At Coinscipher, we’re always exploring new technologies that can help drive mainstream adoption. One scaling solution that has us particularly excited is Arbitrum – an ingenious layer 2 network that unlocks faster and cheaper transactions for Ethereum. So, we’ll equip you with a deep understanding of what is Arbitrum how it works and why it stands out.
Summary
Arbitrum is a layer 2 optimistic rollup scaling solution that helps scale Ethereum by moving computation and data storage off-chain. It uses novel cryptography and economic incentives to ensure validity of off-chain transactions while leveraging Ethereum’s security.
Arbitrum offers faster and cheaper transactions than Layer 1 Ethereum, while ensuring EVM compatibility for easy migration of dApps. The network has seen tremendous growth recently, with over $2 billion in TVL. The native ARB token also completed a highly anticipated airdrop in March 2023.
What is Arbitrum?
Arbitrum is a Layer 2 optimistic rollup solution built to improve the speed, scalability, and costs of Ethereum transactions while inheriting Ethereum’s superior security.
It uses blockchain rollups to batch transactions off-chain before settling them on Ethereum Layer 1. This offloads computational load from the main chain while leveraging its security.
Specifically, Arbitrum is an optimistic rollup, meaning it uses fraud proofs and economic incentives to ensure the validity of off-chain transaction batches. If no fraud is detected during the challenge period, the transactions are considered valid and settled on Layer 1.
Arbitrum was developed by Offchain Labs, an Ethereum startup founded in 2018 by Ed Felten, Steven Goldfeder and Harry Kalodner. The network mainnet launched in August 2021 and has seen tremendous growth since.
How Does Arbitrum Work?
Arbitrum works by executing transactions and running smart contracts off-chain in batches before storing the results on Ethereum Layer 1. This happens via the following process:
- Transactions are sent to Arbitrum sequencers, who order them into batches or “rollups”
- The rollup batch is executed by Arbitrum validators and stored off-chain
- Validators submit a cryptographic proof of the rollup execution to Layer 1
- There is a challenge period where anyone can dispute the rollup batch by submitting a fraud proof
- If no fraud proof is submitted, the rollup is considered valid and results are finalized on Layer 1
This unique architecture provides two major benefits:
- Speed/Scalability: By batching transactions and doing computation off-chain
- Low fees: Ethereum only stores batch data, not every transaction, reducing fees
Arbitrum uses economic incentives and staking mechanisms to ensure hackers cannot exploit the “optimistic” assumption of valid batches.
What Makes Arbitrum Unique?
There are a few key features that make Arbitrum stand out from the growing array of Layer 2 solutions:
Ethereum Virtual Machine Compatibility: Arbitrum offers seamless smart contract compatibility using the custom Arbitrum Virtual Machine (AVM). This makes migration easier for Ethereum decentralized finance (DeFi) developers.
Developer Experience: Arbitrum provides comprehensive documentation and support for developer tools like Truffle and Hardhat. Building on Arbitrum is just as easy as building on Ethereum.
Established Ecosystem: Leading Ethereum projects like Uniswap, Aave, Chainlink, Polygon already integrate with Arbitrum, demonstrating a growing network.
Fair Launch: Unlike many competitors, Arbitrum had no ICO or token pre-mine. The network aims for decentralized community governance.
Arbitrum Ecosystem’s Features
There are 3 major products built under the Arbitrum ecosystem – Arbitrum One, Arbitrum Nitro, and Arbitrum Nova. Let’s analyze each in detail:
Arbitrum One
Arbitrum One is the core mainnet powering the Arbitrum network since its official launch on August 31, 2021. It allows execution of smart contracts on the custom Arbitrum Virtual Machine (AVM).
Over 400 dApps have integrated Arbitrum One so far including top DeFi names. It has proven scaling capacity of 2,000+ TPS and secured over 2 million unique users.
Arbitrum Nitro
Arbitrum Nitro is a major network upgrade deployed in August 2022 to improve Arbitrum One’s speed, costs and compatibility. Specifically, it makes the network fully EVM equivalent at the opcode level.
Nitro also introduces Arbitrum WASM – a new virtual machine that runs Ethereum code 3-4x faster than before. This positions Arbitrum as a performance leader among Layer 2 chains.
Arbitrum Nova
Arbitrum Nova is a complementary scaling solution to Arbitrum One, optimized for gaming and social dApps that require ultra-low costs. It minimizes fees by storing transactions off-chain on a Data Availability Committee.
By sacrificing some decentralization, Nova achieves industry-leading low fees of $0.0001 to $0.001 per transaction. It’s designed for applications where gas costs currently inhibit usability.
Arbitrum Token: What is ARB?
The native token powering the Arbitrum ecosystem is called ARB. It serves some key roles:
Governance Token: ARB allows holders to vote on Arbitrum improvement proposals and other governance decisions
Liquidity rewards: ARB is used to reward liquidity providers on Arbitrum DEXs to incentivize network growth
Staking: ARB can be staked to operate validator nodes on the network or participate in consensus
There is a fixed supply of 10 billion ARB, with annual inflation capped at 2% per year.
