About Arbitrum

Arbitrum, a layer 2 scaling solution for Ethereum, was launched by Offchain Labs and was put into test in May 2021. It was officially launched at the end of August. Immediately, it became a chain with the largest total value locked (TVL).

According to coingecko.com, the TVL (Total Value Locked) of Arbitrum has reached $3.15 billion, accounting for 30.18% of the Layer 2 market. The second largest is Base, with a TVL of $1.7 billion, accounting for 16.31%, and the third largest is Blast, with a TVL of $1.317 billion, accounting for 12.6% (data as of July 18, 2024).

Source: coingecko.com

To further understand Arbitrum, we must first understand why Layer 2 solutions have emerged.

Overview of the Arbitrum Ecosystem

Key Features

Optimistic Rollup Technology:
Arbitrum uses Optimistic Rollup technology, which improves transaction efficiency while ensuring security.

Low Transaction Fees:
Leveraging Layer 2 advantages, transaction fees on Arbitrum are typically much lower than on the Ethereum mainnet.

High Transaction Throughput:
Arbitrum can handle more transactions than the Ethereum mainnet, enhancing overall transaction efficiency.

Compatibility with Ethereum:
Arbitrum is highly compatible with Ethereum, allowing developers to seamlessly migrate to Arbitrum.

Key Projects in the Arbitrum Ecosystem

Uniswap V3 on Arbitrum:
The leading decentralized exchange, Uniswap, has launched its V3 version on Arbitrum, offering a more efficient trading experience.

Aave on Arbitrum:
The renowned DeFi lending protocol, Aave, is now live on Arbitrum, providing users with faster lending services.

Chainlink on Arbitrum:
The oracle service provider, Chainlink, offers data services on Arbitrum, supporting dApp developers.

Sushiswap on Arbitrum:
The decentralized exchange, Sushiswap, is also live on Arbitrum, giving users more trading options.

GMX on Arbitrum:
The derivatives trading platform, GMX, has launched on Arbitrum, providing users with efficient derivatives trading services.

Why is Layer 2 necessary?

Undoubtedly, Ethereum is a favorite blockchain among users in terms of its TVL, multiple DeFi applications, and the number of blue-chip NFT projects. However, it has been criticized for its high fees and low processing speed since so many users have used it. Only 15 transactions can be processed/verified per second because the operation mechanism of the Ethereum blockchain has a limit. The slow speed often leads to frequent on-chain congestion, further resulting in high transaction fees (Gas Fee). To eliminate the above-mentioned defects, various solutions are created, and one of the most popular ones is the Layer 2 scaling solution.

In a nutshell, Layer 2 means building another blockchain to share Ethereum’s work. A large number of complex calculations are transferred to Layer 2, and then the conclusions and records are transmitted to Ethereum. This not only takes advantage of Ethereum’s security but also uses Layer 2 to increase computing speed and reduce handling fees.

Two technical solutions for Layer 2: Optimistic Rollup and ZK Rollup

As its name suggests, “Rollup” means summarizing and packaging. Rollup Protocol uses other computing devices to execute most transactions off-chain and then transmits the results to Ethereum for records. This reduces the computation burden on the chain, thereby relieving congestion and cutting handling fees.

Currently, there are two different types of aggregation techniques for Layer 2 solutions: Optimistic and ZK. Both technologies have their own advantages. However, both Arbitrum and Optimism, with TVLs ranking top 2 in Layer 2, use the Optimistic Rollup technology because the current Optimistic technology can be built at a faster rate.

It is presupposed for Optimistic Rollup that all submitted transactions on the chain are correct and fraud-free (so it is called Optimistic) unless other verifiers raise doubts during the “challenge period,” if no one does so, this transaction will be sent to the Ethereum chain, and the transaction will be officially completed. What’s special is that all validators need to comply with the system of “staking Ether (ETH) as a cash deposit”. Therefore, validators can record honestly and cannot challenge without a reason.

ZK rollup takes advantage of special cryptography to verify each block on the chain. Thus, it is possible to confirm the correctness of the transaction without “optimistically” trusting all validators. Although ZK Rollup can offer lower fees and become more decentralized, it is technically challenging and is still under development. \

Source: Offchain Labs Dev Center

The operation of Arbitrum’s expansion is easily presented in this diagram. For example:

