Arbitrum (ARB): Speeding Up Ethereum Using Optimistic Rollups

Ethereum, renowned for its smart contract capabilities, has emerged as the go-to blockchain for the crypto economy, particularly with the surge in decentralized finance (DeFi) and non-fungible tokens (NFTs). However, its capacity to handle transactions is limited, leading to congestion, especially during periods of intense activity. This results in a poor user experience, characterized by high costs and slower transaction speeds.

Recognizing these challenges, the Ethereum community is actively exploring both on-chain and off-chain scaling solutions. While the long-term strategy involves on-chain sharding, which entails dividing the Ethereum network into multiple segments or 'shards', immediate solutions are being sought in off-chain innovations.

Layer 2 scaling solutions, like rollups, are pivotal in this context. They operate on top of the Ethereum blockchain, offering enhanced functionality without compromising the mainnet’s core technology. One notable Layer 2 solution is Arbitrum, developed by Offchain Labs, which has gained significant attention since 2021. Arbitrum, like other Layer 2 solutions, aims to provide the security benefits of Ethereum while mitigating the high costs associated with its use. This is part of the broader effort to address what is known as the 'blockchain trilemma' of balancing scalability with decentralization and security.

What Is Arbitrum?

Arbitrum stands out as an innovative Layer 2 enhancement for the Ethereum blockchain, designed to expedite smart contract transactions and slash the costs associated with them.

The essence of Layer 2 solutions lies in their ability to augment the foundational Layer 1 blockchain. They achieve this by offloading complex tasks like transaction processing and data storage to a secondary chain. This means that while the Layer 2 blockchain takes charge of executing smart contracts, the primary Layer 1 blockchain is responsible for data storage. For those interested in a deeper understanding of the mainnet, our detailed article on Ethereum provides more insights.

Specifically for Ethereum, Arbitrum plays a crucial role in managing and batching blockchain transactions. This significantly eases the burden on the main network, leading to reduced congestion and lower costs.

Real-world applications of Arbitrum are evident in DeFi platforms like Sushiswap and Aave, which utilize its framework under the surface to facilitate efficient asset swaps at reduced gas fees.

Arbitrum History

Offchain Labs, started by Ed Felten, Steven Goldfeder, and Harry Kalodner in 2018, was all about making Ethereum faster and more efficient. They created Arbitrum, a special tool to help with this, and introduced it to the world on April 15, 2019. First, they tested Arbitrum on a practice version of Ethereum, called the Kovan testnet, starting on Feb. 11, 2020, and then opened it to everyone on Oct. 14, 2020. By May 28, 2021, Arbitrum was ready for real-world use and was available to developers.

Arbitrum One, a version of Arbitrum for everyone, launched on Aug. 31, 2021. Soon, popular Ethereum applications like Uniswap and Aave started using it. On Aug. 31, 2022, Arbitrum One got a big update called Nitro, making it faster and cheaper to use.

Then, on Aug. 9, 2022, Offchain Labs introduced Arbitrum Nova, another version of Arbitrum, but this one was specially made for games and social media apps.

In early 2023, Offchain Labs announced some big changes. On Feb. 7, they talked about Stylus, a new programming language for Arbitrum, making it easier for different types of code, like Rust, to work on Arbitrum. On March 16, they set up the Arbitrum Foundation and a new system called Arbitrum DAO, along with a special token called ARB, to give more people a say in how Arbitrum is run. They officially started this on March 23, 2023, with a special event where eligible people could get some ARB tokens.

On June 21, 2023, they released a toolkit for something called Arbitrum Orbit, which helps people create their own Layer-3 blockchains on top of Arbitrum.

Lastly, on Aug. 3, 2023, they announced a new idea called BoLD to make validating transactions on Arbitrum more open and flexible. However, as of Nov. 10, 2023, this isn't being used yet, as the community is still deciding if it's a good idea.

How Does Arbitrum Work?

