Arbitrum is one of the top layer-2 (L2) scaling solutions in 2024. But what is a layer-2 solution, and what exactly is Arbitrum? This guide covers what Arbitrum is and how you can start using it right now.
KEY TAKEAWAYS
► Arbitrum is an optimistic rollup that has enhanced transaction speed, scalability, and lower gas fees compared to Ethereum.
► Layer-2 solutions like Arbitrum alleviate Ethereum’s congestion by processing transactions off-chain and posting data back to the main chain.
► Arbitrum processes transactions through a protocol that assumes validity unless challenged, allowing for faster transaction execution.
► While both Arbitrum and Optimism are optimistic rollups, Arbitrum employs multi-round fraud proofs and supports a broader range of programming languages.
What is Arbitrum?
Arbitrum is a layer-2 solution that enhances the capabilities of Ethereum’s smart contracts. It helps increase transaction speed and overall scalability.
Let’s say, you want to use any of the decentralized exchanges (DEXs) on Ethereum, then you would have to pay the current Ethereum gas fees. It is notoriously high at times, and it might eat into your portfolio and profits. To reduce these fees, an investor could use the Arbitrum network to access those same DEXs while paying much lower fees for the transactions.
Arbitrum uses the Arbitrum Virtual Machine, which allows developers to run Ethereum Virtual Machine (EVM) compatible code (e.g., Solidity, Vyper, and Yul) on a secondary layer while still enjoying the security of Ethereum’s layer-1 (L1). It was built to fix some of the weaknesses of Ethereum.
These include low transaction throughput and high execution costs, which can lead to a poor user experience. Most importantly, Arbitrum helps users avoid the high gas fees of Ethereum.
Arbitrum uses an optimistic rollup design to execute transactions off-chain from Ethereum’s mainnet and then settles them on-chain on Ethereum. This allows for accurate results while also leveraging Ethereum.
By using Arbitrum, Ethereum theoretically reduces its storage and computational burdens. Many Ethereum DApps are also available on layer-2 solutions, including Arbitrum.
Arbitrum was developed by Offchain Labs, a New York-based development company. Steven Goldfeder, Ed Felten, and Harry Kalodner co-founded Offchain Labs. Ed Felten is a computer science professor at Princeton while Steven is a PhD.
What are layer-2 solutions on Ethereum?
Layer-2 solutions are blockchains that have been created on top of the Ethereum blockchain to help reduce network congestion and transaction gas fees.
In its present form, it’s a known fact that scalability is an issue for the Ethereum blockchain. On layer-1, the scalability issue can be improved by a number of techniques. However, given the network’s current state, that would require a trade off between the security, decentralization, or both.
Instead, solutions like optimistic rollups or zero-knowledge (ZK) rollups can be used to scale the layer-1. Optimistic rollups assume that all transactions submitted to the chain are valid unless challenged by a participant within a specified amount of time. If it is invalide
ZK-rollups use cryptographic proofs as a way to verify that every batch of transactions is valid before it is added to the network. This eliminates the need to trust validators. ZK-rollup technology may be the most advanced layer-2 technology, but it is more complicated than optimistic rollups to implement safely.
Rollups are one of the most in-demand types of layer-2 solutions. These mechanisms validate large numbers of transactions off-chain, batch them (i.e., roll them up), and send them to the main network with a minimal amount of data.
How does Arbitrum work?
As stated previously, Arbitrum is an optimistic rollup. Like many blockchains, users can run nodes for Arbitrum. Nodes are used for various tasks. They can be used to sequence or order transactions into blocks, batch them to the layer-1, and monitor the chain’s state to enforce protocol rules. The rewards for aggregators who submit transactions to the layer-1 chain are paid in ETH.
Arbitrum has a challenge period for rollup blocks. If a sequencer submits an improper batch, validators can raise a challenge during this period. This allows them to verify the accuracy of the submitted state transition and contest it if they believe it is incorrect.
The duration of the challenge lasts one week in Arbitrum’s design, and while challenges are being processed, the chain continues to operate normally. The stake of the misbehaving sequencer can be confiscated or slashed if the block is found to be invalid. This ensures that sequencers play fair and do not propose incorrect state changes.
What is an optimistic rollup?
Rollups relieve Ethereum by supporting transactions off-chain which would otherwise have to be executed on the already cluttered layer-1, the Ethereum network. What’s special about these rollup protocols is the way they handle data.
Rollups use their own infrastructure to execute transactions while relying on the L1 for security. Optimistic rollups rely on fraud proofs, which attempt to prove that a state transition is incorrect. This is opposed to validity proofs in ZK-rollups, which attempt to prove a state transition is correct without a challenge period.
Arbitrum gathers transactions in batches, settles them on its sidechain, and then feeds the transaction data back into the Ethereum blockchain ledger. Arbitrum’s protocol ensures that code runs correctly, as long as the validator is honest. This helps to resist collusion and other attacks.
Arbitrum states that transactions confirmed by this process will be rubber-stamped with the “AnyTrust guarantee” — when all validators agree to the validity of transactions within a block. Validators must stake ETH before they can confirm transactions. By staking crypto, they are incentivized and encouraged to act honestly.
What is the Arbitrum Bridge?
The Arbitrum One Bridge allows anyone to send ERC-20 tokens, including ETH, to Arbitrum One. To use it, you must connect your Ethereum wallet to the bridge. You can use MetaMask or any of the supported wallets.