• Ethereum is at the lower right corner of the figure. Arbitrum is built on Ethereum, and Ethereum is used to make sure the security of data on the chain.
• On top of Ethereum is EthBridge, a set of Ethereum contracts that are used to govern the Arbitrum chain. It is responsible for determining whether the aggregation protocol on Arbitrum is working properly.
• The horizontal line above the EthBridge marks the AVM structure. What EthBridge provides to the upper layers is an Arbitrum virtual machine program that can be used to read all input data and produce subsequent outputs. It is the most important interface in Arbitrum and is used to distinguish the L1 below and the Layer 2 components above.
• One level up is ArbOS, which is software written by Offchain Labs. Similar to an operating system on a computer or mobile phone, it runs on the Arbitrum virtual machine and executes smart contracts on the Arbitrum chain. It is also in charge of recording, controlling the flow of information, and executing programs.
• The horizontal line above ArbOS represents EVM compatibility because ArbOS provides an execution environment compatible with the Ethereum Virtual Machine. Hence, the Ethereum EVM contract code can also be sent directly to ArbOS, which will load the contract and make it work.
• The Ethereum node is at the bottom left, and the Arbitrum node is at the top. It supports the same API as the Ethereum node. Therefore, it can be used with existing Ethereum tools. For instance, an Ethereum-compatible wallet or tool can point to the Arbitrum node. As on Ethereum, all users can run an Arbitrum node.
• Common users are at the upper left corner. They can interact with Arbitrum via wallets, dApps, or other tools. Users can use tools that were originally designed for Ethereum, and it is unnecessary for developers to rewrite their dApps because Arbitrum nodes support the same API as Ethereum.

Advantages of Arbitrum’s Layer 2 Network

Highly compatible

Being highly compatible with EVM (Ethereum Virtual Machine), Arbitrum can seamlessly integrate various DeFi services native to Ethereum, such as Uniswap, Aave, Sushiswap, 1inch, Balancer, Curve, etc. Developers do not need to master another programming language; they can start developing immediately using Solidity and Vyper applied to the EVM.

Low handling fees

Users who should have paid high fees to use DeFi services on Ethereum can directly use the services of the same exchange on Arbitrum. Besides, they can use the same Ethereum token—Ether (ETH)—as the fee, which is rather cheap. Compared to Ethereum, the transaction fee on Arbitrum is much cheaper, which has also attracted many NFT project teams to build their projects on Arbitrum. As a result, it successfully draws the attention of collectors with faster transaction speeds and low fees.

Two major chains

Arbitrum has two independent chains: the “Arbitrum One” chain at the beginning and the “Arbitrum Nova” chain launched by Offchain Labs on August 15, 2022. The latter runs based on AnyTrust technology and is designed for gaming and social networking.

The biggest difference between the two chains lies in the design of the storage area for transaction data and the cost of handling fees. Theoretically, Arbitrum Nova’s handling fee is lower than that of Arbitrum One’s.

How to Start Using Arbitrum

Adding Arbitrum to Your Crypto Wallet

Using Chainlist:

• Visit the Chainlist website.
• Search for “Arbitrum” to find “Arbitrum One” and “Arbitrum Nova.”
• Click “Connect Wallet” under the desired chain.

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If the automatic addition via Chainlist does not work, you can manually add the network to your crypto wallet by entering the following information:

• Arbitrum One Chain:
• Network Name: Arb1
• RPC URL: https://arb1.arbitrum.io/rpc
• Chain ID: 42161
• Currency Symbol: ETH
• Block Explorer URL: https://arbiscan.io
• Arbitrum Nova Chain:
• Network Name: arb-nova
• RPC URL: https://nova.arbitrum.io/rpc
• Chain ID: 42170
• Currency Symbol: ETH
• Block Explorer URL: https://nova-explorer.arbitrum.io

Different crypto wallets might have slightly different methods for manually adding networks, but the fields to fill in remain the same.

How to Transfer Assets Across Chains to Arbitrum

Before transferring, please ensure that you already hold a small amount of ETH (Ether) in your wallet as a fee to make payment because all transactions on the chain will charge fees. Otherwise, you may receive a reminder of insufficient funds during the transfer.

Step 1: Go to the Arbitrum Cross-Chain Bridge website, and click “Connect Wallet” in the upper right corner to connect the wallet.

Step 2: Select a wallet.

Step 3: Select the assets (token) and the amount you want to transfer cross-chain from Layer 1 to Layer 2. Follow the instructions on the screen. The cross-chain transfer of assets will take about ten minutes to finish. \

Observation

Decentralized Derivative Financial Platform

In the old days, if a user wanted to use derivative financial products, he/she could only go to a centralized exchange. But now, several popular decentralized derivative trading platforms have emerged after several key issues, such as liquidity, number of users, and pricing, were solved. They include dYdX, GMX, Perpetual, Synthetix, etc. GMX is a popular trading platform built on Arbitrum.

GMX also supports spot trading in addition to offering decentralized perpetual contract trading services. Formerly known as Gambit built on Binance Chain (BSC), GMX is currently deployed on the Arbitrum and Avalanche. The platform allows users to trade multiple cryptocurrencies with leverage and conduct spot trades in these assets. Its trading volume surpassed $100 million in September 2021, one week after GMX was launched, making it a popular platform for decentralized derivative finance after DeFi. Will it be able to lead the DeFi industry and Arbitrum to become the evolution center of cryptocurrencies in the future? It is worthy of our further observation.

Native Tokens

Currently, Arbitrum hasn’t issued its own native token. It uses ether (ETH) as a payment token for trading. However, another Layer 2 chain, Optimism, which also operates based on Optimistic Rollup, has recently issued its native token $OP. This makes it a focus that whether Arbitrum will be the next chain to issue its native tokens. It is worth our continuing attention.

