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Arbitrum is a leading layer 2 network that makes using decentralized finance, or DeFi, easier and cheaper. DeFi lets you do things with your crypto like earning interest, borrowing, lending, and trading without needing a bank or other middlemen. Arbitrum helps make these activities even faster and less expensive by improving the way transactions are processed. This makes it a popular choice for people who want to use DeFi.
But what are the best DeFi protocols on Arbitrum? And how do they compare to Ethereum? We’ll explore exactly that in the sections below. But first, let’s get clear on what a DeFi protocol is in general.
A DeFi protocol is a set of rules written into code that enables users to do things like lend and borrow crypto without intermediaries. These rules are called smart contracts, and they run on blockchains.
With DeFi protocols, you can trade tokens, lend your crypto to earn passive income, or borrow tokens by using some of your crypto as collateral. For this reason, these kinds of protocols are sometimes called DeFi lending protocols.
Everything happens without needing a bank or other financial institution. This makes DeFi lending platforms and blockchain technologies accessible to anyone with an internet connection, unlike more traditional financial lending and borrowing platforms.
There are different kinds of DeFi protocols on Arbitrum, each helping to make the DeFi ecosystem work smoothly. Here are some of the main types:
Automated Market Makers are protocols that let you trade tokens directly with a smart contract. In other words, you don’t have to use a traditional exchange to trade crypto. AMMs, also known as DEXs, use pools of tokens to set prices and make trading easy and fast. When you trade tokens on an AMM, you swap them with tokens in a liquidity pool.
For example, if you want to trade ETH for USDT on an AMM like Uniswap, you put your ETH into the pool and take out the equivalent amount of USDT. The smart contract handles the trade instantly, based on the tokens’ current price. It’s a quick and straightforward process.
Lending protocols let you lend your crypto assets to others to earn interest. They also allow you to borrow crypto by putting up your own assets as collateral. Decentralized lending is a great way to make your crypto work for you and earn passive income.
For instance, if you have ETH and you want to earn interest, you can lend it on a platform like Aave. You’ll get interest payments from borrowers who use your ETH as a loan, and you can also borrow other assets by using your ETH as collateral.
Liquidity provision involves sending your tokens to a liquidity pool so others can trade with them. In return, you earn a share of the trading fees. This helps make trading easier and more efficient for everyone using the protocol. By providing liquidity, you help keep the market active and earn rewards for your participation.
For example, if you provide liquidity to a USDC-DAI pool on Curve, your tokens are used for trades between USDC and DAI. As a liquidity provider, you earn a portion of the trading fees each time someone trades in the pool, which can add up to a nice passive income over time.
Now let's look at some of the best DeFi protocols you can use on Arbitrum. These protocols make it easy to trade, lend, and earn rewards with your crypto.
Silo Finance is a next-generation DeFi protocol on Arbitrum that helps you manage and optimize your crypto assets. It functions as a lending market that doesn’t expose users to risks beyond their own positions and token holdings.
With Silo Finance, you can stake your tokens, provide liquidity, and earn interest all within a single platform. This protocol is highly efficient, making it a great choice for users looking to maximize their crypto earnings.
Dolomite is a hybrid money market protocol on Arbitrum that combines lending and margin trading functionalities. With over $50 million in total value locked (TVL), Dolomite is rapidly growing and becoming one of the top markets on Arbitrum for lending digital assets.
Users can lend their Wrapped OETH (wOETH) and benefit from incentivized annual percentage rates (APRs). Dolomite also plans to introduce features allowing up to 5x leverage on trades. This would provide users with even more opportunities to grow their assets.
Gyroscope is a unique DeFi protocol on Arbitrum that specializes in creating efficient liquidity pools. It uses a unique mechanism to reduce slippage and impermanent loss. This makes it a more secure and profitable environment for liquidity providers.
By integrating with Arbitrum, Gyroscope supports faster transactions and lower fees. This means it’s a versatile option for trading and earning rewards with wOETH and other tokens. Providing liquidity in Gyroscope pools, especially with wOETH, can also yield substantial returns due to additional incentives like ARB and BAL tokens.
