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The Arbitrum Network Explained

Jon Ganor
Jon Ganor
The Arbitrum Network Explained
Arrow go back

tl;dr

  • Ethereum's network congestion and high fees have posed challenges due to its increasing popularity.
  • Layer 2 scaling solutions have emerged as a response to address these issues by offloading transactions and computations to secondary layers.
  • Arbitrum is a layer 2 scaling solution that operates as an optimistic rollup, aggregating multiple transactions into a single batch before submitting them to the Ethereum mainnet.
  • Arbitrum alleviates network congestion and high fees by offloading computation and transaction processing to its secondary layer.
  • The migration of HORD token to Arbitrum supports the Ethereum ecosystem and leverages Arbitrum's scaling benefits.

Ethereum, L2s, and the Rise of Arbitrum

Ethereum's network congestion and high fees have become persistent challenges as the platform's popularity has skyrocketed. The surge in demand for transactions, coupled with the limitations of Ethereum's base layer, has led to significant congestion on the network and exorbitant fees for users. However, the Ethereum community has been actively working on solutions to address these issues, and this has given rise to layer 2 scaling solutions.

Layer 2 scaling solutions are designed to alleviate the congestion and high fees on the Ethereum network by offloading a significant portion of transactions and computations to secondary layers. These solutions aim to increase the scalability of Ethereum by moving some of the computational burden away from the base layer.

One prominent type of layer 2 scaling solution is called a "sidechain." Sidechains are independent blockchain networks that are interoperable with the Ethereum mainnet. They allow users to conduct transactions and execute smart contracts off-chain, reducing the strain on the Ethereum network. These sidechains periodically settle their transactions on the Ethereum mainnet, ensuring the security and finality of the transactions.

Another type of layer 2 scaling solution is known as "rollups." Rollups bundle multiple transactions together and submit them as a single transaction to the Ethereum mainnet. This approach significantly reduces the number of individual transactions processed on the mainnet, resulting in improved scalability and lower fees.

What is Arbitrum? 

Arbitrum is a layer 2 scaling solution for the Ethereum blockchain designed to enhance its scalability and improve transaction throughput. It operates as an "optimistic rollup," a type of off-chain scaling solution that aggregates multiple transactions into a single batch before submitting them to the Ethereum mainnet.

At its core, Arbitrum aims to alleviate the network congestion and high fees experienced on the Ethereum mainnet by offloading computation and transaction processing to a secondary layer. It achieves this by relying on a combination of smart contracts and a modified consensus mechanism.

With Arbitrum, developers can deploy their smart contracts and DApps on the secondary layer while benefiting from the security and decentralization of the Ethereum mainnet. Users can interact with these DApps, experiencing faster transaction confirmation times and lower fees than the Ethereum mainnet.

How does Arbitrum Work? 

At its core, Arbitrum functions by aggregating multiple transactions into a single batch off-chain and then submitting a succinct summary of these transactions to the Ethereum mainnet. This process reduces the computational burden and congestion on the mainnet while maintaining the security and trustlessness of Ethereum.

The primary components of Arbitrum are the Arbitrum chain and the Ethereum bridge. The Arbitrum chain serves as the secondary layer where most transaction processing occurs. It comprises a set of validators who monitor and validate the execution of transactions. These validators produce roll-up blocks, which include the compressed state and transactions of the Arbitrum chain.

The Ethereum bridge acts as the link between the Arbitrum chain and the Ethereum mainnet. It facilitates the transfer of assets and information between the two layers. The bridge is responsible for accepting deposits of assets from users who wish to engage with Arbitrum and withdrawing assets back to the Ethereum mainnet when necessary.

The execution of transactions on Arbitrum follows an optimistic approach. Initially, transactions are assumed to be valid off-chain without immediate verification on the Ethereum mainnet. This assumption allows for faster and more cost-effective transaction processing. However, in the case of a dispute, the underlying data and computation are submitted to the Ethereum mainnet. The EVM verifies the transactions for fraud or invalidity.

Arbitrum employs a "fraud proofing" mechanism to ensure the integrity of transactions. Validators monitor the execution of transactions and can submit fraud proofs to the Ethereum mainnet if they detect any invalid or fraudulent behavior. These fraud proofs trigger a dispute resolution process, where the Ethereum mainnet evaluates and resolves the dispute based on the evidence provided.

Layer 2 Scaling on Ethereum

Layer 2 scaling solutions work by moving a significant portion of transaction processing and computation off-chain, reducing the burden on the Ethereum mainnet. They aggregate multiple transactions into a batch, allowing higher throughput and lower fees. To achieve scalability, these solutions often employ various techniques, such as sidechains, state channels, and rollups.

