Arbitrum: Airdrop Inbound

Image credit: @0xtypejohnny

Arbitrum is lighting up the crypto trading community with activity as speculation around an airdrop gains momentum. In today's Thunder Trading update, we will jump into the vibrant Arbitrum ecosystem and learn about the hype.

Arbitrum: A Brief History

On Aug. 31, 2021, Offchain Labs, the company behind Arbitrum, announced the official launch of the highly anticipated Arbitrum One mainnet. A number of the top decentralized finance (DeFi) protocols, such as Aave, Balancer, Band Protocol, Curve, Sushiswap and Uniswap are already leveraging or looking to use Arbitrum to increase throughput and lower fees for their users. NFT juggernaut marketplaces such as OpenSea have naturally opened up to Arbitrum, also aiming to provide lower fees to its users.

Since its mainnet launch, the Ethereum scaling solution has been a raging success. Although competing with established ecosystems such as Polygon and up and comers such as Optimism, it's still managed to secure $973M USD of Total Value Locked (TVL) into its ecosystem. It officially has more value locked than Solana and Optimism, some of this though can be attributed to airdrop hype.

Worth noting, that at the peak of the crypto market it had secured as much as $2.66 Billion USD, showing that even at current levels, there is plenty of room for growth.

Understanding Arbitrum

Image credit: Eigen Network

To really drive home how impressive the Arbitrum ecosystem is and how far it has come in a short time, simply peruse the Arbitrum Portal and discover hundreds of decentralised apps (dApps) built on the network.

To understand why Arbitrum and other L2s exist, simply think back to DeFi summer of 2020 where a singular transaction could cost north of $200. The cost of transacting on Ethereum became almost untenable for active users and it went against the ETH ethos of 'banking the unbanked'. The L2s were spun up as a viable scaling solution allowing users to gain all the benefit of the Ethereum security budget, without having to compromise on speed and cost efficiency.

Some of the recent growth in Arbitrum is due to 'airdrop farming'. What airdrop farming boils down to is speculation. When a protocol, dApp or L2 does not yet have a token, traders speculate on if and when this will happen. Timing is one thing but how do users actually "farm"?

In the case of Arbitrum, users farm by bridging their Ethereum over to Arbitrum and participating in the ARBI ecosystem. Participation can be minting NFTs, swapping tokens on DEXs, placing trades on perpetual protocols, providing liquidity to a DeFi pool and countless other on-chain activities. All this activity grows the network, attracts more TVL, increases token speculation and maximises network effects.

Airdrop expectations

For the intrepid crypto investor engaging in on-chain activity known as airdrop farming, the lure of 'free money' and a home run trade deep in a bear market is certainly attractive.
To develop a realistic set of expectations for what can happen with a potential Arbitrum airdrop, we only need to look back at the recent airdrop of its competitor, Optimism (OP).

Looking at the listing it had on Binance OP showed the usual listing pump, as FOMO bids were fired into the newly created order book. Unfortunately, for those who came late, the airdrop farmers also come to harvest their rewards, which promptly created a near 80% sell-off.
This shouldn't be the cause of any dismay for those who are simply wanting to get the token from their broker or exchange, if you're patient you can catch some cheap tokens, as we saw with OP which pumped over 400% from its lows during the bull run. Now that Arbitrum is gaining both market and mind share, OP has been in a slow descending price channel.

For those wishing to build long term positions in L2 tokens, its important to understand that the space is very competitive and just as Arbitrum has usurped the throne from OP, it too can be made redundant with the arrival of a new better L2 solution.

GMX: Arbitrum Kingmaker

Image credit: Decrypt

For those understandably enamoured by Arbitrum and what the network has built in such a short period of time, it's important to note one of the main risks within the Arbitrum ecosystem is GMX.

Now there is nothing critically wrong with GMX, it's simply a decentralised derivatives exchange allowing traders to access leverage without requiring KYC. The issue is actually the success of GMX, it's the largest protocol in the Arbitrum ecosystem and accounts for 40% of TVL, approx. $394M USD.

Where this can become problematic is when a similar protocol gets built on top of another chain or different L2. If it becomes popular enough this can cause Arbitrum's TVL to reduce over time and have it fade into obscurity. Inversely, if a competitor to GMX pops up on Arbitrum, this could be a boon for the burgeoning L2 and could be the trigger to making it a super sticky ecosystem.

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