Arbitrum protocols and Ethereum protocols are pretty similar because Arbitrum is EVM compatible. This means many of the same protocols work on both networks. The big difference is that Arbitrum is faster and cheaper than Ethereum mainnet. This is because Arbitrum processes transactions more efficiently, reducing the costs and time involved.
On Arbitrum, you can use many of Ethereum’s best DeFi protocols like Uniswap and Aave, and they often work better because of the improved speed and lower fees. This means you can trade tokens, lend crypto via flash loans, and earn rewards more easily and cost-effectively.
While both networks offer great DeFi opportunities, Arbitrum's lower fees and faster transactions make it an attractive choice for users looking to maximize their returns without spending too much on gas fees.
By choosing Arbitrum, you get the benefits of Ethereum's robust DeFi ecosystem with the added advantages of a more efficient network. Many users choose to use both networks to some extent, as diversification is often a good practice for risk management.
Wrapped Origin Ether (wOETH) is expanding its integrations on both Ethereum and Arbitrum, providing users with more opportunities to earn high yields in DeFi.
One of the main ways to use wOETH on Arbitrum is by providing liquidity in Gyroscope’s pools. By depositing wOETH and ETH into these pools, users can earn substantial rewards from trading fees, staking yields, and additional incentives like ARB tokens.
To get started, first acquire Wrapped OETH (wOETH) on Arbitrum. You can do this by bridging ETH or Origin Ether to wOETH through the Origin dapp or by swapping ETH for wOETH on Balancer if you already have funds on Arbitrum.
Next, connect your wallet to the Gyroscope dapp and navigate to the wOETH-ETH liquidity pool. Deposit your tokens into the pool to start earning yield. You’ll begin earning rewards immediately, which can range from 8.97% to 11.58% APR, plus additional incentives.
In addition to Gyroscope, you can use wOETH on other DeFi platforms like Dolomite for lending and borrowing. By supplying wOETH as collateral on Dolomite, you can borrow WETH and take advantage of competitive loan-to-value (LTV) ratios. This flexibility allows you to leverage your OETH to maximize your returns across multiple DeFi protocols on Arbitrum.
Using Arbitrum protocols can be highly beneficial due to the network's lower transaction fees and faster processing times compared to Ethereum. These advantages make it easier and cheaper to perform DeFi activities like trading, lending, and providing liquidity. For users looking to maximize their returns, Arbitrum provides a more efficient and cost-effective alternative to the Ethereum mainnet.
However, it’s important to be aware of the risks involved. While Arbitrum offers improved performance, DeFi activities still carry risks such as smart contract vulnerabilities, market volatility, and liquidity risks. Always do thorough research and consider your risk tolerance before participating.
Overall, if you’re looking to get more out of your DeFi activities, using Arbitrum protocols is worth considering. The network's enhanced performance and lower costs can help you achieve better returns on your crypto investments. With Origin Ether's integration on Arbitrum, you can take advantage of these benefits and maximize your yield opportunities.
If you’d like to get started, we recommend reading our guide on how to use wrapped OETH on Silo Finance via Arbitrum.
What is Wrapped OETH and how can I use it on Arbitrum?
Wrapped OETH is a liquid staking token that can be used on Arbitrum for earning high yields. You can use wOETH by providing liquidity in Gyroscope’s pools or lending it on platforms like Dolomite. These activities help you earn rewards and maximize your returns.
How do I provide liquidity with wOETH on Arbitrum?
To provide liquidity with wOETH on Arbitrum, first get wOETH through the Origin dapp or swap for it on Balancer. Next, connect your wallet to the Gyroscope dapp and deposit wOETH and ETH into the liquidity pool. This lets you earn rewards from trading fees, staking yields, and extra incentives.
Why should I use Arbitrum protocols over traditional banking or lending services?
Arbitrum protocols are faster and cheaper than traditional banking or lending services. They allow you to earn higher returns and use advanced DeFi strategies that aren't available in traditional lending. This makes Arbitrum a great choice for maximizing your crypto earnings.
