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Arbitrum: Speeding up Ethereum with Optimistic Rollups

Ethereum is one of the largest blockchain platforms for developing decentralised applications (Dapps). The blockchain-based platform can be used by anyone to build and safely deploy any digital service without the need to go through a formal process of approval. 

If you are a frequent reader, you already know that we examined Ethereum many times before. If you are interested in finding out more about the Ethereum network, check out this article: ‘Crypto Basics: What is Ethereum’. 

In the past few years, Ethereum managed to widely broaden its user base. A massive adoption amounted to the blockchain network pushing to its absolute limits and leading to unrestrained congestion.  

One part of the community believed that the best way to scale Ethereum is through on-chain upgrades, while the other part was more interested in pursuing different innovations, such as Layer 2 scaling solutions. One of these Layer 2 scaling solutions is known as Arbitrum. 

To understand Layer 2, we suggest reading this article first: ‘Crypto Basics: What is Layer 2 and how does it work?’. 

We can define Arbitrum as an Ethereum Layer 2 scaling solution based on Optimistic Rollup Technology. Optimistic Rollups are types of rollups that optimistically assume all transaction data in the rollup is valid.

This may sound a bit complicated at first, so we suggest reading our ‘Top Layer 2 Projects to Consider in 2023’ to learn more about Optimistic Rollups and similar scaling solutions.  

A. A brief history of the Arbitrum network

Arbitrum was co-founded back in 2021 by Ed Felten, Steven Goldfeder and Harry Kalodner, the team of well-known blockchain researchers and engineers behind the company Offchain Labs. This Layer 2 scaling solution was created to address main problems that plague Ethereum such as network congestion and high gas fees, without compromising the network’s security.  

The soft launch of the Arbitrum network via its mainnet beta launch happened in May 2021. After the soft launch, the Arbitrum mainnet was launched in August 2021. Furthermore, Arbitrum AnyTrust was introduced in March 2022 with the objective to allow faster and cheaper Layer 2 chains with minimal trust-related assumptions. Its mainnet launch, Arbitrum Nova, happened in July 2022. 

Recently the Arbiterum Foundation announced the formation of the Arbitrum DAO, along with the decision to airdrop Arbitrum’s native token known as ARB. DAO stands for decentralised autonomous organisation. This marks the beginning of decentralised governance for the Arbitrum protocol.

We examined DAOs in a few articles, but if you want to understand its basics, take a look at this one: ‘What’s a DAO?’

B. How does Arbitrum work?

Arbitrum is an Ethereum sidechain that bundles many transactions together, puts them on the Arbitrum chain first, and then submits that transaction data to the Ethereum blockchain. 

As mentioned above, Arbitrum uses a technology known as Optimistic Rollups. The technology in question enables Ethereum smart contracts to scale by passing data between smart contracts on the Ethereum main chain and those on the Arbitrum second layer chain. In fact, the transaction processing is executed on the second layer, while the results are recorded on the main chain. 

If you want to remind yourself how smart contracts work, check out this article: ‘How to use crypto: What are Smart Contracts?’. 

Optimistic Rollups are called optimistic in the sense that any verifier is able to post a rollup block and verify the validity of other blocks. Basically, Optimistic Rollups assume that the transactions contained within the rollup are valid. To speed things up, multiple transactions are confirmed at once, so users do not have to wait until the blockchain gets around to a particular transaction.

Further, the Arbitrum protocol is used to make sure that the code will run correctly as long as any verifier is honest. The network is then enabled to resist many forms of attack. 

Verifiers or validators have to play fair or risk certain consequences. Validators are required to check the correctness of a block and issue a challenge if something is wrong. In case it is proven that a block is incorrect, or the challenge was unjustified, that validator’s stake will be confiscated.

The Arbitrum ecosystem has its own custom virtual machine known as the Arbitrum Virtual Machine (AVM). The virtual machine serves as an execution environment for smart contracts that interface with the Arbitrum side chain. 

C. What makes Arbitrum unique?

Arbitrum is not the only scaling solution on the crypto market that is able to handle Ethereum’s drawbacks. You can read about other Layer 2 solutions in our ‘Top Layer 2 Projects to Consider in 2023’.

While the Optimistic Rollup technology is a great tool, there are a few other things that amount to Arbitrum being a preferable scaling solution.

Full Compatibility with Ethereum: The Arbitrum Virtual Machine is entirely compatible with the Ethereum Virtual Machine. In simple words, developers can write smart contracts for the Ethereum network and deploy programs written in popular programming languages on Arbitrum with only minimal changes. Full compatibility makes it easier for developers to create decentralised applications (Dapps) on Arbitrum and bring them to the Ethereum mainnet. 

