Solving the Low Liquidity Problem on Arbitrum
Enabled by the Dexible Team’s latest integration
Contents
Arbitrum is a Layer 2 roll-up modeled off of Ethereum with the intention of scaling max transaction throughput with additional security features. It’s been called a “Decongestant” for the Ethereum main chain by some (BeinCrypto). To get funds onto or off Arbitrum, traders use the Arbitrum One Bridge. The network is supported by your favorite wallets like Metamask, WalletConnect, and Coinbase Wallet.
Today, Arbitrum has $1.11b TVL. GMX, a derivatives exchange focused on perpetual contracts, has a 36% dominance on the chain. Key platforms include Curve, Synapse, Aave, Uniswap, Balancer, Dopex, Beefy, and more.
Solving Low Liquidity
Abitrum’s key benefit is low cost. However, its use of multiple Fraud Proofs (explained below) is a double-edged sword, enhancing security at the cost of speed.
The key challenge Arbitrum users have faced is low liquidity, given that it’s a fairly new L2 solution, and bridging can be seen as risky.
This has two key drawbacks:
- higher price impact
- higher susceptibility to arbitrage
The best way to tackle low liquidity, slow execution, and higher costs is by controlling the execution parameters at the source.
The best way to tackle low liquidity is through controlling execution parameters at the source.
Dexible specializes in big orders in low liquidity. It’s been active for 2 years as an underground project, but has recently surfaced in terms of outwards integrations and partnerships. Dexible lowers slippage and price impact through its Order Splitting algo baked into every swap performed on the platform.
Order Splitting means not only routing orders through multiple dexes at one time, subatomically, to split up impact, but it also means dividing up the total swap (the parent order) into child orders. These child orders take advantage of low fees on L2s while maximizing the available accessed liquidity through splitting up when the order transactions fire off. The result is 30% or greater output on transactions. These can be dynamically and randomly timed by setting a Time Period for the order using a TWAP order or it can be done immediately one after the other with a bit of a buffer for liquid recovery through a Segmented Market Order.
Order Splitting means dividing up the total swap which results in lower slippage and lower price impact, taking advantage of low L2 fees to maximize capital efficiency.
The other key benefit of Order Splitting is the inherent minimization of MEV potential. By executing lower-value child orders, attackers have significantly less profit opportunity for front running. This isn’t to say that routing through Private Relays like Flashbots or Eden can’t be used alongside Order Splitting; in fact, integrating them is on the roadmap as well. However, so long as orders move smaller bits of value in the market, those blocks with these child orders will be less valuable to front run for attackers.
About Arbitrum
Network Details:
- Network Name: Arbitrum One
- Token: ETH
- RPC: https://arb1.arbitrum.io/rpc
- Chain ID: 42161
- Currency Symbol: ETH
- Block Explorer URL: https://arbiscan.io
- Website: portal.arbitrum.one
L2 is similar to Optimism, as both are Optimistic Rollup chains as opposed to ZK Rollup chains. Arbitrum, like Optimism, validates transactions off-chain via side chains and sends only necessary proof data back to the main network, to prevent computation and state storage from lagging the network.
Optimistic Rollups validate transactions off chain through Fraud Proofs.
There are a few key design differences despite their similarities. The main difference is in the application of Fraud Proof verification, which is essentially a fact-checking service for the current state of truth. Optimistic Rollups use Fraud Proofs that happen at a high throughput off-chain, and in Arbitrum’s case, it happens on a proprietary sidechain. This sidechain gathers transaction batches for processing. The proofing process assumes that posted data is valid until it is challenged.
While Arbitrum uses multiple rounds, Optimism relies on Ethereum base chain settlement for the entire L2 transaction, which increases cost and lowers the speed on Optimism. Optimism is dependent on Ethereum’s EVM, whereas Arbitrum solely passes back calldata from its own AVM.
Arbitrum is a Decongestant for the Ethereum main chain.
The tradeoff for this design is increased block time for fulfillment. To account for this security weakness in scalability, both Arbitrum and Optimism introduce a challenge grace period of 7 days, where any challenges to the accuracy of the information could mean a validator who’s lying about something to have their stake confiscated.
It’s possible to port over Ethereum base Mainnet chain contracts without modifying them to this L2. Abritrum smart contracts are run through the Arbitrum Virtual Machine on top of ETHBridge.
For context, another key Ethereum scaling solution is Polygon chain ($1.25b TVL), larger than Optimism ($906.4m TVL) and Arbitrum ($987m TVL) respectively. Polygon is secured by a Proof of Stake chain, whereas Arbitrum is secured by the Ethereum base chain “settlement layer” and its Fraud Proofing side chain & operators. Arbitrum’s design looks more like Proof of Work through its use of operators to propose valid blocks than Proof of Stake, and it’s similar to how oracle networks handle the state of truth. Transaction fees on Arbitrum are higher than Polygon, but arguably Arbitrum is more decentralized. However, Polygon has faster withdrawals.
Polygon and Arbitrum are currently supported on Dexible.
Key Uses of Arbitrum
By far and away, the GMX protocol on Arbitrum dominates the main use for Arbitrum. So much so that DeFiLlama has this indicator on the chain dashboard for Arbitrum.
Other Arbitrum-specific protocols include Radiant, Mycelium, Vesta Finance, PlutusDAO, JonesDAO, and Cap. Additionally, Arbitrum supports major DeFi liquidity services like Uniswap, Sushi, Aave, and Curve which prop up other chains along with the bridges like Synapse and Stargate.
The most significant uses for Arbitrum are for Derivatives followed by Lending. Gaining exposure to these protocols and the liquidity services required to maintain them is a key play and there’s still room to become an early adopter. Traders use Dexible to hone their liquid exposure and maximize their efficiency in lower liquid environments.
The competitive advantages Arbitrum has in its similarity to Ethereum and its compatibility for mulitple smart contract languages to make the developer onboarding experience fairly seamless.
Sources:
- Iluia Vasile, Levy Prata. BeInCrypto. “What is Arbitrum?” (2022.03.31)
- Zipmex. “What Is Arbitrum? Learn How It Works and its Advantages” (2022.04.26)
- Sam Kiemens. “What is Arbitrum, and how is Arbitrum different from Polygon?” (2021.07.12)
- Metamask. “Network profile: Arbitrum”
About Dexible
Dexible maximizes the capital output of swaps for pro traders.
Dexible is the execution platform for savvy traders who care about best execution, want to minimize slippage and price impact, and ultimately time the market better. Dexible achieves this through dex aggregation and custom algos, routing across 60+ liquidity sources on all major chains and offering 7 algo order types.
Traders can use the Dexible Trade Portal, web app user interface, or the low-code SDK, available in Typescript. Our updated user documentation is here.
- Reach out to us on Telegram or Discord for general inquiries or questions.
- To get in touch with our sales team — follow the link here.
- For any media inquiries — team@dexible.io.
