Ethereum, as a pioneer blockchain in supporting smart contracts and decentralized applications (DApps), has faced limitations in scalability and high transaction costs. Layer-2 (L2) solutions were born as a “savior” for Ethereum, in which Arbitrum emerged as a bright name. In this article, Unich Analyst will delve into Arbitrum, exploring in detail its technology, advantages, disadvantages, applications, and future potential.
What is Arbitrum?
Arbitrum is an advanced Layer-2 (L2) solution designed to improve scalability and reduce costs for Ethereum. Acting as a “second layer” built on the Ethereum blockchain, Arbitrum processes transactions off-chain, only sending the final results to Ethereum for verification. This reduces the load on the Ethereum network, allowing for more transactions to be processed at a faster rate and at significantly lower costs.
Arbitrum uses Optimistic Rollup and AnyTrust Chains technology, combined with a state-proof mechanism and an Ethereum-compatible Arbitrum Virtual Machine (AVM). As a result, Arbitrum provides an ideal environment for decentralized applications (DApps) such as DeFi, NFT, GameFi, and Web3 to thrive, while opening the door for the future explosion of the blockchain ecosystem.
Arbitrum Overview
Layer-2 Concept and Blockchain Scalability Issues
Layer-1 (L1) blockchains like Ethereum process all transactions directly on the main network. This leads to congestion and high costs as the number of transactions increases. The layer-2 solution acts as a second layer built on the L1 blockchain, allowing transactions to be processed off-chain, and only the final result is sent to L1. This approach reduces the load on the L1 network, increases transaction speed, and reduces costs.
Arbitrum: Optimistic Rollup-Based L2 Solution
Arbitrum is a layer-2 scaling solution for Ethereum that uses Optimistic Rollup technology. Instead of processing individual transactions on the Ethereum main chain, Arbitrum bundles multiple transactions into a single transaction and sends the final result to Ethereum.
Arbitrum Development History
Offchain Labs Launches & First Demo (2018): Moving From Theory to Practice
In 2018, Ed Felten and his colleagues founded Offchain Labs, a company focused on developing and deploying Arbitrum. In the same year, the first demo version of Arbitrum was released, allowing the blockchain community to have an initial look at the potential of this solution.
Arbitrum One Launches (May 2021): Marking a New Step
After many years of research and development, in May 2021, Arbitrum One officially launched its mainnet, opening the door for decentralized applications (DApps) and users to join the Arbitrum ecosystem. This event marks an important milestone, affirming Arbitrum’s position as a potential L2 solution for Ethereum.
Arbitrum Nitro: A Major Upgrade (August 2022)
Continuously striving to improve performance and scalability, in August 2022, Offchain Labs introduced Arbitrum Nitro, a significant upgrade to Arbitrum One. By implementing many technical improvements, Arbitrum Nitro helps reduce transaction fees, increase processing speed, and bring a smoother user experience.
Expanding Vision with Arbitrum Nova & Arbitrum Orbit (2022): Diversifying the Ecosystem
2022 saw the launch of Arbitrum Nova and Arbitrum Orbit, demonstrating the ambition to expand the Arbitrum ecosystem into many new areas.
- Arbitrum Nova (July 2022): Using AnyTrust Chains, a variant of Optimistic Rollups, Arbitrum Nova focuses on providing solutions for ultra-low-cost applications such as GameFi and social networks.
- Arbitrum Orbit (December 2022): Allowing projects to build and deploy their own chains on Arbitrum, Orbit offers high customization and meets the unique needs of each project.
How Arbitrum Works
Two-Layer Architecture
Arbitrum adopts a two-layer architecture:
- Execution Layer: This is where the transaction execution and state calculation of Arbitrum takes place. All operations such as interacting with smart contracts and transferring tokens are handled here.
- Verification Layer: Responsible for verifying the validity of state updates from the Execution Layer. Instead of re-executing the entire transaction, this layer only checks the mathematical proof to ensure correctness.
