What is Arbitrum？

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).

The TVL of Arbitrum currently reaches $2.85 billion, accounting for 47.8% of the entire Layer 2 market, according to L2BEAT.com. Ranked 2nd, Optimism is a chain with a TVL of $1.91 billion, accounting for 32.13%. The third largest chain is dYdX, with a TVL of $518 million, accounting for 8.69% (Data collected on August 10, 2022).

Source: L2BEAT.com

To acquaint yourself with Arbitrum, you need to understand how Layer 2 came into being.

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 because of 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, which further results in high transaction fees (Gas Fee). In order 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 the work of Ethereum. A large number of complex calculations are transferred to Layer 2. Then, the conclusions and records are transmitted to Ethereum. By doing so, it 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 transmit the results to Ethereum for records. In this way, it 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 EVM contract code for Ethereum can also be sent directly to ArbOS. And ArbOS will load the contract and get it to 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. There is no need for developers to master another programming language, but they can start developing immediately using Solidity and Vyper applied on 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 speed and low fees.

Two major chains

Presently, 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, the handling fee of Arbitrum Nova is lower than that of Arbitrum One.

How to get started with Arbitrum?

Add Arbitrum to your crypto wallet:

First, go to the Chainlist website, search for Arbitrum, and you will see two chains: “Arbitrum One” and “Arbitrum Nova”. Then, click on “Link Wallet” below the chain you want to connect to.

If the automatic addition on Chainlist fails, you can also manually “add a network” in the crypto wallet. You need to fill in the following information:

(Different cryptocurrency wallets may have different manual operations, but the information added to the field is the same.)

Arbitrum One chain:

Network Name: Arb1

RPC: https://arb1.arbitrum.io/rpc

Chain code: 42161

Token: ETH

Block Browser URL: https://arbiscan.io

Arbitrum Nova Chain:

Network name: arb-nova

RPC: https://nova.arbitrum.io/rpc

Chain code: 42170

Token: ETH

Block Browser URL: https://nova-explorer.arbitrum.io

How to transfer assets across chains to Arbitrum:

Before transferring, please make sure that you already held 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 that you want to transfer cross-chain from Layer 1 to Layer 2. Just follow the instructions on the screen. It will take about ten minutes to finish the cross-chain transfer of assets.

Observation

Decentralized Derivative Financial Platform

In 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 come into being after several key issues, such as liquidity, number of users, and pricing, are solved. They include dYdX, GMX, Perpetual, Synthetix, etc. Among them, 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 as well as 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 perish some users’ thoughts to make a transfer. It will be the biggest obstacle to the advancement of Arbitrum. However, It will remain unsolved unless a new technical improvement plan is put forward.

Conclusion

As a scaling solution of Ethereum, Layer 2 has drawn the attention of the public 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.