders earn $esGMX rewards and platform fees in $AVAX or $ETH. The reward ratio can be seen on their earn dashboard.
$esGMX and multiplier points are rewards given to long term $GMX stakers and $GLP holders. Claiming $esGMX will convert them into $GMX, which vests daily over a year.
You will also receive multiplier points every second when you stake $GMX at fixed 100% APR.
Users can compound their pending multiplier points and $esGMX by staking them, increasing the amount of rewards they receive.
Vesta Finance is a L2 lending protocol on Arbitrum that allows users to obtain maximum liquidity against their collateral without paying interest. With a current market capitalization of $6.48 million, Vesta ranks 13th on Arbitrum with a TVL of $57.55 million.
Users can borrow against their crypto assets with low interest rates and repay their loan whenever they want. Vesta allows users to collateralize $ETH, $renBTC, or $gOHM to borrow $VST against their assets instead of selling them while offering a lower minimum collateralization ratio compared to single-vault-based systems such as Maker, Abracadabra, etc.
Using ETH as an example, users will be able to borrow against ETH on Vesta Finance at 110% minimum collateralization ratio at zero-interest rate. This means you will be able to mint up to $90.9 worth of VST with every $100 worth of collateral.
Recovery Mode kicks in when the total collateralization ratio (TCR) of the system falls below critical collateralization ratio (CCR) for that collateral type. While we are in this mode, liquidation conditions are relaxed and the system blocks borrower transactions that would further decrease the TCR.
Recovery Mode is structured to incentivize borrowers to raise the TCR back above the collateral's CCR by encouraging collateral top-ups and debt repayments. This also incentivizes $VST holders to replenish the stability pool.
Vesta also allows users to earn $VSTA for providing liquidity on their platform. Users will be able to deposit $VST to stability pools, which is used to instantly liquidate the individual vaults that are under the minimum collateralization ratio. This liquidation process can be initiated by anyone and provides a return for people who deposit into the stability pools.
Similarly, users that help to bootstrap the ecosystem through their liquidity mining pools will be rewarded with $VSTA. There are currently two liquidity pools that users can stake their LP tokens in, VSTA-ETH and VST-FRAX.
Stability Pool Staking
$VST, Vesta Stable is a USD pegged stablecoin. 1 $VST is geared towards maintaining value of $1 USD due to it always being over-collateralized, which means the value of locked ETH will always exceed that of the issued $VST.
$VSTA is a governance token that allows users to vote on the parameters within Vesta’s lending protocol, such as interest rates, new collateral types, and new product direction. The DAO exists solely for executing the decision of the governance proposals.
When a liquidation occurs, the liquidated debt is cancelled with the same amount of $VST in the Pool (burned), and the liquidated collateral is proportionally distributed to depositors.
If the liquidated debt is higher than the amount of $VST in the stability pool, the system tries to cancel as much debt as possible with the tokens in the stability pool, and then redistributes the remaining liquidated collateral and debt across all active vaults.
Treasure is a decentralized NFT ecosystem on Arbitrum that is built specifically for metaverse projects. $MAGIC, the native currency of Treasure, has a current market capitalization of $161 million, ranking 2rd on Arbitrum with a TVL of $581 million.
At the center of Treasure is a place called Bridgeworld, where $MAGIC is emitted and harvested. Bridgeworld is a P2E game of strategic commerce, trade and domination connected by resources and narrative. The Bridgeworld narrative establishes building blocks for which other games and communities can be built. Bridgeworld utilizes a three-part resource economy:
- $MAGIC (Power)
- Treasures (NFT / Resources)
- Legions (NFT / Players)
As a community-first game, Bridgeworld incentivizes social coordination through the formation of guilds and sub-DAOs, enabling collective strategies around resource accumulation and optimization. Players can stake their Legions, Treasures and Consumables to develop characters, build narrative, and improve mining efficiency.
All projects listed on Treasure’s marketplace utilizes $MAGIC in their respective metaverses, with each community creating their own lore for this resource. $MAGIC is the sole currency for marketplace transactions, which also acts as the reserve currency for metaverses under the Treasure umbrella.
Treasure will be launching a second NFT marketplace, Trove, to widen its current marketplace. Trove will be transacted in $ETH instead of $MAGIC for the convenience of Ethereum native users. The DAO will ultimately still own both Trove and Treasure marketplaces.
$MAGIC is the natural resource of the Treasure metaverse. It turns NFTs into productive yield-bearing assets. $MAGIC is designed to be increasingly scarce as emissions decline with the increasing complexity of the economy. The DAO uses $MAGIC emissions to grow new projects while continuing to support the existing ones.
$gMAGIC is a governance token where governance rights are weighted towards community members who are committed to the longer term success of the DAO. $gMAGIC derived from the Genesis Mine is weighted based on timelock. The longer you lock your $veMAGIC, the higher the weight of your vote.
Only staked $MAGIC ($veMAGIC) or MAGIC-WETH SLP within the rewards contract are eligible to vote with $gMAGIC.
Vitalik Buterin believes that Layer 2 is the only safe way to scale ethereum and preserve decentralization, and Arbitrum has the highest TVL and activity amongst the Layer 2s, making it a prime candidate to be the leading ethereum layer 2 solution for further growth.
Being on Arbitrum, protocols are able to take advantage of near-instant confirmations and significantly reduced gas fees to explore the L2 frontier, attracting Ethereum native users towards Arbitrum while Ethereum continues to scale. The near-instant confirmation is truly a breath of fresh air when compared to other EVMs.
While waiting for more protocols to launch, these protocols mentioned in this article are prominent projects that also present yield farming opportunities for users to maximize the value of their assets and level up their DeFi game.
Additionally, with Arbitrum being a relatively new network that is less than a year old, there is a lot of opportunity for growth when it comes to investing in these arbitrum protocols as they are still at an early stage, with many of these protocols having relatively small market cap compared to its ethereum counterpart.
About Switcheo Labs
Switcheo Labs is a creative and experimental think tank that guides and nurtures decentralized ecosystems in the DeFi space. Founded in 2018, Switcheo Labs was born out of a simple desire to make finance accessible and trust optional. Recognizing the financial challenges that currently exist, Switcheo Labs innovates on robust alternatives to put power back where it rightly belongs, in the hands of the people.
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