What Is Arbitrum: 10 Points to Take You From Zero to Hero

OK. Get a load of this. I just found out about a thing that could scale Ethereum by 100x over the next few years. It’s name is Arbitrum. Arbitrum is here to shake things up and get you boogying. This lesser-known digital asset has been making waves in the crypto space thanks to its unique approach to scalability and transaction speed. Oh, and it doesn’t even have a token yet. In this article, we’ll delve into the ins and outs of Arbitrum crypto, including how it works, the benefits of using it, and how it compares to other similar solutions on the market.

Table of Contents

• 1. What is Arbitrum?
• 2. Optimistic Rollups vs. Zero-Knowledge Rollups.
• 3. How Arbitrum Crypto Works
• 4. What makes Arbitrum special
• 5. Who uses Arbitrum
• 6. Arbitrum token and airdrop
• 7. Arbitrum vs Optimism
• 8. What the future holds
• 9. Conclusion
• 10. Helpful Resources
• Arbitrum FAQs

Concepts you will learn in this article: Arbitrum, Layer 2 sidechains, Optimistic Rollups, ZK-knowledge rollups, AnyTrust chains

Concepts you need to know beforehand to understand Arbitrum: What is Ethereum?

Ok, drop that avocado toast and let’s do this thing.

First things first. What is it?

1. What is Arbitrum?

Arbitrum is a Layer 2 solution that uses Optimistic Rollups to scale Ethereum.

Huh? Come again?

Yeah, ok. Let’s break this down.

Y’all know that Ethereum is the most popular blockchain platform for building stuff right?

All of the original gangsters of decentralized finance started their journey on Ethereum. You’ve got Compound, MakerDAO, Uniswap and a gazillion other protocols. Because Ethereum was the first general purpose blockchain it got a first mover advantage that delivered gigantic networks effects. I’m on Ethereum, you’re on Ethereum, we’re all on Ethereum.

You get it.

If everyone is on Ethereum then that’s the place to be. Why go anywhere else?

But there is a small “problemo” with this. Ethereum can process relatively few transactions per second. So, if everyone is using Ethereum, it gets congested, resulting in high transaction fees compared to other blockchain solutions that are out for blood; the so called Ethereum killers such as Solana, Cardano, Polkadot, Fantom etc.

Enter Arbitrum to save the day. Arbitrum does something really simple. It batches transactions outside of Ethereum, which it can do much faster, and then sends that batch of transactions to Ethereum to verify them in one go. The crypto industry calls bundling up transactions in this manner a rollup.

Now, there are two types of rollups. If you want to understand crypto well, which is the aim of this site, then I recommend you pay attention to both of them.

Let me walk you though them.

2. Optimistic Rollups vs. Zero-Knowledge Rollups.

Both Optimistic Rollups and ZK-rollups execute transactions on a separate chain. Once they execute the data they compress it and roll it up to Ethereum in a single batch.

When I say execute I mean they write in code that Jane sent Alexander 0.1 ETH, Gustavo sent Jolene 4 ETH, Ayofemi withdrew 0.2 ETH etc. The way the two types of rollups differ is in the way that they make sure that the rollup submitted is not fraudulent.

2.1 How Optimistic Rollups work

Optimistic Rollups start off by assuming that the data is correct in the first place. Hence the term “optimistic”. This has the benefit that, if all is good, then no additional work is necessary.

In the case of an invalid transaction the system has to be able to identify it, recover the correct state, and penalize the party that submits such a transaction.

Here is how this works.

Like with any crypto protocol, Optimistic Rollups allow anyone to participate in its system of posting transactions. Such participants are known as validators.

Now, the validator that submits transactions also needs to post an amount of ETH as bond. Or in other words to stake some ETH. If the transaction proves to be fraudulent, then they lose part of their stake. Hence, validators will always want to tell the truth.

What guarantees truthfulness is that anyone can submit a fraud proof if they spot an incorrect transaction. When this happens the system goes into “dispute resolution mode”. The transaction is posted to the Ethereum Network which verifies wether it is indeed an incorrect transaction or not. If it is, then the bad actor has their ETH slashed. Keep in mind that those submitting fraud proofs also need to stake ETH.

This system works even if there is only one honest party that submits fraud proofs when necessary. Given the incentives, entering a dispute resolution is rare.

2.2 How ZK-rollups work

ZK-rollups don’t have a dispute resolution mechanism. Instead they use a type of cryptography called zero-knowledge proofs. They are called zero-knowledge because you don’t need to see the actual transaction to accept that it is valid.

Let me walk you through a real world analogy of how this works.

Say you want to prove to a color blind girlfriend that two balls are distinguishable.

Ask her to hide them behind her back and switch them once in a while. If she repeats this 100 times and you get it right every time, then she will accept that you can tell the balls apart. Note that you haven’t revealed the colors to her. She has zero knowledge of the colors of the balls but she has proof that you can distinguish them.

