What Is Arbitrum?
Tech Deep Dives

What Is Arbitrum?

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Created 2yr ago, last updated 7mo ago

CoinMarketCap takes a deep dive into a new layer 2 protocol.

What Is Arbitrum?

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Ethereum is an incredibly popular platform for developing decentralized applications (DApps). But in recent years, a dramatic surge in adoption has seen the network pushed to its absolute limits — sending transaction fees through the roof and leading to rampant congestion.

While some circles believe that the best way to scale Ethereum is through on-chain tweaks and upgrades, others are instead pursuing different routes, known as second layer solutions.

Though these vary significantly in their form and function, one such solution — known as Arbitrum — has begun picking up considerable momentum due to its novel solution to the problem.

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The ARB Token Airdrop

Following rumors of a massive funding round at a $1.4 billion valuation, the Arbitrum token (ARB) airdrop has now been confirmed — and both early and heavy users of the network are likely to receive some tokens.

According to the official airdrop portal, users that meet at least three of six eligibility criteria will receive ARB tokens.

In total, 12.75% of the ARB token supply will be airdropped to various early participants and DAOs in the Arbitrum ecosystem. According to Nansen, the median airdrop amount is 1,250 tokens.

Some users — typically heavy and early Arbitrum users — may receive much more, with over 4,000 addresses set to receive 10,250 ARB tokens per address.

While not to be taken for the eventual launch price, a number of individuals were looking to sell ARB at ~$1.25-$1.5 via OTC whereas most buy offers were between ~$0.9-$1.25. Beyond this, Arbitrum IOUs are currently trading over $7. That said, it's important to note that IOU prices rarely match spot prices — due to the massive differences in liquidity and buy/sell demand.

The token is set to be listed on many of the largest centralized and decentralized exchanges, including Binance, Coinbase, Bitfinex, BitMEX, and Bybit.

Want to check if you’re eligible for the airdrop? Connect your wallet using the official airdrop portal.

Token Utility

The ARB token will be used for governance within the Arbitrum DAO. Token holders will be able to participate in decentralized governance decisions which will be automatically executed on-chain once passed. The voting process will take between 21-37 days (depending on the nature of the proposal) before it can pass and be executed.

The Arbitrum DAO will also vote to elect the Arbitrum Security Council, consisting of a 12-member multisig of highly regarded community members.

Arbitrum Ecosystem Growth

As a layer 2 built on Ethereum, Arbitrum is immediately accessible to those that are familiar with transacting on Ethereum and used to popular decentralized applications like Uniswap, Sushi and Aave.

It's also just as simple to build on Arbitrum as it is on Ethereum, since developers can use all their standard developer tools — such as Truffle, Hardhat, Remix, etc., to build and deploy on the platform.

This has led to what can only be described as meteoric growth of its user base and the rapid expansion of its ecosystem. Indeed, there are close to 4 million unique Arbitrum addresses — a number that has been increasing parabolically since launch. Meanwhile, there are now more than 400 Arbitrum DApps, many of which fall under the DeFi umbrella.

Some of the platform's most popular DApps now have over $100 million in TVL — including GMX, Uniswap, Treasure and Camelot.

Despite being the fourth most popular blockchain by TVL, Arbitrum is the 18th blockchain by 30-day fee revenue — at just $3.8 million compared to Ethereum's $178.4 million, per data from token terminal.

Want to learn more about the Arbitrum ecosystem? Check out our deep dive.

Arbitrum One Mainnet Launch and $120 Million Funding

On Aug. 31, 2021, Offchain Labs, the company behind Arbitrum, announced the official launch of the highly anticipated Arbitrum One mainnet. A number of the top decentralized finance (DeFi), such as Aave, Balancer, Band Protocol, Curve, Sushiswap and Uniswap are already leveraging or looking to use Arbitrum to increase throughput and lower fees for their users.

Offchain Labs also announced that they have raised $120 million in a series B funding round led by Lightspeed Venture Partners. This gives the company a valuation of $1.2 billion. Other notable investors in Offchain Labs include Coinbase Ventures, Pantera, Compound and Blocknation.

What Is Arbitrum?

Arbitrum is a layer 2 solution designed to improve the capabilities of Ethereum smart contracts — boosting their speed and scalability, while adding in additional privacy features to boot.
The platform is designed to allow developers to easily run unmodified Ethereum Virtual Machine (EVM) contracts and Ethereum transactions on a second layer, while still benefiting from Ethereum's excellent layer 1 security.

It’s built to address some of the shortcomings of current Ethereum-based smart contracts — such as poor efficiency and high execution costs — which have damaged the Ethereum user experience and frequently make transacting an expensive task.

Arbitrum uses a technique known as optimistic rollups. Transactions are executed off-chain, before being bundled in large batches and submitted on the Ethereum mainnet as calldata. This process helps to offload most of the computational and storage burden Ethereum currently suffers from, by moving them off-chain.

Each batch incurs fixed transaction costs on Ethereum, which are spread across each transaction on Arbitrum, lowering the cost for end-users. Off-chain transactions are assumed to be valid, hence the name "optimistic," and there is a challenge period for anyone to dispute the transaction by posting a fraud proof.

New York-based development firm Offchain Labs is currently building the Arbitrum product, as well as an entire suite of scaling solutions. The initiative is spearheaded by Offchain Labs co-founders Ed Felten, Steven Goldfeder and Harry Kalodner. Ed is a professor, Steven received his Ph.D, and Harry is a Ph.D. candidate at Princeton University. All three are blockchain experts with a passion for making cryptocurrencies more capable.

How Does Arbitrum Work?

