Ethereum has difficulties in keeping up with demand due to unprecedented growth over the past few years. Layer 2 solutions, including sidechains, channels, and rollups, provide Ethereum users and developers with increased speed and security without the price tag.
We take a look into Arbitrum and how it takes rollups to the next level — and a dive into a few of the novel DeFi products building on the network.
How do smart contracts on the Arbitrum network scale Ethereum?
Arbitrum is a layer 2 project being developed by New York-based development firm Offchain Labs, which is at the forefront of scaling solutions for the Ethereum chain. The team is led by co-founders Ed Felten, Steven Goldfeder, and Harry Kalodner. Under their leadership, Offchain Labs is building Arbitrum along with a suite of additional scaling tools.
The Arbitrum chain operates using an innovative technology known as optimistic rollup, which allows smart contracts and transactions on Arbitrum to leverage the decentralization and security of Ethereum Mainnet.
Essentially, this approach optimizes data storage and allows the validator to process all the transactions, but have them validated by the security layer of the Ethereum network. This makes it faster, more efficient, and allows for higher transaction throughput. With its unique capabilities, Arbitrum has quickly become one of the most exciting projects in the cryptocurrency space today.
What makes Arbitrum unique?
Arbitrum’s key value proposition is that its scalability allows for cheap and fast transactions — essential for accessibility and onboarding users onto blockchain technology. Developers can use Arbitrum to create smart contracts in a quick and low-cost manner. This, in turn, allows businesses to build promising new products and protocols quickly and at a fraction of the price it would have cost on Ethereum.
Over the coming months, we can expect to see a couple of exciting projects launching on the Arbitrum network. Some of these DeFi protocols can be considered pioneers and offer powerful financial primitives that can be used to unlock a wide range of use cases. Whether you are a sophisticated trader looking for better tools to hedge exposure or an investor searching for investment opportunities, Arbitrum offers an interesting solution.
GMD Protocol
GMD Protocol is a yield-optimizing and aggregating platform built on Arbitrum. GMD builds on top of existing protocols, like perpetual exchange GMX, which has been a great product market fit over the past six months. GMD deploys (pseudo) delta-neutral (DN) strategies to aggregate yield from index tokens, such as GLP from GMX. These strategies involve single staking vaults for specific assets such as Ethereum and Bitcoin.
The deposits are then used to mint GLP and the protocol automatically hedges the exposure. Obviously, the exposure to GLP cannot be hedged entirely, mainly due to crypto’s high volatility. As a solution, the GMD token acts as a risk-absorbing asset for the protocol.
The protocol will establish a GMD reserve that absorbs the underperformance of single-staking vaults due to impermanent loss. This helps to protect investors from incurring significant losses and is a crucial part of GMD’s product design. This model shifts the risk of volatility from single asset stakers on the GMD protocol to GMD token holders. This includes both downside and upside risk.
GMD launched its product and bootstrapped liquidity for its vaults only recently. As such, it is difficult to make hard conclusions about the performance of the platform with the little data there currently is.
Web: GMD.Protocol
Twitter: @GMDProtocol
Rysk
Another innovative protocol on Arbitrum is called Rysk and is a new options platform. Rysk is built around the idea of uncorrelated returns and aims to ignore market conditions to generate lower-risk returns with lower volatility. The protocol is currently in a closed Beta stage with its first product called Dynamic Hedging Vault (DHV). This vault was capped at $750k and the threshold was reached within minutes. It shows the demand and interest in Rysk’s platform.
The vault is basically a new (European) option AMM and investors who deposit into the vault become market makers of the platform. Option buyers and sellers can come in and exchange options with a certain range of expiries and strike prices.
The Dynamic Hedging Vault is aware of its position at all times, including its delta exposure, and therefore will price its options in such a way as to incentivize the sale or purchase of options that bring the DHV’s delta exposure closer to 0. For example, if demand for calls outstrips that for puts, the vault will automatically increase the price of calls and reduce the price for puts, incentivizing a market-driven rebalancing of the book’s delta.
During periods of sustained stronger demand in one direction (like our example of more calls sold than puts) and where the rebalancing incentivization alone isn’t enough, the DHV has a number of external tools it can utilize to immediately hedge delta, in either direction. These include, but are not limited to buying spot assets on Uniswap markets, as well as perpetual futures offered by Rage Trade.
Currently, funds deposited into the DHV are being used to run short options strategies, such as strangles, straddles, or single-legs targeting DHV delta of 0. The alpha phase is a restricted, controlled version of the platform. Their full product, called Rysk Beyond, is expected to release within two months and opens up trade flow and other interesting options tools.
Web: rysk.finance
Twitter: @ryskfinance
Y2K Finance
Y2K Finance is a cutting-edge suite of structured products designed specifically for exotic derivatives. These products allow market participants to hedge or speculate on the risk of pegged assets deviating from their fair value. It is designed for users to protect their investments from depeg risks.
When it comes to managing volatility risks in the crypto space, few products can match the power and flexibility of Y2K’s first product called Earthquake (EQ). Designed specifically to help traders hedge, speculate, and underwrite these crucial asset fluctuations. EQ provides a range of unique features that make it the perfect tool for anyone looking to stay ahead of the curve in today’s fast-paced crypto landscape.
With this product, users can open positions by depositing $ETH into fully collateralized ERC-4626 variants, tapping into seven different pegged assets including DAI, USDC, FRAX, FEI, MIM, stETH, and wBTC. As a user, you have complete control over how much you want to deposit, as well as in which asset you want to transact on each market — giving you full freedom and flexibility when navigating today’s complex financial climate.
As of writing, the project has an Initial Farm Offering live for their token, allowing users to deposit into the Risk and Hedge side of their Earthquake product and earn Y2K token rewards. In the future, Y2K will launch two other products: Tsunami and Wildfire.
Web: y2k.finance
Twitter: @y2kfinance
In Conclusion
With the launch of the Arbitrum network, a new wave of DeFi protocols has emerged. These protocols offer a number of exciting financial primitives, making it possible for traders and investors to engage in more sophisticated trading strategies and investment techniques.
What stands out is the choice of all these projects to build on the strong technical foundation of Arbitrum, making Arbitrum a unique solution in today’s DeFi ecosystem. Thanks to Arbitrum’s performance, high speed, and advanced security features, these platforms can thrive and grow into the future.
The three protocols included in this article are still in their initial phases. We encourage investors and traders to take this as a lead and perform more thorough research into each product and platform. More details can be found on their websites or in their Discord channels. Let’s keep an eye on these exciting new projects as they continue to develop and evolve!
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