Numerous top decentralized finance (DeFi) platforms, such as Aave, Balancer, 1inch, Band Protocol, and Curve, are already leveraging Arbitrum or looking to do so to increase throughput and lower their fees. You can check out its portal to see all the Ethereum DApps available on the Arbitrum layer-2.
Arbitrum risks and challenges
There are a few frameworks by which you can judge rollups and layer-2s in terms of risk factors. Popularized by the popular website for rollups, L2Beat, rollups can be classified in three stages: Stage 0, 1, and 2. Arbitrum is at stage 1, whereby it:
- Has a working and live proof system
- At least 5 external actors can submit fraud proofs
- There is an exit window
- Users can exit in the case of an upgrade
- It has a property security council
What Arbitrum lacks is that the exit window is extremely limited and a limited number of actors can submit fraud proofs. Essentially, what this means is that if there is a sequencer failure, users have a limited window to submit transactions and the validator set is limited as well.
How to use Arbitrum
To use Arbitrum, you can either access it through DApps like Aave or 1inch, or you can connect your wallet to the Arbitrum token bridge. The main purpose of Arbitrum is to send ERC-20 tokens from the Ethereum mainnet to the Arbitrum network, to get rid of those ridiculously high gas fees.
To demonstrate how to use Arbitrum, we will connect a wallet to the bridge and use the applications available on the portal.
Step 1. Connect wallet to Arbitrum Bridge
Firstly, you’ll need to go to the Arbitrum Bridge and connect your wallet. The supported Ethereum wallets are MetaMask, WalletConnect, and Coinbase Wallet.
Step 2. Transfer ETH to Arbitrum L2
After connecting your Ethereum wallet, make sure you are on the Ethereum network in your wallet. Select the ERC-20 token that you want to bridge over to Arbitrum and the amount. Click on Deposit when you are ready.
You will then get a notification from Arbitrum, stating that the transaction will take ten minutes and that you will not be able to withdraw your funds back to Ethereum for eight days.
You’ll then have to confirm the transaction from your wallet. However, note that the Ethereum gas fee is quite high, regardless of the transaction amount. Spending $30 to transfer $10 might not be the greatest solution.
But each crypto investor should check the current Ethereum gas fees at the moment of the transaction. Depending on your wallet, you should get a notification similar to this one:
Step 3. Add Arbitrum network to your wallet
Also, make sure that you add the Arbitrum network to your wallet. After you transfer your coins through the bridge, you won’t be able to see the funds in your wallet on the Ethereum network anymore. You will need to add the Arbitrum network.
To do so, simply click on the Add L2 Network button in the top right. If you want to add the Arbitrum network manually to your wallet, you need to go to your wallet. Click on the MetaMask extension and click on the Ethereum Mainnet network, at the top. Click on Add network and enter the following:
- Network Name: Arb1
- RPC: https://arb1.arbitrum.io/rpc
- Chain ID: 42161
- Currency Symbol: ETH
- Block Explorer URL: https://arbiscan.io
Your wallet will ask you if you want to add the Arbitrum network. Click on Approve.
You will also need to allow Arbitrum to switch your wallet’s network.
Step 4. Access DApps
You can browse through the Arbitrum One portal to discover all the Ethereum apps available in layer-2. When you choose any of them, you will be taken to the DApp, where you can connect your wallet and select the Arbitrum network.
Let’s say we want to use 1inch. When we go to the app and connect our wallet, we can switch to Arbitrum, and benefit from the lower fees offered by the network. Instead of performing all trades directly on the Ethereum blockchain, which would incur high fees for every single transaction, we use Arbitrum. You can perform the same trades, without paying the astronomical gas fees.
Arbitrum vs. Optimism
The Optimism team created the rollup technology. The Arbitrum developers used their open-source code to add some of their own features and launched the Arbitrum network. The main differences between the two Ethereum layer-2 solutions, Arbitrum and Optimism, are:
- Fraud proof verification
- Optimism’s Ethereum dependency
- Token bridges
The main difference between Optimism and Arbitrum is the use of single-round fraud proofs. Arbitrum uses multiple-round fraud proofs. Secondly, both Optimism and Arbitrum are optimistic rollup protocols, as they rely on the majority of Ethereum validators to process transactions accurately. They both also use the EVM, although Arbitrum calls their the AVM.
Both Arbitrum and Optimism use bridges to interconnect with other blockchains and facilitate the flow of tokens. On the other hand, Optimism uses a universal, permissionless bridge that can be used for all tokens. Arbitrum does this when it is convenient.
| Features | Arbitrum | Optimism |
|---|---|---|
| Token | ARB | OP |
| Challenge period | 7 days | 7 days |
| Virtual machine | EVM (AVM) | EVM |
| Fraud proofs | Single-round | Multi-round |
Is Arbitrum a long term scaling solution?
Now that you know what Arbitrum is, you can decide if this is the best layer-2 solution for you and your Ethereum portfolio. And that is different for each crypto user. Layer-1 networks such as Ethereum and Bitcoin value security and decentralization over scaling. Arbitrum aims to resolve this blockchain trilemma by implementing optimistic rollups, which satisfy all three elements.
Much of the Ethereum community believes that zk-Rollups are the best long-term solution. Arbitrum, one of the most popular L2 platforms, will likely to absorb current technology trends to scale the platform further and encourage its expansion.
Frequently asked questions
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What is Arbitrum?
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