Arbitrum: The Complete 101 Guide

Innovation races ahead at breakneck speeds in the crypto world with each new advancement promising to bridge the gaps of its predecessors. Still, the crypto sphere has not been without its shortcomings.

Bitcoin and Ethereum's scalability issues have been well-documented and often serve as a topic of interest in crypto circles. This scalability bottleneck, together with high transaction fees and slower confirmation times, affects mainstream adoption. These issues created the need for a solution that addresses these problems while preserving crypto's decentralization ethos.

Enter Arbitrum, which aims to illuminate a path toward a more scalable crypto future.

In this Arbitrum review, we will give you the lowdown on everything you should know about this L2.

What Is Arbitrum

One of the blockchain projects using Optimistic Rollups is Arbitrum. Built on top of the Ethereum network (Layer 1), this is a Layer-2 blockchain, or L2 shortened. Adopting optimistic rollups helps Ethereum solve the scalability issue, thus boosting the throughput for transactions, which in turn lowers the transaction fee as more transactions can be added to the block faster.

Although transactions are processed on Arbitrum via ArbOS, the operating system that handles the transactions and collects fees, security for the transactions is still processed by the Ethereum network. So it's essentially combining the best of both worlds.

The consensus mechanism used by Arbitrum to process transactions is known as the AnyTrust Guarantee. How this works is that all the validators need to agree for a block to be added. As long as there is one validator who disagrees, the block won't be added to the blockchain.

The project's primary target audience is developers, as it offers an ETH-friendly environment for them to build DApps without costly fees. There are also various key features of the projects that we will point out in the following sections below.

Arbitrum Rollup

One of the ways to distinguish one type of rollup from another is the number of rounds of disputes required to resolve challenges. Arbitrum's version uses the Multi-Round Interactive Optimistic Rollup. An on-chain contract referees the back-and-forth between the challenger and the asserter. In addition, the amount of data on-chain is low.

EVM-Compatible and Ease of Use

Another highlight of Arbitrum is its high compatibility with the Ethereum Virtual Machine (EVM). In a nutshell, the EVM is the "computer" that runs the Ethereum network for smart contract execution. Arbitrum has its own"supercomputer", known as Arbitrum Virtual Machine (AVM), that underpins everything that is Arbitrum. On top of the AVM is ArbOS, as mentioned earlier. The AVM supports the EVM architecture. This means that ETH developers can develop on Arbitrum just as if they are developing it on the Ethereum network itself.

In this sense, Arbitrum is positioning itself as the "home-away-from-home" option for ETH developers. Not only is it compatible with EVM, but it also natively supports all Ethereum development tools without any special add-on. This includes all smart contract languages like Solidity, which works just as well on Arbitrum. Therefore, dApps originally developed in Ethereum can easily move over to Arbitrum with minimal code changes. It's never been easier to move dApps over, making it a most attractive option as the transaction costs are drastically lower than working on the Ethereum network itself.

Brief History

The project had a soft launch in May 2021. By early July, two months later, about 300 DApps were running on it. The mainnet launch, known as Arbitrum One, was launched on Aug. 31, 2021.

Arbitrum Ecosystem

L2s currently have a Total Value Locked (TVL) of $10.68 billion with Ethereum claiming over half of the total.

TVL for Arbitrum One, the Optimistic Rollup, stood at $5.84 billion. That's more than half the market share! This goes to show the popularity and belief of the Ethereum developer community.

Now, let's see what kind of DApps are on Arbitrum.

"Your portal to discover the Arbitrum ecosystem" is the first thing you see when you are at the Arbitrum Portal. There are two categories to choose from: Projects and Bridge.

Projects

This lets you explore over 600 DApps in the Arbitrum ecosystem. According to DefiLlama, the top-10 DApps on Arbitrum all have to do with DeFi. However, there are a few interesting ones as well, per DAppRadar.

• In Web3 gaming, there's HunnyPlay, SpartaDEX and MODragon.
• ZKasino, JustBet and BetSwirl are listed in the gambling category.
• Post.Tech, Galxe and QuestN are among the top social DApps on Arbitrum.

Bridge

The Arbitrum Bridge facilitates the transfer of assets between Arbitrum One, Arbitrum Nova (an an AnyTrust chain) and the Ethereum mainnet.

Offchain Labs

The team building Arbitrum carries an impressive resumé. Based in New York, prior experiences range from Deputy US CTO at the White House and senior Advisor to the President (Ed Felten) to co-author of the leading textbook in cryptocurrencies, Bitcoin and Cryptocurrency Technologies (Steve Goldfeder) to technical consulting for cryptocurrency projects. In addition, many rank-and-file employees are also crypto-enthusiasts and have their areas of interest in the crypto-verse.