ARB Tokenomics
In March 2023, 12.75% of the total ARB supply was distributed to users and supporting DAOs via one of the most anticipated airdrops of 2023.
Here is the current ARB token allocation breakdown:
- Airdrop Participants and DAOs: 13.88%
- Investors & Team: 44.47%
- DAO Treasury: 42.78%
As the Arbitrum DAO decentralizes governance, the community can vote to change tokenomics and associated reward distributions.
Token Utility
Beyond serving as a value transfer medium, the ARB token offers the following utility:
- Voting Rights for Protocol Governance
- Deciding funding allocations, development priorities, technical changes etc. through on-chain proposals
- Used for Staking as validators to secure the network
- Used to participate in governance of Arbitrum Security Council (ASC) elections
With greater utility and adoption, the ARB token aims to accrue value in a sustainable, decentralized manner.
Arbitrum vs. Other Layer 2s
Many competing Layer 2 solutions are aiming to improve Ethereum scalability. Let’s compare Arbitrum to some popular options.
| Arbitrum (Optimistic Rollup) | Optimism (Optimistic Rollup) | zkSync (zkRollup) | |
| Native Token | ARB | OP | ZKS |
| Consensus Mechanism | Optimistic, Fraud Proofs | Optimistic, Fraud Proofs | zkSNARK Zero-Knowledge Proofs |
| Scalability (TPS) | 2,000+ | 2,000+ | 500-2000 |
| Average Fees | $0.10 to $3 | $2 to $10 | $0.0001 to $0.10 |
| Token Utility | Governance, Staking | Governance | Pay fees, Governance |
| Supported Languages | Solidity, Vyper | Solidity | Solidity, Cairo |
| Key Advantages | EVM-Equivalent, Rich Ecosystem | EVM-Equivalent | Stronger Privacy, Faster Withdrawals |
| Key Disadvantages | 7-Day Withdrawal Delay | Challenge Period Security Tradeoffs | Requires Cairo Language Familiarity |
While both Arbitrum and Optimism are leading “optimistic rollups” focused on scalability, Arbitrum seems to have an edge when it comes to ecosystem growth, flexibility for developers, and roadmap execution.
Meanwhile, ZK rollups like zkSync offer different tradeoffs, with lower fees but some added complexities. Ultimately different Layer 2 designs can serve complementary purposes based on dApp requirements.
Arbitrum vs Optimism: Key Differences
Given their similarity, it’s worth isolating some of the key technical differences between Optimism and Arbitrum:
- Consensus: Optimism relies solely on Ethereum, while Arbitrum offers additional security guarantees from validator agreements.
- Transparency: Arbitrum provides open source contracts. Optimism keeps some core contracts opaque.
- Rollup Validity: Optimism uses a single fraud proof, while Arbitrum requires multiple coordinated fraud proofs for security.
Overall Arbitrum seems to offer more transparency, customization, and some believe – superior scalability. However, both networks are pushing the performance boundaries of Layer 2 solutions with recent upgrades.
How To Use Arbitrum Network Securely
For added security while transacting on Arbitrum, we recommend these best practices:
- Use a hardware wallet like Ledger to secure your private keys instead of relying solely on software wallets.
- Validate transactions carefully before approving to avoid getting scammed. Think before interacting with sketchy new tokens.
- Keep updated about the latest Arbitrum developments, as improvements happen frequently. Code upgrades can sometimes cause hiccups.
As with any nascent technology, it pays to take precautions with securing funds and managing risks. But Arbitrum offers a compelling path to start benefitting from Ethereum’s scalability and security simultaneously.
Conclusion
Arbitrum has established itself as one of the top layer 2 solutions in the race to scale Ethereum. By leveraging blockchain rollups and clever incentive design, it unlocks faster and cheaper on-chain transactions.
As Arbitrum evolves, it may one day serve as a high-performance data availability layer for Ethereum by offloading storage and intensive computation. Integrating layer 3 networks could further enhance interoperability down the road. But for now, focusing on scalability and ecosystem growth seems wise.
Both retail and institutional investors are paying attention. The recent ARB airdrop rewarded early community participants. There is still much room for the network to capture value and reduce reliance on Layer 1.
Overall, Arbitrum represents one of the most credible paths to start benefiting from Ethereum’s scalability today – while retaining its security guarantees for decentralized finance applications. With relentless iteration on products like Arbitrum Nova and Nitro, flexibility for different use cases is increasing too.
FAQs
Does Arbitrum have its own native token?
Yes, the Arbitrum ecosystem has its own native token called ARB. It serves governance and staking purposes.
How is Arbitrum different from Optimistic Rollups?
While both use fraud proofs for validity, Arbitrum offers some customization of the virtual machine and greater transparency about core protocol contracts.
What is the long term vision for Arbitrum adoption?
Arbitrum aims to serve as a massively scalable data availability layer for Ethereum. The end goal is for thousands of multi-chain dApps to rely on Arbitrum for fast, inexpensive transactions and computation.