Arbitrum is a type of technology known as an optimistic rollup. It allows Ethereum smart contracts to scale by passing messages between smart contracts on the Ethereum main chain and those on the Arbitrum second layer chain. Much of the transaction processing is completed on the second layer and the results of this are recorded on the main chain — drastically improving speed and efficiency.

It’s optimistic in the sense that any validator is able to post a rollup block and confirm the validity of other blocks, while the term rollup is used to describe how public information can be used to reconstruct a complete history of the chain from an optimized log of events. The Arbitrum protocol ensures that code will run correctly (i.e. as intended) so long as any validator is honest, helping the network resist collusion and other forms of attack.

As with many blockchains, individual nodes can choose to participate in the Arbitrum chain. Validator nodes are involved in observing the state of the chain, and full nodes help to aggregate layer 1 transactions. Aggregators that submit transactions to the layer 1 chain earn rewards paid in ETH, while the rest of the user transaction fees are distributed to other network participants — such as validators.

Arbitrum introduces a challenge step for rollup blocks, which sees other validators check the correctness of a block and issue a challenge if they believe it is wrong. If the block is proven to be incorrect or a challenge is proven unjustified, the lying validator will have their stake confiscated, ensuring validators always play fair or risk the consequences.

The platform also has its own custom virtual machine, aptly named the Arbitrum Virtual Machine (AVM). This is the execution environment for Arbitrum smart contracts and exists above the EthBridge — the set of smart contracts that interfaces with the Arbitrum chain. Ethereum-compatible smart contracts are automatically translated to run on the AVM.

What Makes Arbitrum Unique?

The project is designed to provide an easy-to-use platform developers can use to launch highly efficient and scalable Ethereum-compatible smart contracts.

But it’s not the first platform looking to overcome Ethereum’s limitations, there are at least a dozen other solutions looking to offer similar functionality. So what separates Arbitrum from the rest? Well, it has several distinguishing features, including:

High EVM compatibility

Arbitrum is considered to be one of the most EVM-compatible rollups. It’s compatible with the EVM at the bytecode level, and any language that can compile to EVM works out of the box — such as Solidity and Vyper.

This makes it easy to develop on, since developers do not need to get to grips with a new language before building on Arbitrum.

Robust developer tooling

The team behind Arbitrum are doing what they can to minimize barriers to entry when it comes to building on their layer 2 solution. As such, they have produced comprehensive developer documentation for Arbitrum, and the developers can get started using existing tooling for Ethereum. There is no need to download anything specific to Arbitrum, such as plugins, or compilers like Hardhat or Truffle.

Low fees

As a layer 2 scaling solution for Ethereum, Arbitrum isn’t just designed to boost Ethereum’s transactional throughput, it also minimizes transaction fees at the same time.

Thanks to its extremely efficient rollup technology, Arbitrum is able to cut fees down to just a tiny fraction of what they are on Ethereum, while still providing sufficient incentives for validators.

Fairly launched

Arbitrum has run several testnets since October and is currently live on mainnet for developers. Unlike many other layer 2 scaling solutions, Arbitrum doesn't have its own native utility token — hence there was no token sale.

Moreover, all interested developers will have time to get up and running before Arbitrum opens to the masses, with Arbitrum recently pledging to give all 250+ development teams that applied to build on the developer mainnet at least two full weeks of development time before opening Arbitrum One to everyone.

Well-developed ecosystem

Arbitrum is already working with a wide variety of Ethereum DApps and infrastructure projects, including the likes of Uniswap, DODO, Sushi and dozens of others.

What Is Arbitrum Nova?

In August 2022, Arbitrum launched Nova — a new chain built using AnyTrust technology and designed to further scale the Ethereum blockchain. This is distinct from the original Arbitrum One chain, which is built using Offchain Labs’ Rollup technology.

Arbitrum Nova is designed to further reduce fees over Arbitrum One, making it one of the most cost-efficient blockchains in operation. Its primary function is to support high-throughput DApps, especially gaming-focused ones.

Unlike Arbitrum One, transaction data is sent to the data availability committee (DAC) and only data availability certificates are posted to the L1 — as opposed to the full transaction data as on Arbitrum One.

That said, Arbitrum Nova is arguably more centralized than Arbitrum One, since the DAC is required to provide data availability to end users. As it stands, the DAC consists of just a handful of members, including Infura, Offchain Labs, Google Cloud and Reddit.

In short, Arbitrum Nova introduces some trust assumptions in order to bring down costs.

The platform currently has a TVL of $1.88 million, the vast majority of which (>60%) is associated with SushiSwap.

Arbitrum vs. Other Layer 2s

The Ethereum layer-2 landscape is currently bursting with projects, all competing for users, developers and total value locked (TVL).

Arbitrum falls into the category of rollup-based L2s, of which there are now at least 9 examples.

Though Arbitrum is currently the most popular by TVL, Optimism is a close second — with over 117 protocols active on the chain and a TVL of ~$1 billion. Other examples include Metis and Boba Network, which currently have limited ecosystem development and usage metrics.

Optimism rollup platforms currently dominate the L2 landscape, but some believe they are set to face stiff competition from the likes of Polygon Hermez, Loopring, StarkWare, and zkSync.

The primary difference between the two is that zk-rollups are expected to be more efficient, since they’ll only need to post a small amount of information back to the L1. Likewise, optimistic rollups generally include a challenge window, allowing transactions to be disputed. Zk-rollups do not require good faith and instead use computational methods to prove transaction validity.

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That said, some believe that zk-rollup solutions will never be able to match the scalability of optimistic rollup options, due to the computational work involved in generating cryptographic validity proofs.

For a more complete overview of the different L2 solutions and their individual merits, click here.
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