They have managed to secure funding with major well-known ventures in the blockchain space. Major investors include Lightspeed, Pantera and Polychain Capital. Together with other VCs such as Coinbase Ventures, Blockchain, Fenbushi Capital, and Mark Cuban Companies, to name a few, a total of $120 million of series B funding was raised for the venture.

With this amount of institutional support, it's safe to say that Arbitrum is no fly-by-night operation, and the calibre of its team is proof of its staying power in the crypto world. They're also looking to expand their team to cater for their dramatic growth.

Arbitrum Reddit Project

One of the more exciting projects the Offchain Labs team was involved in was a collaboration with Reddit. When Reddit decided to launch its ERC-20 token, known as Community Points, to its members, it had a "Scaling Bake Off" to pick the best blockchain for collaboration. Arbitrum beat out 21 other competitors to win the competition. Reddit users earn these tokens by providing quality comments or contributing in other ways. The tokens can be spent on items within the Reddit ecosystem.

Arbitrum Token Airdrop

In March 2023, Arbritum released ARB, its governance token. The airdrop was hugely successful, distributing over 1 billion tokens. Before the launch, daily transactions increased from 300k to over 2.7 million on the day of the airdrop, and active users increased from 100,000 to over 600,000.

Contributors to the Arbitrum TVL were: -

• GMX: A decentralized perpetual exchange 
• Uniswap V3: A liquidity provider
• Arbritum Exchange
• Sushi: A DAO

Arbitrum had a $1.62 billion total value locked (TVL) in January 2023. However, by March 31, TVL was over $2 billion and, according to Arbitrum website's, TVL stood at $5.5 billion as of Aug. 31.

Arbritum has an over $1 billion market cap, with a fully diluted value of more than 9 billion

Arbitrum ARB has a total supply of 10 billion, and CoinGecko lists ARB as the 41st largest coin by market cap.

ARB hit an all-time high of $8.67 in March 2023 but gave up those gains in September 2023, when it cratered to its all-time low.

As we move out of the bear market, it will be interesting to see how ARB performs. 

Arbitrum Technology Upgrades

Nitro

In August 2022, Arbitrum launched the Nitro upgrade. The improvements over the original Arbitrum include the following:

• Reduced transaction costs: By lowering the amount of data posted to layer 1, the average fee to send Ethereum (ETH) on Arbitrum is $0.25.
• Nitro upgrade increased performance for layer 1 nodes.
• EVM (Ethereum Virtual Machine) compatibility.
• Additional layer 1 interoperability
• Geth trading for better debugging support and high compatibility with Ethereum by “compiling in the core code of Geth (go-Ethereum).”

"Geth (go-ethereum) is a Go implementation of Ethereum - a gateway into the decentralized web. Geth has been a core part of Ethereum since the very beginning. Geth was one of the original Ethereum implementations making it the most battle-hardened and tested client." Source: Geth Ethereum

Nitro has a two-phase strategy for processing transactions, beginning with a single-order sequence and processing by a deterministic state transition function in that sequence.

Arbitrum also wanted to separate execution from proving. Nitro compiles the same source code twice: -

1. Executed for speed in a Nitro node to native code.
2. To WASM for use in optimising security and portability and proving

Nitro uses an optimistic roll-up protocol to settle transactions in the layer 1 Ethereum chain (with interactive fraud proofs) 

Arbitrum One and Nova are powered by Nitro, our proprietary blockchain network-powered technology stack. Nitro’s next-generation rollup architecture provides 7x more throughput than Ethereum and lower fees without sacrificing any security. (Source: Arbitrum)

Rollups are a layer 2 solution that bundles transaction data and transfers it off a main chain. Transactions are executed off-chain, and assets are held in a smart contract on-chain. 

A primary benefit of Arbitrum is its super-fast transaction speeds (TPS). 

Ethereum averages around 30 TPS, compared to a staggering 40,000 TPS for Arbitrum transactions. Faster transactions equal lower fees. Ethereum transactions can cost several dollars compared to around two cents for Arbitrum. 

Arbitrum Nova: AnyTrust Chain

Arbitrum launched Nova in July 2022, which uses AnyTrust technology.

AnyTrust protocol accepts a mild trust assumption by relying upon an external committee. Regardless of how many people are on the Committee, AnyTrust works on the belief that at least two people are honest. Subsequently, when given access to data, one of the parties must be trustworthy so that the available data ensures the rollup functions correctly.

Arbitrum Nova provides high security with low transaction costs and helps DApps that want to reduce high transaction costs. 

Nova's use cases include the following:

• Game Developers: To enable increased functionality for users.
• Social Projects: The Reddit Community point system was built on Nova.
• Blockchain DApps. Suitable for multiple use cases, such as NFT ecosystems

Nova has "strong security guarantees using a DAC (Data Availability Committee) model). Committee members include the following list of well-known companies: -

• Reddit
• Consensys
• Quicknode
• Offchain Labs
• Google Cloud

"Nova is powered by the most trusted organizations across web2 and Web3." (Source: Arbitrum)

To learn more about AnyTrust technology, visit Arbritum's Developer AnyTrust page.