Optimistic Rollup: Best Assumption & Challenge Mechanism
Arbitrum One, the main network of Arbitrum, operates on Optimistic Rollup technology. This mechanism is based on two principles:
- Best Assumption: All transactions sent to Arbitrum are assumed to be valid. This allows the Execution layer to process transactions at high speed without waiting for confirmation from Ethereum.
- Challenge Fraud: To ensure security, anyone can “challenge” a transaction that they believe is fraudulent. At this point, Arbitrum will use a special process to re-verify that transaction on Ethereum. If fraud is detected, the fraudulent validator will be punished, and the challenger will be rewarded.
State Proof Mechanism: The Foundation for Optimistic Rollups
In order for the Verifier layer to verify the correctness of updates from the Execution layer, Arbitrum uses a state-proof mechanism. Whenever the Arbitrum state changes, the Execution layer generates a short mathematical proof that proves the validity of the change. This proof is then sent to the Verifier layer on Ethereum for verification.
AnyTrust Chains: Cost Optimization for Arbitrum Nova
In addition to Optimistic Rollups, Arbitrum also introduced AnyTrust Chains, the technology used for Arbitrum Nova. AnyTrust Chains works similarly to Optimistic Rollups but with a few differences:
- Data Availability Committee: Instead of storing all transaction data on Ethereum like Optimistic Rollups, AnyTrust Chains uses a committee of special nodes to store the data. This significantly reduces the amount of data that needs to be uploaded to Ethereum, thereby reducing transaction costs.
- Reduced Security: However, AnyTrust Chains are less secure than Optimistic Rollups because they rely on the honesty of the data storage committee. If a large portion of the committee “colludes”, they can hide fraudulent transactions.
Arbitrum Virtual Machine (AVM): A Bridge for Ethereum Applications
AVM is a key component that allows Arbitrum to be compatible with Ethereum. AVM is designed to securely and efficiently execute smart contracts written in Solidity (the most popular programming language on Ethereum). Thanks to AVM, developers can easily deploy existing Ethereum applications on Arbitrum without rewriting the code.
Arbitrum’s on-chain data explorer and tracker
Arbiscan
Built specifically for Arbitrum, providing detailed and up-to-date data about the Arbitrum network. User-friendly interface, easy to use, and packed with analytics features.
- Look up transactions and check their status.
- Check Arbitrum wallet balance.
- View detailed information about smart contracts.
- Explore blocks on the blockchain.
- View statistics and events on the Arbitrum network.
Blockscout
Pros: Open-source blockchain explorer, supporting multiple blockchains, including Arbitrum. Provides a user-friendly interface and rich data analytics features.
Cons: Data may not be updated as quickly as Arbiscan.
DeFi data tracking tools
Pros: Tools like DeFiLlama, Zapper.fi, and Debank provide detailed data on DeFi protocols on Arbitrum, including total value locked (TVL), trading volume, and yield.
Cons: Typically focused on DeFi and may not provide insights into other aspects of the Arbitrum network.
Arbitrum and Nitro upgrade
The Nitro upgrade was activated on the Arbitrum One mainnet on August 31, 2022.
This is a revolutionary upgrade that completely changes the architecture of Arbitrum, bringing many significant improvements:
Increased transaction speed and reduced fees:
- Nitro uses WASM (WebAssembly) to run smart contracts, replacing the previous AVM (Arbitrum Virtual Machine). This speeds up transaction processing and significantly reduces gas fees.
- The upgrade also improves the compression of transaction data sent to Ethereum, which helps reduce the amount of data that needs to be stored and processed, thereby reducing gas fees for users.
Improve user experience:
- Transactions are processed faster, users do not have to wait long for transactions to be confirmed.
- Lower gas fees make using applications on Arbitrum more accessible to many users.
Increased scalability:
- The Nitro upgrade lays the foundation for future scalability improvements to Arbitrum, allowing the network to process even more transactions.
