Scaling Without Sacrifice: Arbitrum's Approach to Ethereum's Layer 2 Future

Transcript

Hey everyone. Um, going to get started now. Uh, thank you very much for coming. Um, for those who don't know me, my name is AJ Warner. I'm the chief strategy officer at Offchain Labs, the initial developers and core contributors to the Arbitum protocol. Um, I also sit on the oversight committee of the Arbitum Dow's operating entity. Um, and I'm excited to speak to you today about Arbitum's approach to layer 2s. Um, a lot of my colleagues have spoken, I'm sure you've been familiar with Arbitum and you've heard about the technology stack and what it does. The goal of this talk is really probably to formulate more um, the business strategy and the vision for all of the different pieces in arbitum.

We obviously have arbitum one which is the DAO governed arbitrum chain. Arbitum Orbit which is the ability to launch your own chain like Robin Hood announced yesterday. they are going to be using the arbitrum stack. So many people often un don't understand all the different components. How do these pieces fit together and what's the broader strategy from both a product and business perspective? Um in order to fully understand this it's really under important to understand the economic differences between how an L1 operates a layer 1 blockchain and how an L2 blockchain like the arbitrum stack operates. Some of the limitations from a business perspective of L1 blockchains are other than Bitcoin for example which is proof of work they typically take their transaction fees and they pass

them through to stakers or validators in the form of rewards as payment for economic security. Generally the the issue with that is the blockchain as a business has no retained earnings. Everything passes through to the L1 and the cost of that can be quite high. Typically L1's often are frequently subsidizing this to the tune of up to around 7% in order to ensure that validators are sufficiently compensated to pay for um block um to secure the blockchain. Arbitum and layer 2 technologies in general do not have that limitation.

All arbitum transactions are secured by the protocol on the layer 1 Ethereum and they don't have to pay for their own sets of validators for security. So what's critical about that is when you have arbitrum transactions about 93 to 94% of the transaction fee is actually retained by the protocol about 6% is paid to Ethereum in the form of blobs or data availability. Um but the key thing here is you don't have to have any token issuance for security. The protocol retains earnings and you can compound and grow the treasury of the arbitum dowo. And sometimes this is very misunderstood. People don't understand this dichotomy of when you don't earn yield by holding an arbitrum token that

you don't actually capture economic value. In reality and this is where arbitum is actually quite different from other L2 ecosystems. Every onchain transaction, the transaction fees flow directly into the onchain treasury controlled by arbitum token holders or at least 94% of them. So what that does though is it enables us and this is the unique structure of the arbitum DAO. It enables us to actually reinvest into the ecosystem or to do whatever the protocol and the token holders would like to do with these fees. But this structural difference between L1 and L2 economics is critical to understanding the vision um for the arbitum protocol and arbitum as a digital sovereign nation and we'll talk about that means

every blockchain whether it's an L1 or an L2 prioritizes the first two of these buckets constituents and stakeholders that's um developers users token holders investors all those different participants how are they benefiting and um reaping rewards from the from the protocol. The the natural resources in this in this analogy um arbitum's natural resources are selling block space. We have arbitrum one a very liquid, secure, credibly neutral decentralized L2 um has the most ETH stable coin liquidity of any L2 in existence. And we also have the orbit stack. The way we think about arbitum is that as a platform and when we think

about the strategy around the orbit chain, it's the same thing. That's our natural resources. That is what's valuable. And we'll talk about that more in a second. What most blockchain ecosystems are not focusing on is the third, the economic zones of opportunity. And the reason for that is because of how the economics of these ecosystems are structured. when you don't have the ability to retain earnings, you're actually not able to do this because there's no concept of reinvestment of the DAO's assets. So, we'll talk about these in a little bit more detail so that you can get a better sense. Um, I'm not going to spend too much time on this. Um, there's other talks going on at the conference about this, but just so you understand what I would say is the core unique differentiating factors of Arbitum. So,

Arbitum 1 which is again like I said the main Arbitum protocol has about $15 billion in TVL um very large ecosystem hub is the first uh resource so to speak and then the arbitrum orbit protocol. So, orbit like many L2s is the stack for which you can deploy an arbitrum chain. What makes Orbit unique is that its prioritization is on being flexible to the needs of the developers and you can do whatever you want with it. We have in our SDK the ability to choose whether you want custom gas tokens, whether you want alternative DA, whether you want to have a permission to permissionless, you want to add privacy layers, KYC, you can really do whatever you want to the

stack. And the thesis that we have is that the world doesn't need more blockchains. What we need is blockchains that become part of the product for people who want to launch their own chains. So for example, yesterday when Robin Hood announced that they want to build their own chain, that chain might look different than arbitum one. And that's great. And we want to make sure that we can enable Robin Hood and everybody else to design the chains as they like. And the way the DAO earns from this is if they launch an L2 blockchain, it's very simple. It's a 10% profit share through what we call the arbitum expansion program with the arbitrum DAO. Every dollar gets funneled directly into the DAO's onchain treasury. Stylus is a technical example

