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What Is Arbitrum and Why Do We Need It

Sunflower Corporation· 6 min read

Arbitrum is a second-level (L2) solution for the Ethereum network developed by the American company Offchain Labs. The project aims to improve the speed and scalability of the underlying blockchain. How does it work? Why do we need it? Let’s find out together!

Arbitrium employs the concept of Optimistic Rollups, which enables developers to quickly launch smart contracts and decentralized Ethereum applications with lower transfer fees and increased bandwidth while making no changes.

Arbitrium surpassed Ethereum as the leading L2 solution in terms of transactions, applications, and blocked liquidity volume in the first half of 2022. (TVL).

Who created Arbitrum?

The Arbitrum L2 solution was developed by the American company Offchain Labs, a New York-based company founded in 2018 by Ed Felten, Steven Goldfeder and Harry Kalodner.

All three are experts in the field of cryptography and blockchain technologies, Felten worked as a professor of computer science at Princeton University.

In 2019, Offchain Labs attracted seed investments in the amount of $3.7 million. In the spring of 2021, before launching the alpha version of the Arbitrum network, the startup held a Series A investment round, which resulted in $20 million.

On August 31, 2021, the main Arbitrum One network was launched. At the same time, Offchain Labs announced the raising of $120 million in the Series B round, which was led by the Lightspeed Venture Partners fund. Other significant investors include Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research and Mark Cuban. After this round, the company received a valuation of $1.2 billion.

What is Arbitrum’s feature and what is Optimistic Rollups?

Because of Ethereum’s slow transaction speed and high fees, several projects have emerged that have been developing solutions on top of the main network to improve its performance.

For these purposes, the Arbitrum network employs Optimistic Rollups technology. Transactions are processed on the second-tier network, while the security layer is handled by the main Ethereum network. Many transactions are combined into a compact block during L2 network processing, which is included by validators in the main Ethereum network.

The term “optimistic” refers to the principle that any transaction is “optimistically” assumed to be genuine until proven otherwise. This concept was created for Optimism, a competing L2 network. Arbitrum’s developers, on the other hand, have improved the technology by introducing multi-stage fraud protection, which consumes significantly less gas than Optimism’s one-stage protection.

In the Arbitrum network, ETH is used to pay transaction fees. Transferring to the Arbitrum network is typically 90–95% less expensive than transferring to Ethereum, and there is significant room for further commission reduction.

In August 2021, Arbitrum, unlike other L2 networks, lacked a native token. Offchain Labs representatives did not reveal any specific plans for its release. In an interview, Ed Felten stated that in the future, network management could be transferred to DAO, implying the release of a management token. This statement supports the crypto community’s hope for token distribution among early users, similar to what happened on the Optimism network in early June 2022.

How does Arbitrum work?

Arbitrum is deployed on the first (L1) and second (L2) levels. The EthBridge component, which is a set of smart contracts, operates on the Ethereum network and contains folders of incoming and outgoing transactions.

Its own virtual machine (Arbitrum Virtual Machine, AVM), which is fully compatible with the Ethereum Virtual Machine (EVM), is responsible for transferring transactions from L1 to L2 and back. AVM supports all EVM programming languages, such as Vyper, Solidity, Flint, YUL+, LLLL, which greatly simplifies application development.

In the L2 network, the ArbOS operating system handles the execution of smart contracts and transaction processing. It transfers transactions via AVM to the outgoing transactions folder of the Rollup protocol for their further addition to the block, its confirmation and inclusion in the main Ethereum chain.

Validators are responsible for approving new blocks and are compensated with transaction fees. The Arbitrum’s architecture is designed so that one honest validator can approve a block regardless of how many malicious validators are present.

Among the validator nodes, the roles are distributed as follows:

  • Active validator makes a bet (places his ETH in a deposit smart contract) and proposes new blocks for inclusion in the main Ethereum chain. The validator will lose the bid if the proposed block is incorrect;
  • Protective validator monitors the operation of the convolution protocol and intervenes when incorrect blocks are detected, either by offering its own block or betting on the block of another validator;
  • Watchdog validator only monitors the operation of the Rollup protocol, without placing bets.

Due to the fact that the security and watchdog validators have 8 days to challenge the block, the same period takes the withdrawal of assets via the native bridge from the Arbitrum to Ethereum.

What does the Arbitrum system include?

As of the beginning of July 2022, more than 200 blockchain projects are already operating on the Arbitrum platform. There are:

  • The largest DeFi protocols — Uniswap, SushiSwap, Curve and 1inch;
  • Backup and algorithmic stablecoins USDT, USDC, DAI, FRAX, TUSD etc;
  • Original services such as the GMX perpetual contract trading platform and the dForce landing service;
  • Yield aggregators yEarn Finance, Pickle Finance, Badger, Beefy Finance;
  • NFT-Lootex, Stratos, ToFunFT marketplaces, etc.

Many Web3 wallets, including MetaMask, Trust Wallet, MathWallet, and others, support the Arbitrum network. The largest centralized crypto exchanges, including Binance and OKX, announced support for the Arbitrum network and the ability to withdraw ETH and a number of stablecoins into it, including, KuCoin, FTX, and others, in the first half of 2022. Furthermore, Arbitrum is compatible with over 20 cross-chain bridges, including Multichain, Hop Exchange, Stargate, Across, and others.

How is Arbitrum evolving?

Arbitrum One is not only the most popular L2 solution for scaling Ethereum, but it is also one of the top ten decentralized networks in terms of TVL and the number of DeFi applications.

In June 2022, an 8-week Arbitrum Odyssey program was launched to popularize and attract users to the L2-network Arbitrum One. It consists of eight stages, each of which is dedicated to a different aspect of the Arbitrum ecosystem.

More than 140 thousand users participated in the first and second stages, causing network congestion and an increase in transaction fees. Users who have completed the tasks of each stage are rewarded with special NFTs from the Project Galaxy service. According to the terms of the contest, upon receiving 12 tokens, the participant will also receive another NFT, the purpose of which is unknown. Only those who have met all of the requirements of the first stage are eligible to participate in the Arbitrum Odyssey.

They intend to release an update to Arbitrum Nitro in the near future that will further reduce transaction fees and increase network bandwidth. The essence of the update is that for large projects on the network, such as blockchain games, AnyTrust chains will be deployed, which will work under the control of a “committee” of 20 validators and should become a faster and cheaper analogue of sidechains.

# Web3

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