Key points
- Arbitrum is a layer-2 (L2) solution for Ethereum, developed by the US company Offchain Labs. It is designed to increase the base chain’s speed and scalability.
- Arbitrum uses Optimistic Rollups, allowing developers to deploy Ethereum smart contracts and decentralised applications without changes, with lower fees and higher throughput.
- In the first half of 2022 Arbitrum led Ethereum’s L2s by transaction count, number of applications and total value locked (TVL).
Who created Arbitrum?
The Arbitrum L2 was developed by the American company Offchain Labs, founded in New York in 2018 by Ed Felten, Steven Goldfeder and Harry Kalodner. All three are specialists in cryptography and blockchain; Felten was a professor of computer science at Princeton University.
In 2019 Offchain Labs raised $3.7m in seed funding. In spring 2021, ahead of the alpha launch of the Arbitrum network, the startup closed a $20m Series A.
The Arbitrum One mainnet launched on August 31, 2021. Offchain Labs also announced a $120m Series B led by Lightspeed Venture Partners. Other notable investors included Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research and Mark Cuban. The round valued the company at $1.2bn.
What makes Arbitrum distinctive, and what are Optimistic Rollups?
Ethereum’s limited throughput and high fees spurred several projects to build on top of the base network to improve performance.
Arbitrum uses Optimistic Rollups. Transactions are processed on the L2, while Ethereum provides the security layer. On L2, many transactions are bundled into a compact block that validators post to the Ethereum mainnet.
The term “optimistic” refers to the principle that any transaction is “optimistically” treated as valid unless proven otherwise. The concept was developed for a competing L2 called Optimism. Arbitrum’s developers refined the technology with multi-round fraud proofs that consume significantly less gas than Optimism’s single-round scheme.
ETH is used to pay transaction fees on Arbitrum, as on Ethereum. Transfers on Arbitrum are on average 90–95% cheaper than on Ethereum, with substantial room for further reductions.
In March 2023 the project conducted an airdrop of the ARB governance token. Holders can make decisions concerning the Arbitrum One and Nova networks, including code changes. The team aims to transfer control to a DAO.
How does Arbitrum work?
Arbitrum spans layer 1 (L1) and layer 2 (L2). The EthBridge component, a set of smart contracts, runs on Ethereum and maintains inboxes and outboxes.
A bespoke virtual machine, the Arbitrum Virtual Machine (AVM), handles transaction passing between L1 and L2 and is fully compatible with the Ethereum Virtual Machine (EVM). The AVM supports all EVM languages such as Vyper, Solidity, Flint, YUL+, and LLLL, greatly simplifying application development.
On L2, the ArbOS operating system executes smart contracts and processes transactions. It passes transactions through the AVM to the rollup protocol’s outbox for batching, confirmation and inclusion in the Ethereum main chain.
Validators approve new blocks and receive fees. The architecture allows a single honest validator to approve a block regardless of how many malicious validators there may be.
The roles among validator nodes are as follows:
- active validator — stakes (locks ETH in a deposit smart contract) and proposes new blocks to the Ethereum main chain; if a proposed block is invalid, the validator loses the stake;
- defensive validator — monitors the rollup and, upon detecting invalid blocks, intervenes by proposing its own block or staking on another validator’s block;
- watchtower validator — monitors the rollup without staking.
Because defensive and watchtower validators have eight days to challenge a block, withdrawing assets via the native bridge from Arbitrum to Ethereum takes the same period.
What is in Arbitrum’s ecosystem?
As of early July 2022, more than 200 blockchain projects run on Arbitrum. They include:
- leading DeFi protocols — Uniswap, SushiSwap, Curve and 1inch;
- reserve-backed and algorithmic stablecoins — USDT, USDC, DAI, FRAX, TUSD, and so on;
- original services such as the perpetuals platform GMX and the lending service dForce;
- yield aggregators — yEarn Finance, Pickle Finance, Badger, Beefy Finance;
- NFT marketplaces — Lootex, Stratos, ToFunFT and others.
Many Web3 wallets support Arbitrum — MetaMask, Trust Wallet, MathWallet and others. In the first half of 2022, major centralised exchanges including Binance, OKX, Gate.io, KuCoin, FTX and the like announced support for the network and enabled withdrawals of ETH and several stablecoins to it. More than 20 cross-chain bridges also connect to Arbitrum, including Multichain, Hop Exchange, Stargate, Across and others.
How is Arbitrum evolving?
Arbitrum One is not only the most popular L2 scaling solution for Ethereum; it also ranks among the top ten decentralised networks by TVL and number of DeFi applications.
In June 2022, to popularise the L2 and attract users, the eight-week Arbitrum Odyssey programme was launched. It comprises eight stages, each devoted to a particular aspect of the Arbitrum ecosystem.
More than 140,000 users took part in the first two stages, causing network congestion and higher fees. Users who complete each stage receive special NFTs from Project Galaxy. Under the rules, collecting 12 tokens also earns another NFT whose purpose is not yet known. Only those who completed all conditions of the first stage can participate in Arbitrum Odyssey.
In the near future the Arbitrum Nitro upgrade is planned to further cut fees and increase throughput. In essence, for large projects on the network, such as blockchain games, AnyTrust chains will be deployed, governed by a “committee” of 20 validators and intended as a faster, cheaper analogue of sidechains.