Sidechains operate as independent blockchains that are linked to the Ethereum mainnet. They process transactions and smart contracts off-chain and periodically settle the final state on the Ethereum mainnet, reducing congestion and gas fees. Sidechains provide a high level of flexibility and can implement their own consensus mechanisms and governance models.

State channels enable participants to conduct multiple transactions off-chain while maintaining the security and integrity of the Ethereum network. These channels establish direct payment channels between users, allowing for rapid and cost-effective transactions. The final state of these off-chain transactions is settled on the Ethereum mainnet, ensuring the immutability of the underlying transactions.

Rollups, such as Optimistic Rollups and ZK-Rollups, bundle multiple transactions into a single transaction that is submitted to the Ethereum mainnet. These rollups aggregate the transaction data and verify the correctness of the transactions off-chain. The Ethereum mainnet is responsible for validating the rollup's validity and incorporating the verified data into the blockchain. Rollups significantly enhance scalability by reducing the computational overhead required for transaction execution on the mainnet.

ARB Token & Tokenomics

ARB token is the native token of the Arbitrum network. It is a governance token that allows holders to participate in the network's decision-making process. ARB can also be used to transfer value and as an investment.

The total supply of ARB is 10 billion tokens. The distribution of ARB is as follows:

  • 42.78% to the Arbitrum DAO Treasury
  • 26.94% to the Offchain Labs Team and Future Team + Advisors
  • 17.53% to Offchain Labs Investors
  • 11.62% to users of the Arbitrum platform via airdrop

The tokenomics of Arbitrum are designed to incentivize the use of the network and promote the ecosystem's long-term growth. ARB holders will be able to participate in the governance of the network, and they will also be able to earn rewards for staking their tokens.

The use of ETH as gas in the network ensures that the network is secure and reliable. ETH is also used to pay for transactions on the Arbitrum network.

Arbitrum Ecosystem

The Arbitrum ecosystem is comprised of two different blockchains, each with its own perks and use cases. The most popular blockchain in the Arbitrum ecosystem is Arbitrum One, although Arbitrum Nova shows promise.

Arbitrum One

Arbitrum One is a Layer 2 scaling solution for the Ethereum blockchain. It uses optimistic rollups to achieve high throughput and low fees, while still maintaining the security of the Ethereum mainnet.

Optimistic rollups work by batching transactions together and submitting them to the Ethereum mainnet as a single transaction. The mainnet then verifies the validity of the batch, and if it is valid, it is committed to the blockchain. If the batch is invalid, then the parties involved in the transaction can dispute the outcome.

Arbitrum One uses a number of techniques to improve the performance of optimistic rollups. These include off-chain computations, fraud proofs, and virtual machine compatibility.

Arbitrum Nitro

Arbitrum Nitro is a significant technical upgrade for Arbitrum One that was launched in August 2022. It is designed to improve the performance, security, and compatibility of Arbitrum One.

One of the key features of Nitro is that it uses a new prover that can do Arbitrum's classic interactive fraud proofs using WebAssembly (WASM) code. This means the L2 Arbitrum engine can be written and compiled using standard languages and tools. WASM code replaces the custom-designed language and compiler used in previous Arbitrum versions. This makes Nitro more efficient and easier to develop for.

Nitro also introduces several other improvements, including better throughput, lower fees, more robust security, and increased compatibility.

Arbitrum Nova

Arbitrum Nova is a Layer 2 scaling solution for the Ethereum blockchain that uses AnyTrust technology to achieve ultra-low transaction costs. Nova differs from Arbitrum One by not posting transaction data on the chain but to a Data Availability Committee (DAC). This means that Nova can achieve even lower fees than Arbitrum One while maintaining the Ethereum main net's security.

AnyTrust technology works by having a group of trusted nodes called the DAC store the transaction data off-chain. Users can query the DAC to get the transaction data when they want to verify a transaction. This eliminates the need to store the transaction data on the Ethereum mainnet, which reduces the load on the network and lowers the fees.

Arbitrum Nova is still under development, but it has the potential to be a major player in the Ethereum ecosystem. It offers ultra-low transaction costs, compatibility with the EVM, and security that is comparable to Arbitrum One.

Arbitrum’s Security

The security of Arbitrum is based on a number of factors, including the Ethereum mainnet, fraud proofs, and data availability.