2.3 Which one is better: Optimistic Rollups or ZK-Rollups?

With ZK-rollups, when you post a batch to Ethereum (or any other layer 1 blockchain), it includes a similar cryptographic proof. I usually avoid acronyms but because you may come across this term frequently, this type of proof is called a zk-SNARK: Zero-Knowledge Succinct Non-Interactive Argument of Knowledge.

Ok, forget about the acronym now.

The cool thing about these types of proofs is that the L1 verifies them when the transaction batch is submitted and invalid batches can be rejected straight away.

One of the drawbacks of Optimistic Rollups is that they need to give enough time for anyone to raise a fraud dispute. This mean that withdrawals on Optimistic Rollups take 1-2 weeks to withdraw funds back to Layer 1.

However, wherever there is a bottleneck in crypto there is an opportunity. Already, there are a number of projects that are working to provide instant withdrawals back to L1 such as Hop Protocol and Connext.

ZK-rollups don’t have this problem as the funds are available for withdrawals as soon as the batch and its validity proof is submitted to L1.

The problem with compatibility

However, a challenge that ZK-rollups face is that it is very hard to make them compatible with Ethereum and this makes it more difficult to scale general purpose applications without rewriting the app logic. Optimistic Rollups, on the other hand, are EVM compatible, meaning it is easy to port apps over from Ethereum since it requires almost the same code.

Also, ZK-rollups are more computation heavy. This means that you can’t run them unless you have a high-spec machine.

In addition, ZK-rollups are way more complex. Optimistic Rollups are more intuitive and easy to understand. Developers usually prefer simplicity if given a choice.

Finally, Optimistic Rollups post data on chain much more frequently compared to ZK-rollups. Until the data is on-chain you are not guaranteed. In a period of volatility you probably want your transactions on chain very quickly.

OK, that about sums up the differences between optimistic and ZK-rollups.

Now that you understand the two types of rollups let’s take a closer look at how Arbitrum works

3. How Arbitrum Crypto Works

Arbitrum is like the express lane of Ethereum transactions. It’s a sidechain that lets you bypass the congested main road and zip through your transactions super fast.

To use Arbitrum, you just have to use some special software to send your transactions to a node. The node will then pass your transactions along to the Arbitrum Sequencer, which is like the traffic cop of the sidechain. The sequencer makes sure all the transactions are processed in the right order, and it usually gets the job done in just a few seconds.

Next, all the data from Arbitrum transactions is recorded on the Ethereum blockchain to keep everything transparent. Once a transaction is recorded on the Ethereum blockchain, it’s set in stone and can’t be messed with.

How Arbitrum uses rollups

To make sure the transactions are processed correctly, Arbitrum uses Optimistic Rollups. Remember, we’ve got these special computers called validators. They handle the transactions off the main Ethereum blockchain and report back the results in the form of an assertion.

An assertion is like a summary of a bunch of transactions, and it’s posted on the Ethereum blockchain optimistically, which means it’s not automatically accepted as correct. The validators have to put down a stake, which is like a deposit that they’ll lose if they try to pull a fast one. This keeps them honest.

If a validator’s assertion is challenged and it turns out to be wrong, the validator loses their stake and the challenger gets a reward. But if the challenge window expires without any drama, the assertion is considered correct and gets accepted by Ethereum. As long as there’s at least one honest validator, Arbitrum can guarantee that your transactions will be processed correctly.

Finally, if you want to move your assets back to the main Ethereum blockchain, you can do a withdrawal. Withdrawals have to be confirmed, but Arbitrum has this thing called pipelining that lets transactions keep moving along while the withdrawals are being confirmed. This helps keep the system running smoothly.

3.1 Arbitrum One and Nova

ok, it’s time to get into some of the nitty-gritty of Arbitrum. Only for a little while I promise.

Arbitrum runs two rollup chains.

1. The first one is called Arbitrum One. This chain is considered more secure and is intended for DeFi protocols. The latest upgrade to Abritrum One is called Nitro. With this upgrade Arbitrum’s code at its core is the same code running Ethereum. This allows Nitro to compress data by 100x which results in less data being used on Ethereum. Nitro is currently the cheapest rollup solution.
2. The second Arbitrum chain is called “Nova”. This chain trades security for cost and is intended for gaming or other protocols that might need high throughput and are willing to sacrifice some security for cheaper transaction cost. For example, Reddit uses Nova.

Nova is what is called an AnyTrust chain.

3.2 What is an AnyTrust Chain

An AnyTrust chain is a sidechain that does not have the same security guarantees of a normal rollup chain. An AnyTrust chain manages the data off chain. If there is a challenge then there exists a committee that is responsible for taking that data and reverting back to rollup mode to post it on L1. This implies you need to trust 1 or 2 members of the commitee. Last I checked the members of Arbitrum’s AnyTrust committee were Offchain Labs, Reddit, Consesus p2p, Google Cloud and FTX. The idea is that everyone can feel comfortable that this will work. It is not a rollup. But it is more secure than a side chain and cheaper.