of something that differentiates arbitrum. U arbitram is an EVM compatible blockchain like many other L2 roll-ups. But what makes arbitum unique is you can write in Rust as well. You do not have to write in solidity or other EVM compatible languages. Um, we've seen teams take advantage of this with onchain darkpools and other more advanced cryptography and this is one of the key features that makes arbitrum unique. And finally is time boost. This is a new thing that was deployed to arbitrum one about two months ago. Time boost is a priority auction mechanism that basically um provides market makers or other sophisticated actors who want to have faster latency to the sequencer the ability for the protocol to

internalize those profits the form of an auction. Um it's been live about two months and it's annualizing around $15 million in gross profit for the arbitum Dow on a yearly basis today. So just to talk a little bit about organic demand that we're seeing again in the orbit stack um we're seeing more than a 100 chains launched on the arbitrum and it's a very very very varied set of participants. So obviously we know we're going to surprise surprise Robin Hood announced yesterday that they're launching an arbitrum orbit chain which is obviously extremely exciting but we have teams like ISUKI and APC chain are building in the consumer culture space. Um proof of play Z are building gaming chains uh plume

kinto are building chains that are focused on rwas. The stack is intended to be very flexible and the reason for that is and what we take pride with the arbitrum as a platform is it's a top five blockchain by economic activity and arbitrum one top five stack by adoption and it's providing opinionated block space. We want arbitum to be able to work with the developers throughout the journey and life cycle of the project. So if you're early stage and you don't want to launch your own chain, it's quite an ambitious thing to do. Launch an arbitrum one and as you grow and as you scale, however you want to take your project, we want you to be able to use arbitrum and being able to capture the developer throughout that process is

critical to the broader strategy. Um and that's the case with Robin Hood. So Robin Hood yesterday announced that they're bringing stocks to the EU, tokenized stocks onchain. Um an extremely exciting announcement for the Arbitum ecosystem. They're starting on Arbitum 1. So, as of today on the Robin Hood EU app, you can actually uh buy tokenized stocks and it's on arbitrum one. As they scale their crypto business, they plan on launching their own chain. And arbitrum again provides the ability to have that flexibility for them to be throughout the journey of what they're trying to accomplish. And if you look at our mandate generally, it's quite broad. RWAS we were working with closely with BlackRock, Franklin Templeton. Um, stable coins USDT0 which is the interoperability protocol for

Tether has chosen Arbitum as his hubchain. And for Paxos, Arbitum is the only L2 that it supports today. Um, in the gaming and consumer, we have crypto native teams like ISUKI and APChain for which we're building their blockchains for them. And then Loe, a Korean conglomerate, Ubisoft are building as well. And finally, most famously, Arbitum is frequently known as um the DeFi hub. And we have protocols like GMX and Pendle, which are arbitum sort of stalwarts for many years. Oium and early an early purpose protocol as well as hyperlquid which is sources all of their liquidity onchain um from arbitram 1.

It's about almost $4 billion today. Um so all of this demand actually generates opportunity for the arbitum DAO to take and compound what it's been generating again again its core three revenue streams are transaction fees on arbitum 1 time boost fees on arbitum 1 and the 10% arbitum expansion program that it shares from all of the orbit chains that are choosing to launch L2s and all of this revenue creates opportunity and what we call economic zones of opport opportunity for the arbitr to take advantage of and I want to walk through this strategy. So we want to capture fees and be able to support builders and

developers beyond the traditional relationship that you might see between blockchains and developers and users. And I'll give you some examples. So like I said before sequencer and time boost fees arbitrum expansion program those are sort of how you can think about the traditional revenue lines of what arbitum is trying to accomplish. But we have this flywheel and a dual mandate today for where arbitum is in its growth strategy of how do we both compound demand for the technology and also compound the DAO's treasury and assets. And that's really what we're focusing on today. How do we turn the assets of the arbitrum dow u for some context for folks that might not be familiar the arbitum dowo has about 25,000 ETH and somewhere between 40 and $50 million in

stable assets. again that the DAO owns and controls outside of its arbal allocation. Um so I'm going to walk you through how you can think of some initiatives that the arbitum dowo has done and the this is sort of the the blueprint of how we want to continue to build out the vision for that relationship in arbitum and that dual mandate of growing demand for the use of the technology and growing demand and the growing the assets um of the DAO. The Arbitum Gaming Ventures. This is I would like to say one of the most misunderstood programs that the Arbitum Dow has done. Uh for those that might be familiar, it used to be called the gaming catalyst program. And the thesis behind this initiative was gaming as a category has the ability to

onboard a lot of users into blockchain. And gaming as a category uh is a very logical use case for blockchains. Whether it's the sale of skins or marketplaces or other ways for for people to interact with the games, it's very logical. The problem though with the gaming category is nobody wants to pay transaction fees. So you can have all of these users and all of these people running games on the chain, but if they don't pay transaction fees, you don't actually earn. They also don't typically use other things. The idea of like a gamer then opening like a leverage long position on GMX is like a pipe dream.