Arbitrum's Layer 2 solution, a part of its suite of scaling technologies, primarily employs a method known as optimistic rollups to enhance transaction processing on the Ethereum blockchain. These rollups function through a two-tier system where transactions are initially processed off-chain and then finalized on the main blockchain. The key advantage here is efficiency: instead of validating individual transactions, the blockchain confirms a whole batch at once.

Optimistic rollups, which are central to Arbitrum's approach, stand apart from other Layer 2 solutions like sidechains. Their security is directly linked to the main Ethereum blockchain. This 'optimistic' method allows any validator to propose a rollup block, assuming the responsibility for confirming the accuracy of transactions.

The term 'rollup' in this context refers to how public data can be utilized to reconstruct the full history of the chain from a streamlined record of events. Arbitrum Rollup specifically denotes the protocol behind these optimistic rollups, and Arbitrum One is the inaugural rollup chain utilizing this technology. It facilitates scaling by enabling Ethereum smart contracts to interact seamlessly, exchanging messages not only within the Ethereum mainchain but also with contracts on the Arbitrum secondary layer.

What Is an Optimistic Rollup?

A rollup is a blockchain data compression method that consolidates batches of transactions into a single transaction. This technique significantly enhances blockchain efficiency by allowing the processing of multiple transactions at once, rather than individually. This not only saves time but also reduces costs, as the blockchain only needs to verify one collective transaction.

Among various rollup technologies, 'optimistic rollups' are particularly noteworthy. They operate under the assumption that transactions within the rollup are generally valid, thereby speeding up the process. These rollups incorporate compression techniques to further reduce gas fees and optimize block space on the Ethereum blockchain, storing only essential data. When a transaction is disputed, however, a detailed verification process is triggered. Participants have a week to raise disputes against questionable transactions, and if found fraudulent, the validator responsible for approving them loses their collateral. This robust fraud detection system, however, results in a week-long processing time for withdrawals.

Arbitrum employs optimistic rollups, settled on its proprietary sidechain, which is a separate blockchain linked to the main Ethereum chain. This system involves collecting transaction batches, settling them on the Arbitrum sidechain, and then integrating the transaction data back into the Ethereum ledger. Transactions confirmed through this process carry the 'AnyTrust Guarantee,' signifying unanimous validator agreement on their validity. Validators, who must stake ETH as collateral, are incentivized to ensure honest operations.

What Is the ARB Token?

ARB, the governance token for the Arbitrum blockchain, plays a pivotal role in the ecosystem as an ERC-20 token. It empowers holders to actively participate in network decision-making and influence the ecosystem's direction and development. As a tool for transferring value within the Arbitrum network, ARB tokens are not only a medium of exchange but also a gateway to governance voting. Holders can voice their opinions on key decisions, ranging from fund allocation to technical updates, through democratic voting on platforms like Snapshot.org.

In addition to governance, ARB token holders also have a say in electing the Security Council, a 12-member team responsible for managing the Arbitrum treasury, thereby contributing to the network’s security and integrity. The tokenomics of ARB is designed with a 10 billion initial supply and a maximum 2% yearly inflation, balancing growth with stability.

The distribution of these tokens is meticulously planned: 17.53% to investors, 1.13% to DAOs in the Arbitrum ecosystem, 11.62% to individual wallets, 42.78% to the DAO treasury, and 26.94% to the team and advisors. This distribution can be modified by the Arbitrum DAO, the decentralized governance body.

The launch of $ARB in 2023 was marked by one of the year's most anticipated airdrops, with strict criteria to identify 'active' users. Eligibility required fulfilling at least 3 of 6 conditions, such as bridging assets to Arbitrum One or Nova, performing regular transactions, or interacting with Arbitrum smart contracts. In March 2023, 12.75% of the total supply was distributed to eligible users and DAOs, leading to a circulating supply of approximately 1.275 billion $ARB.

Beyond its value transfer function, the $ARB token grants holders governance rights within the Arbitrum DAO, enabling them to make critical decisions about the network's operation and future. These decisions are made through proposals on forums like Snapshot.org, where wallet-connected users can vote on various matters, including treasury allocations and protocol updates. The $ARB token's utility is further extended to voting for the Security Council members, ensuring the network's financial management remains in trusted hands.

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