Key Takeaways
- Arbitrum is an Ethereum Layer 2 scaling solution that improves transaction speed and reduces gas fees using Optimistic Rollups while maintaining Ethereum’s security and decentralization.
- The network offers seamless Ethereum compatibility, allowing dApps to operate at lower costs and with faster transactions, making it a preferred choice for many users.
- It competes with other Layer 2 scaling solutions, offering a multi-round fraud-proof system and more developer-friendly integration.
- The future of Arbitrum includes major upgrades, reinforcing its position as a top Ethereum scaling solution.
Scalability remains one of the biggest challenges for blockchain networks, especially for Ethereum. As the leading smart contract-enabled blockchain, Ethereum supports thousands of decentralized applications (dApps), driving hundreds of thousands of users to its platform.
However, this widespread adoption came with its own set of challenges. It has led to network congestion and high gas fees, making transactions costly and slow. To address these limitations, several Layer 2 scaling solutions have emerged. Among them, Arbitrum stands out as one of the most promising, offering faster and cheaper transactions.
In this guide, we will explore what Arbitrum is, how it works, and why it is a game-changer for Ethereum’s ecosystem.
What Is Arbitrum?
Arbitrum is a Layer 2 scaling solution built on top of Ethereum to improve transaction speed and reduce gas fees while inheriting the same level of security as Ethereum. Developed by Offchain Labs, it uses optimistic rollup technology to bundle multiple transactions together before settling them on Ethereum. This method greatly increases efficiency without compromising security.
By shifting most of the transaction execution off-chain and only submitting proofs to Ethereum, transactions on Arbitrum remain secure while significantly reducing congestion on the main network. At the same time, users can use Ethereum’s native token on Arbitrum and interact with Ethereum dApps seamlessly. All while enjoying lower fees and faster confirmation times, making it more user-friendly and efficient.
How Does Arbitrum Work?
Arbitrum connects to Ethereum using several key technologies that ensure fast and low-cost transactions while maintaining Ethereum’s decentralization. These include:
Optimistic Rollups
At its core, Arbitrum uses optimistic rollups, a scaling method that processes transactions off-chain and only submits a summary of these transactions to Ethereum. Instead of verifying each transaction immediately, like on the Ethereum mainnet, it assumes transactions are valid by default (hence the name “optimistic”) but allows users to challenge fraudulent ones.
Users who challenge and uncover malicious nodes and transactions get rewarded with ETH. Overall, Arbitrum’s method significantly reduces computation on Ethereum while maintaining the same level of security as the mainnet.
Optimistic Execution
Optimistic execution means that transactions on the Arbitrum blockchain execute quickly without needing immediate verification on Ethereum. If no one disputes a transaction within a specified challenge period, the transaction is finalized. This delayed dispute resolution helps keep costs low while ensuring fraud prevention mechanisms remain in place.
On the other hand, the challenge period is roughly 6.4 days long, which can cause uncertainty in some transactions. Since the network relies on watchers, invalid transactions can also be finalized.
Arbitrum Bridge
To use Arbitrum, users must move their assets from Ethereum using the Arbitrum Bridge. This bridge allows users to deposit Ethereum-based assets into an Arbitrum smart contract, where they can then transact on the Layer 2 network at a fraction of the cost.
The bridge enables users to interact with Arbitrum-based dApps while maintaining control over their funds. For example, ETH transferred turns into ArbETH and is used for gas fees.
Accessing Apps on Arbitrum
One of Arbitrum’s biggest advantages is its Ethereum compatibility, allowing developers to deploy their Ethereum-based dApps without modifications. As a result, some of the biggest decentralized applications on Ethereum are also readily available on the Layer 2:
- Uniswap (Decentralized Exchange)
- Aave (DeFi lending platform)
- Curve Finance (Stablecoin trading)
- SushiSwap (Decentralized exchange)
By using these apps, users can trade, stake, lend, and borrow assets while benefiting from lower fees and faster transactions compared to Ethereum. For example, the average transaction fee on Arbitrum for the past 30 days is roughly $0.005. At the same time, gas on the Ethereum mainnet costs hundreds of times more.
Arbitrum DAO
In March 2023, the Arbitrum Foundation turned into a decentralized autonomous organization, giving community members a way to directly participate in governance. Currently, the Arbitrum network is governed by the Arbitrum DAO, a decentralized autonomous organization that allows users to make decisions about network upgrades and ecosystem development.
$ARB Token Explained
The $ARB token is the governance token. When the Arbitrum Foundation transitioned into a DAO, it also launched the $ARB token. Furthermore, through its tokenomics it distributed roughly 13% of the cryptocurrency‘s supply to some of the most active community members.
Holders of $ARB can participate in voting on network proposals, ensuring a decentralized governance structure that aligns with the interests of the community. The token does not serve as gas for transactions, as Arbitrum uses Ethereum for settlement, but it plays a crucial role in guiding the network’s future. At the time of writing, $ARB has a market capitalization of more than $2 billion, reflecting the token’s importance in the ecosystem.