Like that's just not the user sort of journey on blockchains. They play the game, they have fun, they might discover other games and they might return to their business. So how do you support the category in a way that's actually sustainable? So we did was we took um about 6% of the arbitrum Dow's ARB allocation and put it into a fund. um structure is a little bit more complex um out of the Cayman Islands but the way to think about it is the arbitrum DAO is essentially almost like the LP of this fund and the goal of it was again to manage this dual mandate. How do we help this vertical grow and how do we ensure that the way we do it is sustainable and aligns from a business perspective with

the teams deploying. So this entity, the arbitrum gaming ventures, they've um started and they deployed their first five investments um into games like wildcard which is you know the words with friends founders um T-Rex blockchain proof of play and others and they've been leading rounds with really strong investors like bigcraft and paradigm and framework and again the goal here is to be very particular but have this dual strategy of growing the demand and also growing the Dow treasury. And it's been a fantastic program um and been really exciting to see. And what's interesting here is it ties very well into the orbit strategy because the more teams that we can have

deploying orbits and expanding those zones of opportunity by bringing on more games into their own ecosystems, it expands the leverage for what the Arbitum Dow's gaming venture fund is actually able to deploy capital into. Uh this is another example. I think this has been a really effective program. Um when we first heard that Black Rockck in 2020 uh four 2024 was going to be launching money market funds, we realized quickly that this is going to be the beginning of a huge rush onchain for traditional asset managers. And the thing that these institutions care about is assets under management. And how can we have them onboard into arbitum

critical for our strategy of having DeFi meet Trfi and do it in a way that is sustainable for the ecosystem and also can generate for the DAO. So the DAO actually established something called the short stable treasury endowment program where it said we're going to buy money market funds from asset managers that deploy to arbitrum and they took about $40 million in capital. They submitted got RFPs from BlackRock, Franklin Templeton, Wisdom Tree, many other large global institutional players and the thesis was we want them on arbitrum. We're going to have great compounding effects if they join the ecosystem. And we're also going to earn.

So the Dows earned um in the first eight months over a million dollars in interest fees yield basically from these money market funds. Again, diversify the treasury holding stable assets and compounding on that mission. Um and those are two examples. We've started a third program where we're doing DeFi management where the Dow took 7500 ETH and they've deployed it back into the arbitrum protocol to ensure that we have um more liquidity attracting more builders. And this is the thesis this dual mandate. Um so how do we think about this in summary? Um I know I only have five minutes left and um hopefully we'll have time for one or two questions is we have got a barbell product

arbitrum one and arbitrum orbit and across these two things we believe we can serve any developer that wants to use the arbitrum stack and then we think on top of that that we've got the arbitum technology platform and the DAO creating a flywheel where we can take the treasury assets because the DAO retains its earnings compound growth in demand and for the protocol and continue that flywheel so that we can meet our ambitious visions of having arbitum everywhere and this is a multi-dimensional concept. We want arbitrum to power chains. We want teams that are want to build on arbitrum 1 to be building on arbitrum 1. We want DeFi.

We want gaming. We want tradi. We want payments. And we want to be able to do it in a way that's sustainable um for the arbitrum ecosystem. So thank you very much and I hope you want to join us on this journey to have arbitum everywhere. I think I have I think I have three minutes for questions left or so. So, if anybody has one, I'm happy to answer. Very controversial question maybe. Is arbitum exploring base rollup design?

Um, we've looked at it. I'm not the best to analyze it from a technical perspective. Um I think from my understanding um there are certain benefits, there are certain drawbacks. Um our current design like works for what we're trying to accomplish largely, but again I'm not the best uh to answer the technical uh pros and cons of that question. Other question? Um, does everything in the arbitrum

orbit follow the same priority auction rules? Uh, no. So, time boost is um is an added feature. So the way it works is by default all chains launched with a first come first-s serve pro protocol uh which is how arbitrum one operated until about two months ago. Um if those protocols prefer to they can use any priority mechanism. So we like time boost a lot and I'm happy to talk to you about why we think time boost is the best between trade-offs between uh latency and and and revenue capture. Um but they can use priority gas auctions if they'd like. They could use first come first serve. They can use time boost. We really like to have that flexibility. Like for example, if you're

a gaming chain and you want just like really fast block times and you don't really have any economic activity, you should not turn on time boost. And and that sort of tracks our vision of we want the we want the orbit stack to become part of your product and become opinionated to make sure that your product can best serve your users. Thank you. How do you think about incentivizing killer applications that are built on top of arbitum to stay within the arbitrum ecosystem? And I'm specifically thinking about the example of hyperlquid which was an absolutely breakout application the last 6 months uh but now they're building their own chain.

Yeah. So it's a great question. So the hyperlquid chain was always something that was part of the road map. um the hyperlquid core which is like the purpose protocol they source that liquidity from arbitrum and you know I've spoke their team has told me this in the past but obviously they'd be best to answer sort of their strategic questions around that but for from their perspective arbitrum one is secure credibly neutral decentralized cheap and liquid and that was the best way and continues to be the best way for them to onboard people into the core purpose protocol and in terms of incentivizing them it's it's a great question you know you can perpetually incentivize no puned intended teams to to do things. But I think the technology, the ecosystem has to be at some point the value

proposition. Um otherwise it's constantly going to be a losing battle. Okay, thanks for questions. Thanks for the talk. Thank you very much.