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What is Arbitrum?

Arbitrum is an open-source decentralized protocol that enables Ethereum-compatible transactions and smart contracts to be executed using a permissionless, trustless and layer 2 scaling solution. It is built on top of Ethereum and uses a network of nodes to process transactions and smart contracts, providing a more efficient and cost-effective alternative to traditional blockchains.

What is Optimism?

Optimism is a side chain that allows Ethereum to run faster. It is a layer 2, similar to Polygon, that runs along the side of Ethereum. It can support all the same Dapps, and is perfectly compatible with each Dapp on the Ethereum network. Optimism reports that as of a year ago, they have saved users $10 million in gas fees across 100,000+ individual transactions.

What is Velodrome?

Velodrome is an AMM on running on the Optimism side chain. It is building upon what was already in place at Solidity, and improving upon it by upgrading the mechanics behind its compensation methods. Solidity works well on Optimism, but liquidity providers are punished harshly in terms of the impermanent loss experienced when the tokens in a the pair change prices.

Velodrome is also dedicated to offering support for their product post launch- something that Solidity never did. They are supported by a small fee on early transactions so the support team can be adequately compensated.

How does it work?

The Optimism side chain allows multiple transactions to be put in a singular block on the Ethereum network. Optimism is considered a rollup- a rollup is where a layer 2 takes transactions that would typically be put directly to the main chain, and writes them to its own series of blocks. The optimistic rollup is said to take an entire week to upload their block to the Ethereum mainnet. A week is a long time for a block to be sitting in purgatory, but the rollup claims to handle a greater amount of transactions per second than the mainnet, which will increase speeds and lower transaction costs.

The graph above depicts the total swap count and the number of unique users over time.

• The orange line represents the number of unique users over time- as it shows linear growth over the last month
• However, the number of unique users is quite small. It peaked out at 8,000, and by the August 14th, was down to 25
  • ==The long run does show constant growth over time==
• The blue line shows the total swap count over time. Linear growth is displayed, but it is incredibly volatile.
• The two lines do more with close correlation
• The last week of July showed immense growth, but it quickly regressed by the beginning of August. However, this graph can be better explained by the volatility chart below

The graphs above depict a breakdown of the tokens swapped on Velodrome

• The most popular tokens swapped were USD, OP, WETH, VELO, and DAI
• Stable swaps are fairly common, so it should come as no surprise that USDC is number 1 and DAI cracks the top 5
• VELO and OP are native to the network, VELO to Velodrome, and OP to Optimism. WETH is a native token to the Ethereum network and used in many transactions
• In the pie chart, the “other” slice represents the rest of the tokens that are transacted that are not in the top 5
• ==Stable coins and native tokens make up 90% of all tokens transacted==
  • ==This is massive, because it shows general distrust in the industry==
• USDC is the predominant stablecoin on almost every network, so this is no surprise it dominates activity here as well

The graphs above give a breakdown of the swap volume in terms of amount in USD

• Although USDC makes up just a 1/3 of all swap volume in terms of TX count, it accounts for nearly half in terms of USD
• This means that many of the large transactions that are placed on the the OP network, are being placed while transacting USDC
• Other than USDC and the native token VELO, all other coins have proportionally less transacted in USD than they do in pure TX volume
• ==DAI makesup a much smaller amount of the USD equivielent than it does in TX volume- by over 40%==
• Native tokens and stablecoins still dominate the game- whether they’re native to the layer 1 or layer 2, they make up a massive percent of the volume in USD
• USDC on its own accounts for nearly 50% of the volume in USD on Velodrome
  • This is not necessarily good nor bad
  • But would like to see some diversity on the network incase theres another UST-esque stable collapse

So how about the health?

Based on the charts above, I have several takeaways regarding the health of the protocol

1. The amount withdrawn from pools lately is concerning- especially given how well the market has performed in that timeframe
   • Ethereum is up roughly 10% in that time frame, yet money continues to flow out
   • However, this may be offset by the fact that the price of VELOW and the flows of the token have been net positive in that time
2. The user base gives rational for concern
   • Although the total number of users and the number of unique users has seen linear growth, the number of both is remarkably small
   • This includes a mere 8,000 unique users publishing transactions in this AMM
3. The lack of diversity in token swaps may be a problem

   • Stable coins and native tokens represent 89% of the transactions within Velodrome

   • This may pose a problem- such as DAI or USDC having a UST-esque collapse

     
     Overall, there is a lot to like about Velodrome. The speed at which the network operates and the integration with Optimism and then the eventual integration with Ethereum are great. That being said, the protocol is quite small as of now, which makes it a risky investment. If you are a retail investor looking to purchase $VELO be aware that you would be 1 out of ~4000 active/distinct users on the network.