The Ethereum mainnet is one of the most secure blockchains in the world, and it ultimately secures the Arbitrum network. This means that if an attacker were to try to defraud the Arbitrum network, they would also have to defraud the Ethereum mainnet.

Fraud proofs are a way for users to challenge fraudulent transactions on Arbitrum. If an attacker tried to defraud the Arbitrum network, other users could challenge them. These users could then provide a fraud-proof to the Ethereum mainnet, invalidating the attacker's transaction.

Data availability is another important security measure for Arbitrum. The data for all transactions on Arbitrum is stored on the Ethereum mainnet. This means that if an attacker were to try to censor the data for a particular transaction, they would also have to censor the data for all transactions on Arbitrum. This is difficult to do, as the Ethereum mainnet is a public blockchain.

Arbitrum’s Gas Fees

Gas fees on Arbitrum are significantly lower than those on the Ethereum mainnet. This is because transactions on Arbitrum are processed off-chain, reducing the Ethereum main net's load.

The exact gas fees on Arbitrum vary depending on the demand for network resources. However, they are typically in the range of 0.1 to 0.5 gwei. This is a fraction of the gas fees on the Ethereum mainnet, which can be as high as 100 gwei or more during periods of high congestion.

For example, a simple ERC20 token transfer on Arbitrum typically costs around 0.1 gwei. This is equivalent to a few cents in USD. The same transaction on the Ethereum mainnet would cost around 100 gwei, which is equivalent to a few dollars in USD.

As a result, Arbitrum is a very attractive option for users looking to save money on gas fees. It is also a good option for developers who are looking to build decentralized applications that are more affordable to use.

Arbitrum Pros & Cons

Arbitrum is a layer-2 scaling solution for Ethereum that uses optimistic rollups to achieve high throughput and low fees. It can process up to 40,000 transactions per second, and transactions are typically only a few cents. Arbitrum is also fully compatible with the EVM, which means that any dApp that can be deployed on Ethereum can also be deployed on Arbitrum.

However, Arbitrum is not yet fully decentralized. The sequencer, which is responsible for submitting transactions to the Ethereum main chain, is currently centralized. This means that there is a single point of failure for Arbitrum, which an attacker could exploit. Additionally, Arbitrum is not as easy to use as Ethereum. There are a few extra steps involved in using Arbitrum, such as bridging your funds from Ethereum to Arbitrum.

Arbitrum vs. Optimism

Arbitrum and Optimism are two layer-2 scaling solutions for Ethereum that offer high throughput, low fees, and EVM compatibility. However, there are some key differences between the two platforms.

One key difference is their architecture. Arbitrum uses a sidechain architecture, while Optimism uses an optimistic rollup architecture. This means that Arbitrum is a separate blockchain connected to Ethereum, while Optimism is a layer-2 solution built on top of Ethereum.

Another key difference is their security. Arbitrum is secured by a combination of fraud proofs and optimistic verification, while Optimism is secured by fraud proofs. This means that Optimism is slightly more secure than Arbitrum, but it also means that it is slightly slower.

Lastly, their fees and user experience also differ. Arbitrum transactions are typically very cheap, costing a few cents. Optimism transactions are also very cheap, costing a few cents. However, Optimism transactions are slightly more expensive than Arbitrum transactions. 

Additionally, Arbitrum is not quite as easy to use as Optimism.  Arbitrum requires users to bridge their funds from Ethereum to Arbitrum, while Optimism does not require users to bridge their funds.

Arbitrum and Hord 

As an Ethereum liquid staking platform, Hord is dedicated to building a brighter future for the Ethereum ecosystem. As such, Hord bridged most of its token liquidity from BNB and Ethereum to Arbitrum. Bridging Hord tokens to Arbitrum not only reduced the gas fee requirements for ETH staking and transaction fees but also is a strategic move to support Ethereum. 

By supporting a prominent L2, Hord is developing a more decentralized future for Ethereum staking, but also L2s and the greater Ethereum ecosystem.

Bottom Line

The future of Arbitrum holds great promise as a leading Layer 2 scaling solution for the Ethereum network. With its ability to significantly improve scalability and reduce transaction costs, Arbitrum is well-positioned to address the growing demand for more efficient and cost-effective blockchain solutions.

As Ethereum continues to face challenges related to network congestion and high fees, Layer 2 scaling solutions like Arbitrum offer a viable path forward. By leveraging off-chain computation and batching transactions, Arbitrum can process a high volume of transactions while minimizing congestion on the Ethereum mainnet. This scalability improvement opens up opportunities for applications with high transaction throughput, such as decentralized exchanges, gaming platforms, and DeFi protocols.