Gearing Up for Arbitrum

The real questions are if Arbitrum will be able to (1) pull significant TVL away from Polygon and (2) if it can pull significant TVL at all. Arbitrum will not be creating its own native token, rather will use ETH as its native asset. You can read about this in their blog post here. Utilizing ETH as its underlying asset is a highly welcome decision but has negative implications.

Like many assets and platforms in crypto, prices, TVL, and volume are both reflexive upwards and downwards. Higher prices push APY upwards, which then attracts more yield-seeking capital. Prices then rise again, and the cycle continues until no longer sustainable, and capital begins to look for the exit. Prices crash, sending APY down, and the reverse now occurs in a downward spiral.

This trend has likely benefited Polygon tremendously, with additional rewards across multiple platforms (Aave, Curve, SushiSwap, Bancor) being given out in MATIC. At the same time, MATIC has continued to skyrocket despite the overall market being down significantly. Perhaps we have yet to see the end of Polygon’s growth cycle.

Incumbent platforms launching on Arbitrum will likely find it challenging to provide additional incentives for liquidity without any native asset — unlike MATIC, they can’t just give out ETH. It’s also unlikely that they will be able to give out inflationary rewards to the same degree as any new DeFi project (on any platform).

Another thing to note is that for trading activity on Arbitrum to really take off, users must want to take liquidity (trade) from L2 DEXs vs on L1. With insufficient liquidity, it may not make sense due to slippage. The only trading activity will likely be arbitrage between L1 and L2. It might be a bit of a chicken and egg issue that incentivsation typically reduces.

Thus, despite the hype, it’s uncertain if there will be explosive growth in the short term simply due to a lack of inflationary rewards from incumbents. This is not necessarily a bad thing. Capital that moves into Arbitrum might simply be more sticky — in the medium to long term, and there is a good opportunity for Arbitrum to grow.

Uniswap on Arbitrum

Luckily, it’s not all about incentives. Uniswap v3 coming to Arbitrum following the governance vote is an interesting development. In fact, they’re already deployed!

They were initially set on extending their v3 launch to Optimism once it went live. However, given the delay, things have obviously changed.

v3 on Ethereum has been criticised for its heavy gas usage compared to v2. It’s not unexpected, given the additional complexity of the contracts. v3 LPs exist as NFTs, and these are typically more expensive to work with. v3 might have thrived on Polygon, they just probably just weren’t optimistic enough.

Visor Finance has already given us a taste of the additional yield possible from active strategies. Deployment on Arbitrum will potentially allow users to fully realise the true potential of v3 with more active LP strategies, made possible by capital efficiency from low fees. More sophisticated strategies could also be created to take advantage of these low fees, likely attracting significant TVL (and some competitors).

This also means that being an early user on upcoming active LP strategy platforms may be an exceptional play, yielding both platform tokens and higher (potentially defensible) yields from strategies.

MCDEX

MCDEX was the first project that began building on Arbitrum (despite its multi-chain strategy), and thus it is fair to believe that they are one of the farthest along in terms of development, and should be ready to launch when Arbitrum does.

They’ve also recently managed to close a $7m round with various funds, including Alameda, Delphi, DeFiance and Multicoin. High demand for trading perpetuals (“perps”) on centralised exchanges and growing volume on Perpetual Protocol has already given us a good indication of the demand we might see on MCDEX.

A potential integration with Uniswap v3 has also been discussed, extending the capabilities of MCDEX far beyond what is achievable alone. With the ability to permissionlessly create perp markets, all eyes will be on MCDEX. They may eventually evolve into the staple decentralised perp trading platform and pull in significant capital into Arbitrum.

Update: Tracer’s perps are coming too.

Source: https://medium.com/hillrise-research/gearing-up-for-arbitrum-fb2101d363ef?source=rss——-8—————–cryptocurrency