Methodology: The 5 metrics

1. Unique users vs. Total transactions
2. Tokens swapped by TX volume
3. Liquidity health
4. Tokens swapped by volume in USD
5. Velodrome price vs net activity

Definitions:

==Week==: The timeframe used to measure the performance of the Arbitrum network during a given week

==Transaction Volume ETH:== The total amount of Ether (ETH) transactions made

==Avg Transaction Volume ETH:== The average amount of Ether (ETH) transactions made during a given week.

==Median Transaction Volume ETH:== The middle amount of Ether (ETH) transactions made during a given week.

==Transaction Count:== The total number of transactions made during a given week.

==Block Count:== The total number of blocks generated on the Arbitrum network during a given week.

==Unique Senders:== The total number of unique senders of transactions during a given week.

==TX Fee==: The fees associated with each transaction made during a given week.

==Avg Fee:== The average fee associated with all transactions made

==Median Fee Amount:== The middle fee associated with all transactions made during a given week.

==Cumulative TX Volume:== The total amount of Ether (ETH) transactions made

==Cumulative TX Count:== The total number of transactions

==Cumulative Block Count:== The total number of blocks generated

==Cumulative Unique Sender Count==: The total number of unique senders of transactions

==Cumulative TX Fee:== The total amount of fees associated with all transactions made

The graphs above represent the liquidity health of Velodrome

• The amount deposited in Velodrome in USD is represented in blue, while the outflow is represented by the area in Orange
• Inflows far outweighed the outflows- up until the end of July
• However, since July August 1st, significantly more money has been leaving than coming
  • The largest example of the discrepancy came between August 9th and 15th, where a lot loss of $21 million left the system
• The graph to the right depicts the breakdown of stable vs volatile pools, as labeled in the Flipside data
• ==There are more than double the amount of volatile pools as there are stable pools==
  • This should be looked at as a possible reason for the quick and massive flip in cashflows into vs out of Velodrome
• However, since the end of August, the outlook has looked fairly bleak with minimal volume

The charts above visualize the net flows of VELO, and the price of the coin over time

• The net flows of the VELO coin were negative in the months that there was actually a net positive flow of tokens into the LP pools
• This is contradictory to my initial belief of what the graph would look like before creating it
• ==The net flows of the token in terms of swap volume do follow in tight correlation for the price chart of the token, which does remain low==
• The net flows are positive as of late, and that may be a sign of things to come for the protocol
  • That said, since mid September, the flows have indeed been overwhelmingly negative
  • Although that is relatively normal in a bear market, it is still an overall negative sign for network health

What does this mean going forward

Cryptocurrencies continue to gain in popularity and the future of crypto looks promising. As blockchain technology continues to evolve, the opportunities for new and innovative applications are virtually limitless. Velodrome and Optimism Networks are two of the most exciting crypto projects that have the potential to revolutionize the way we exchange value. Velodrome is a blockchain-based marketplace for trading and exchanging digital assets. It is designed to be a secure and transparent platform that makes it easy for users to exchange digital assets in a trustless environment. The platform allows users to trade in a variety of digital assets, such as cryptocurrencies, tokens, derivatives, and more. Velodrome also offers advanced features such as KYC/AML compliance, decentralized escrow, and automated smart contracts. Optimism Networks is a decentralized lending platform that enables users to borrow and lend digital assets. It is built on top of the Ethereum blockchain and supports a variety of digital assets, including Ethereum, Bitcoin, and other tokens. Optimism Networks also offers a variety of features such as instant loan origination, automated loan repayment, and secure asset storage. Both of these projects have the potential to revolutionize the way we exchange value in the crypto space.

==Here are some of the key points to consider about their future:==

• Increased utility: The increased utility of both Velodrome and Optimism Networks will allow for more efficient and secure digital asset exchanges.

• Improved scalability: The scalability of both projects will allow them to support a larger number of transactions, thereby increasing their user base.

• Increased adoption: The increased adoption of Velodrome and Optimism Networks will lead to more widespread use of digital assets and the blockchain technology that powers them.

• Increased liquidity: The increased liquidity of both projects will make it easier for users to access and use digital assets, thus making them more attractive to investors and users.

• Improved security: The increased security of both projects will ensure that users’ digital assets are secure and their transactions are safe.

==Overall, the future of crypto looks bright, particularly for projects such as Velodrome and Optimism Networks. Their ability to offer efficient, secure, and user-friendly==

Velodrome vs. Optimism health