CoinMarketCap takes a deep dive into a new layer 2 protocol.
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.
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 transaction rollups to record batches of submitted transactions on the Ethereum main chain, and execute them on a cheap, scalable layer 2 sidechain while leveraging Ethereum to ensure correct results. This process helps to offload most of the computational and storage burden Ethereum currently suffers from, while enabling new classes of powerful layer 2-based DApps.
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.
Future versions of Arbitrum will also have two other modes: channels and AnyTrust sidechains.
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.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap.