High Throughput: The Arbitrum network is created with the capability to handle high throughput and low latency transactions. Therefore, it is suitable for many use cases such as gaming, non-fungible tokens (NFTs), and decentralised finance (DeFi). End-users benefit from rapid Arbitrum transactions and lower fees when using applications built off-chain.

Decentralised Governance: Decentralised governance is based on the ARB token. Arbitrum token holders are allowed to participate in decision-making processes and vote on proposals, fee adjustments, and other changes to the Arbitrum protocol.

What is ARB?

ARB is Arbitrum’s native token which uses the Ethereum ERC-20 standard. ERC-20 refers to the most common Ethereum-based token standard. Basically, it represents a set of guidelines that enables developers to build applications with their own token. 

To learn more about token standards, we suggest reading this article: ‘Crypto Basics: What are token standards?’. 

ARB tokens mainly serve as governance and incentive tokens of the Arbitrum ecosystem. 

A. What can you do with ARB tokens?

The ARB token plays an important role within the Arbitrum network. It has a few significant use cases, but it should be noted that ARB tokens cannot be used as transaction gas. In other words, these tokens are not used to pay for any fees on the Arbitrum chain. Let's take a look at ARB token's main use cases.

  1. Governance Participation
    Since ARB is mainly a governance token, it enables its holders to participate in the governance of Arbitrum. With the establishment of the Arbitrum DAO and an Airdrop that happened on 23 March, members of DAO who hold ARB tokens will be able to participate in the governance of this chain. The Arbitrum DAO is made of token holders and their delegates. Governance refers mainly to voting on important decisions such as protocol changes, proposals, and providing incentives to attract more users to participate in the network’s development, as well as electing the DAO's Security Council.
  2. Rewards for Validation Nodes
    Validation nodes that take part in the Arbitrum network receive ARB tokens as rewards. Validators are further required to stake a determined amount of ARB tokens on the network as an incentive for maintaining security. As mentioned earlier in the text, if validators break the rules, they lose a portion of staked tokens. 

B. How to buy ARB tokens?

Buying ARB tokens is quite simple. If you are buying crypto for the first time, you can gain more insight by reading this article: ‘How to use crypto: How to buy crypto’. 

The first step is choosing a crypto exchange platform. There is a number of popular exchanges that provide the ability to purchase ARB tokens such as Binance, Kraken, and KuCoin. 

 To learn the basics of crypto exchanges, we suggest taking a look at this article: ‘A beginner’s guide to cryptocurrency exchanges’. 

After choosing a desirable exchange, you have to create an account. You will be asked to verify your address and identity. After a successful verification, the next step is to make a deposit via various payment methods provided by the exchange platforms. Once you’re done with these steps, just use your funds to purchase ARB.

Main drawbacks of Arbitrum (ARB)

Arbitrum produced an innovative solution to scale Ethereum blockchain. Rapid transaction times and cut fees are a great advancement for the Ethereum community. However, we should mention some existing flaws within the ecosystem.

1. The airdrop affair

An airdrop can be defined as an event in which crypto projects give away a portion of their tokens for free. Find out more about how airdrops work by reading this article: ‘How to earn crypto: Earning from owning’. 

Between the airdrop announcement and the event itself, there was a week-long period in which the crypto community went into a kind of hype regarding the number of tokens and their eventual price.

However, a few hours before the airdrop, the network’s website for claiming tokens and block explorer crashed in response to a high server demand. Due to the service crash, a number of users weren’t able to receive tokens.

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Those that managed to complete the claim process were required to pay very high fees due to the influx of network activity. However, there is something even more complicated.

Months before the airdrop, even before the official announcement, scammers started sharing fake Arbitrum airdrop links and promoting them on social media. This effort to phish was successful since approximately 10,000 users were scammed. 

Unfortunately, the crypto world is plagued by cybercrime. Due to stories of overnight successes, newcomers have been rushing into the crypto environment. Most of them were not prepared to recognise scams. 

The best way to avoid falling prey to cyber criminals is to learn more about crypto before investing or participating in events such as Airdrops. You can start by reading this article: ‘The most common crypto scams & how to avoid them’.

2. Tokenomics as a Key Risk

The fusion of the words token and economics is a term that describes how the mechanics of cryptocurrency function within a particular network and how they relate to value.  

If you want to read further about tokenomics, why not read this article: ‘Crypto Basics: What are Tokenomics?’. 

Let’s go back to Arbitrum. It has been pointed out by a part of the crypto community that ARB token’s major flaw is that it hasn’t got any real utility beyond being a governance voting and enabling its holders to vote on decision-making processes. 

Currently, Arbitrum’s token is like a stock that provides no dividend. Even though the crypto market is still highly volatile, there is a legitimate belief that the Arbitrum network has a real chance to succeed. If users can get past the fact that it doesn’t provide much utility, ARB tokens are still considered a good bet.