Arbitrum Stylus

Arbitrum announced the launch of Stylus in February 2023 as a next-generation "programming environment upgrade for Arbitrum One and Arbitrum Nova." 

Stylus technology is interoperable with Ethereum Virtual Machine (EVM). It enables the deployment of smart contracts in programming languages like C++, C and Rust to Arbitrum One and Nova, alongside Solidarity DApps on existing EVM programs. 

"You won't have to know Solidity to build on Arbitrum. Engineers can use the tooling they already know and love, regardless of their coding preferences." (Source: Arbitrum Medium).

Stylus enables lower fees and faster DApps. Stylus technology means that a contract does not need to know what language others use. It has multiple use cases, such as DeFi, gaming, DAOs, and many more can benefit from the data saving costs and increased performance.

Users compile their programs into WASM, transforming on-chain into an enforced, secure execution.

WASM is an abbreviation of WebAssembly. 

"WASM defines a portable binary-code format and a corresponding text format for executable programs as well as software interfaces for facilitating interactions between such programs and their host environment. WebAssembly. Paradigm. Structured; stack machine." (Source: Wikipedia)

Stylus enables the termination of malicious programs without evoking the EVM and can be proven on-chain.

"Stylus doesn't replace the EVM; it augments it. Everything we are doing is entirely additive, which is why we call it EVM+." (Source: Arbitrum Medium).

Top Projects On Arbitrum

Hundreds of projects have partnered with Arbitrum, from DeFi lending, crypto wallets, NFT platforms, stablecoins, infrastructure and much more. 

• Superfluid: DeFi Primitive
• ToFu NFT: NFT Marketplace
• Aave: DeFi Lending Platform
• Curve: Decentralised exchange
• Coinbase Wallet: Crypto Wallet
• Huobi Wallet: Multi-chain wallet
• Dev Protocol: Middleware Protocol
• Synapse: Cross-Chain Layer Protocol
• Farmland: Decentralised Farming Game
• FluidFi: Tokensised Equity in Fluid Finance
• Abracadabra: Interest Bearing Crypto Assets for Collateral 

To view all projects, visit the Arbiproject website.

Risk & Pain Points

As much of a powerhouse as Arbitrum has been with its success, it is not without some weaknesses. Here are two key areas to pay attention to:

Optimistic vs zkRollups

The design of optimistic rollups involves a challenge period, which can be up to 2 weeks, as it gives people ample opportunity to check that all blocks are actual transactions. For those who want to withdraw their tokens, this can be a long wait time before getting their tokens back. Here is where zkRollups shine.

Unlike Optimistic rollups with the challenge period, zkRollups, also known as zero-knowledge Rollups, generate a validity proof known as SNARK to validate the authenticity of the transactions. SNARK contains only key details of the transaction, not the complete data. This rollup method does not require a challenge period, which makes moving funds around a lot faster.

If you want to dive deeper into the Layer 2 scaling race, check out our in-depth analysis of Arbitrum vs. Optimism and ZkSync.

Fund Security

According to L2Beat, a website that compares L2 projects together with analysis, there are a few ways that the security of funds can be compromised on Arbitrum, including, but not limited to:

• Mistakes in the AVM implementation could lead to lost funds.
• The centralised validator going down, which means users cannot create new blocks. However, exiting the system requires a new block to be produced. In this case, funds can be frozen. This recently happened due to the current centralised structure.
• No delays in code upgrades might mean that a malicious code can slip in without knowing. This kind of incident could result in stolen funds.

Conclusion 

In 2021, we saw the rise of L1 alternatives like Solana, Avalanche and Fantom chomping away at Ethereum's market share. These L1s honed in on Ethereum's weaknesses and jumpstarted their ecosystems of DApps to provide an alternative to Ethereum's offerings. These alternative L1s may have gotten a headstart with faster transaction speed and low-cost fees, but is it as secure as Ethereum? They also have their growing pains to contend with, as can be seen with Solana's on-off outages in the past few months

In the space of L2s, Arbitrum is the top dog and the one to beat. How long it can retain its winning crown depends on its development pace to secure the blockchain. News of a bug causing a 7-hour outage within five months of another bug is not something it wants to be known for.

There is talk that L1s will mainly be for the bots in the future as humans will likely be interacting with DApps built on L2s. When you think of it, internet users don't need to know about IP addresses or website domain hosting to shop online or check their email. 

It is highly plausible in the not-so-distant future that things like gas fees and which blockchain is hosting the DApps will be of no interest to the general public as these friction/touchpoints will already have been ironed out or "rolled up" under a slick UI and compelling service/ product. When that time comes, Arbitrum will only be a brand name known to developers but largely unknown to the general public.

We look forward to watching Arbitrum progress over the next few years.