Tokenomics
Token information
- Token Name: Arbitrum
- Ticker: ARB
- Blockchain: Arbitrum
- Token Contract: 0x912CE59144191C1204E64559FE8253a0e49E6548
- Token Type: Utility, Governance
- Max Supply: 10,000,000,000 ARB
- Circulating Supply: Updating
Token Release Schedule
ARB is currently in a period of strong supply growth when each month about 2.87% of the total supply is unlocked for the team and investors. This is a fairly large number and will affect the potential for ARB’s price increase in the future.
Token Usecase
ARB currently has 2 main usecases
- Participating in Arbitrum network governance
- Rewards for projects developing on Arbitrum
With these 2 usecases, ARB still does not have much potential to drive price increases in the future
Development team
- Ed Felten: Co-founder and Chief Scientist of Offchain Labs. He is a professor of computer science at Princeton University and was the Deputy Chief Technology Officer of the White House under former President Barack Obama.
- Steven Goldfeder: Co-founder and CEO of Offchain Labs. He holds a PhD in computer science from Princeton University and was a researcher at VMware Research.
- Harry Kalodner: Co-founder and CTO of Offchain Labs. He holds a PhD in computer science from Princeton University and was a researcher at Microsoft Research.
Investors
Arbitrum, developed by Offchain Labs, has attracted significant attention and investment from leading venture capital funds in the blockchain and technology space. Here are some notable investors in Arbitrum:
Series A funding round (April 2021 – $20 million):
- Lightspeed Venture Partners: A leading global venture capital fund with an impressive portfolio that includes Snapchat, Affirm, and Nutanix.
- Polychain Capital: A blockchain and digital asset-focused investment fund, known for its early investments in successful projects such as Ethereum and Coinbase.
Series B funding round (August 2021 – $100 million):
- Lightspeed Venture Partners
- Polychain Capital
- Pantera Capital: One of the oldest and largest blockchain-focused investment funds in the world.
Potential and challenges of Arbitrum
Potential
- High scalability: Arbitrum uses Optimistic Rollup technology to process transactions off-chain, which significantly increases the number of transactions per second (TPS) and reduces network congestion.
- Low transaction fees: Thanks to off-chain transaction processing, gas fees on Arbitrum are significantly lower than on the Ethereum mainnet, making applications more accessible to users.
- Ethereum compatibility: Arbitrum is compatible with the Ethereum Virtual Machine (EVM), allowing developers to easily deploy existing applications and smart contracts on Ethereum to Arbitrum with minimal changes.
- Improved security: Arbitrum uses Optimistic Rollup technology, which is considered one of the most secure Layer 2 solutions today, inheriting Ethereum’s security layer.
- Strongly developing ecosystem: Arbitrum has attracted many projects and developers to join its ecosystem, with the presence of many DeFi applications, NFTs, games, etc.
Challenges
- Relatively centralized: Arbitrum uses a number of centralized Sequencers to process and arrange transactions. However, Offchain Labs is researching solutions to decentralize Sequencers in the future.
- Security risks: Although Arbitrum is built on secure technology, there are still risks of code errors or attacks on smart contracts on the network.
- Reliance on Ethereum: As an Ethereum Layer 2 solution, Arbitrum depends on the security and stability of the Ethereum mainnet.
- Fierce competition: Arbitrum faces competition from many other Layer 2 solutions such as Optimism, zkSync, StarkNet, etc.
Conclusion
Arbitrum is a promising project with the potential to revolutionize the way we use blockchain. The network has made significant strides in solving Ethereum’s scalability and cost issues. However, Arbitrum also faces challenges from competition and external factors. Arbitrum’s future growth will depend on its ability to overcome these challenges and continue to innovate to meet the growing needs of the blockchain ecosystem. Above is an overview of Arbitrum that Unich Analysis has compiled. If you have any feedback on the article, please leave it in the comments section below.