Long Challenge Period

As mentioned before, the Optimistic Rollup technology used by Arbitrum is presupposed that all submitted transactions are correct unless other validators raise doubts during the challenge period. Arbitrum’s challenge period lasts seven days, which means that it takes 7 days before all transactions can be completed. For example, it only takes ten minutes to transfer a cryptocurrency from the Ethereum mainnet (L1) to Arbitrum as mentioned, but it will take seven days to officially receive it if it is transferred from Arbitrum to Ethereum.

The design of the challenge period makes it impossible for many transactions to be done cross-chain immediately, which can prevent some users from making a transfer. This will be the biggest obstacle to the advancement of Arbitrum. However, it will remain unsolved unless a new technical improvement plan is put forward.

Tokenomics

Arbitrum is a Layer 2 scaling solution built on Ethereum. Its native token is ARB, which plays a crucial role in the Arbitrum ecosystem.

Main Uses

Governance:
ARB holders can participate in Arbitrum’s governance decisions, such as proposal voting.

Staking:
Users can stake ARB tokens to earn network rewards and participate in consensus.

Paying Transaction Fees:
When conducting transactions on Arbitrum, ARB tokens are used to pay the transaction fees.

Token Distribution

In March 2023, the Arbitrum team conducted an airdrop of ARB tokens, distributing 120 billion ARB. The token distribution is as follows:

• Community and Users: 45%
• Development Team: 19%
• Investors: 21%
• Foundation and Ecosystem Development: 15%

This distribution aims to incentivize early users and developers while reserving a portion of the tokens for future ecosystem development.

Impact of Ethereum Upgrades

Compatibility and Performance Enhancement
The Ethereum upgrades have enhanced EVM (Ethereum Virtual Machine) compatibility, a significant advantage for Arbitrum. Arbitrum’s virtual machine is almost 100% compatible with EVM, allowing developers to seamlessly migrate existing Ethereum applications to Arbitrum without rewriting code. This reduces the barrier for developers and accelerates the deployment of applications.

Increase in User Numbers
The Ethereum upgrades have attracted more users and developers to build and use applications on Arbitrum. Despite network congestion issues, the Arbitrum Odyssey user acquisition campaign attracted many new users. The partnership with Galxe has also laid the foundation for future social authentication.

Token Economics and Incentives
Following the Ethereum upgrade, Arbitrum issued its governance token $ARB, rewarding early users and contributing DAOs through an airdrop. This token economic model not only enhances the decentralization of the network but also provides further incentives for the growth of Arbitrum.

Technical Upgrades and Future Outlook
Arbitrum’s technical upgrades, such as Nitro and Stylus, along with support for Layer 3 networks, demonstrate Arbitrum’s investment in and planning for future development. These upgrades will further improve Arbitrum’s performance and scalability, attracting more developers and projects to join its ecosystem.

Arbitrum Orbit

Arbitrum Orbit is a product developed by the core Arbitrum team, Offchain Labs, providing a permissionless way to launch customizable dedicated chains using Arbitrum’s technology. These chains can either be Layer 2 chains settling directly with Ethereum or Layer 3 chains settling with any Ethereum Layer 2.

With Orbit, developers can customize network rules such as privacy, permissions, gas fees, native tokens, and governance while benefiting from Ethereum’s network security.

Arbitrum Orbit is compatible with existing networks in the Arbitrum ecosystem, including Arbitrum One, Arbitrum Nova, and the Arbitrum testnets. Developers can choose the most suitable network for their purposes, leveraging the inherent security and infrastructure, such as the Stylus SDK, while setting their own network rules (e.g., data storage methods, governance rules).

Key Differences Between Arbitrum Orbit and OP Stack

Compared to the Layer 2 networks built by OP Stack, mostly projects of large exchanges and institutions aiming to create an ecosystem through composability, Arbitrum assists developers in establishing lower-threshold Layer 3 dedicated chains. Arbitrum aims to include more small project developers into the ecosystem, transforming its mainnets, One and Nova, into future governance chains, similar to Polkadot’s model, taking a different route from Optimism. Overall, Arbitrum Orbit focuses more on providing developers with customized Layer 3 application chain tools, while OP Stack emphasizes the rapid deployment of general Layer 2 superchains. The two have certain differences in technical solutions, development models, and applicable scenarios, reflecting different development directions in the Layer 2 and Layer 3 tracks.

Overall, Arbitrum Orbit focuses more on providing developers with customized Layer 3 application chain tools, while OP Stack emphasizes the rapid deployment of general Layer 2 superchains. The two differ in technical solutions, development models, and applicable scenarios, reflecting different development directions in the Layer 2 and 3 tracks.

Conclusion

As a scaling solution of Ethereum, Layer 2 has drawn the public’s attention because it has helped enhance the speed and cut the fees. However, it is still necessary for Arbitrum which has applied Optimistic Rollup technology to maintain technical advantages and gain the favor of developers because the fact that

Ethereum will transform from PoW (Proof-of-Work) to PoS (Proof-of-Stake) and the growth of ZK Rollup technology will exert potential influence on Arbitrum.