Arbitrum vs. Other Layer 2 Solutions
The network competes with several other Layer 2 solutions. Some of them use optimistic rollups, just like Arbitrum, while others rely on different scaling methods.
Arbitrum vs. Optimism (Main Competitor)
Optimism is arguably the main competitor to Arbitrum. Both use Optimistic Rollups for scaling Ethereum, meaning they assume transactions are valid unless challenged. However, there are notable differences between the two. Arbitrum offers more advanced fraud-proof mechanisms, utilizing a multi-round fraud-proof system rather than Optimism’s single-round fraud-proof system.
This makes Arbitrum more secure and efficient in handling disputes, as it allows a more flexible and cost-effective way to detect and prevent fraudulent transactions. In addition, it provides higher compatibility with Ethereum’s smart contracts, allowing developers to migrate their dApps with fewer modifications compared to Optimism.
Arbitrum vs. Polygon (Sidechain vs. Rollup Approach)
Polygon operates as a sidechain, meaning it functions as an independent blockchain that periodically communicates with Ethereum. In contrast to rollups, Polygon has its own consensus mechanism, which results in faster transactions but comes at the cost of security decentralization.
Arbitrum, on the other hand, directly inherits Ethereum’s security model, making it more trustless and resistant to attacks. While Polygon may offer lower transaction fees, it relies on its own validator set, which could be less decentralized than Ethereum’s Layer 1 security. As a result, it’s often the preferred option for projects that require Ethereum-level security without sacrificing scalability.
Arbitrum vs. zk-Rollups (Differences in Security and Scalability)
Unlike Arbitrum’s optimistic rollups, zk-Rollups use zero-knowledge cryptographic proofs to verify transactions before submitting them to Ethereum. This means zk-Rollups provide faster finality since transactions are validated immediately without a dispute period. However, zk-Rollups require significantly more computational resources, making them less flexible for general smart contract execution.
Arbitrum prioritizes Ethereum compatibility, enabling developers to deploy dApps with ease, whereas zk-Rollups require specialized modifications to accommodate smart contract interactions. While zk-Rollups offer stronger security guarantees and better efficiency for high-throughput applications, Arbitrum remains a more developer-friendly solution for broader Ethereum adoption.
How To Use Arbitrum
Using Arbitrum is probably easier than you think, to get started, you’ll have to:
Set Up a Wallet
First and foremost, you’ll need a compatible Ethereum wallet like MetaMask or Trust Wallet. Once you’ve created a crypto wallet, simply add the Arbitrum network to your wallet’s settings.
Bridging Assets from Ethereum to Arbitrum
Add some ETH to your wallet because you’ll need it for gas fees and bridging. You can then move different assets to Arbitrum. There are a couple of different options to do that but the most popular one is the Arbitrum Bridge:
- Visit the Arbitrum Bridge website.
- Connect your wallet.
- Select the asset you want to bridge.
- Approve the transaction and wait for confirmation.
Using Arbitrum DApps
With funds available, you can explore popular dApps like:
- Uniswap for decentralized trading.
- Aave for lending and borrowing.
- GMX for perpetual futures trading.
Some of these dApps are also on Ethereum but they work the same way on Arbitrum, except with lower fees and faster transactions.
The Future of Arbitrum
Arbitrum Nitro Upgrade
Back in August 2022, Arbitrum deployed the Nitro Upgrade, bringing faster transaction speeds, lower costs, and better Ethereum compatibility. The upgrade improved overall efficiency and scalability, making the network an even more attractive Layer 2 solution.
Arbitrum Governance & DAO Plans
With the Arbitrum DAO, governance decisions are now in the hands of token holders. Users have access to decentralized decision-making for future network upgrades and ecosystem growth. According to an interview with Offchain Labs co-founder Edward Felten, there are already more upgrades on the way. These include:
- Bounded Liquidity Delay Protocol (BoLD): A new dispute protocol that enables permissionless validation. It’s currently in testnet.
- Stylus: This upgrade lowers the barrier for traditional developers to enter the blockchain space by allowing them to use familiar languages like Rust and C++, instead of being limited to Solidity.
- Timeboost: A transaction ordering mechanism designed to prevent Miner Extractable Value (MEV) exploits and ensure a fairer transaction processing system on the network. The goal of Timeboost is to improve block production fairness by allowing transactions to be ordered based on time of arrival rather than arbitrary manipulation by validators or sequencers.
Potential Growth in DeFi, NFTs, and Web3
As more developers migrate to Arbitrum, its adoption in decentralized finance (DeFi), NFTs, and Web3 applications is expected to grow even further. Through its continuous innovation, the Layer 2 remains one of the leading scaling solutions for Ethereum.
Closing Thoughts
Arbitrum offers a scalable, secure, and cost-efficient solution for Ethereum users and developers. By utilizing Optimistic Rollups, it reduces gas fees while maintaining Ethereum’s security and decentralization. With DAO decisions set to optimize it even further, Arbitrum remains one of the top scaling solutions for Ethereum.
Ready to get started? Set up your wallet, bridge your assets, and explore Arbitrum’s growing ecosystem today!