4. What makes Arbitrum special

The cool thing about Arbitrum is that it is EVM compatible. This means that if you have already coded up your application on Ethereum then you will be able to easily port it over to Arbitrum if you wish to. Already most of the largest DeFi players are now available on Arbitrum. We’ll take a look at them soon.

The key benefit of Arbitrum is that it makes transactions faster and cheaper. In terms of transactions per second, we are talking about going from 15 transaction per seconds to 1-4K per second.

Finally, Arbitrum uses rollups. Duh! But the point I want to drive here is that transactions are more secure because they are more tightly intertwined with Ethereum.

4.1 Arbitrum vs. Polygon

There are other Layer 2 scaling solutions that did not start with rollups. For example, Polygon started off as a sidechain project. In a Blockcrunch podcast ,Arbitrum’s founder says: “What rollups provide is security that relies on Ethereum. Thus, Arbitrum is very closely tied to Ethereum. In Polygon, Matic is a side chain that does not derive security from Ethereum. This means that Arbitrum will never be as cheap as Matic.” Mind you, that interview was over a year ago and Polygon has now moved into the rollups space.

Let’s take a look at some of the major player using Arbitrum

5. Who uses Arbitrum

All the big boys are on Arbitrum. It’s clearly this is where the party is at. With DeFi, you’ve got Uniswap, SushiSwap, Curve Finance, Olympus DAO (Pro), Tether, The Graph, Trader Joe, Yearn Finance and more.

Abritrum also has a strong NFT marketplace. It is number 2 by volume and Open Sea has also launched on Arbitrum.

Then you’ve got the major stablecoins: MakerDAO and its DAI stablecoin, USDC and Tether.

On the centralized exchange side you have many of the major players: Binance, OKEx, Crypto.com, Huobi, Kucoin, Mexc to name a few.

For a full list check out portal.arbitrum.one.

You should also know about their partnership with Reddit.

5.1 Reddit partnership

In August 2022, Reddit announced that they would be using Arbitrum for their community points. If you don’t know what Reddit is, it is a popular social forum that rewards members who provide useful input with community points.

Reddit decided to decentralize community points so that if you wanted to you can take ownership of them. This way no one can take them away even if Reddit where to shut down.

Who cares you might say? That’s not the point. The point is that they are one of the first important Web2 players to do this. Then in the future someone could build on top of this. Maybe you could use your Reddit community points in a game or get access to an event etc.

As a result of all of this, Arbitrum is now the 4th largest chain by volume.

Check out this tweet for some more bullish stats

How's @arbitrum doing?

Glad you asked, anon.

Let's take a look 🧵 pic.twitter.com/FJUjzRn6PE

— Aylo (@alpha_pls) November 26, 2022

The question then is, how come Arbitrum doesn’t have a token?

6. Arbitrum token and airdrop

There is a lot of speculation about a potential airdrop. Officially Arbitrum says they don’t really need a token. If, however, you want to maximize your chances of being eligible for an airdrop then check out my friend Mile’s video on how to go about this. (He’s not really my friend. Maybe one day).

7. Arbitrum vs Optimism

Apart from Polygon, Arbitrum’s other main L2 contender is Optimism. Optimism as the name implies also uses an Optimistic Rollup. However there are some key differences between Optimism and Arbitrum:

7.1 Dispute resolution

The most fundamental difference between Arbitrum and Optimism is the way that they process disputes. In case of a dispute, Optimism submits a fraud on a per transaction basis. Someone will say, “Hey, that transaction is a fraud”. In Arbitrum’s case the unit of dispute can be much larger because they don’t ever run whole transactions on chain. Imagine of block of transactions. If someone initiates a dispute, an iterative process starts between the challenger and person making the claim. The way this works is through a binary search. Hey, we all agree on step 0. But don’t agree on step 100. Let’s go back to step 50. Do we agree there? And so on.

The reason this is important is that disputes affect the non-dispute cases which are the majority. If you need to run on chain you are bound by the limits of Ethereum. Transactions can’t be larger that what Ethereum allows. In Arbitrum’s case you can have transaction that use more data in an Ethereum block. Because you don’t need to run it on chain it gives you a way to do larger transactions.

7.2 Sequencer set up

This is more of a philosophical difference but both Optimism and Arbitrum use a sequencer. The sequencer orders and posts transactions on chain. However, this means that whoever controls the sequencer can front run and extract MEV. (Front running means that if I know about a large order in advance I can buy now and sell higher late). Arbitrum wants to decentralize who runs the sequencer. Optimism on the other hand has a different process of auctioning off the rights to the sequencer. The problem with this is that the entity that can extract the highest MEV will be the one to win that auction .

8. What the future holds

8.1 Could we end up with too much capacity?

So what do you think will happen as Arbitrum and other L2s expand Ethereum’s capacity?

For example, at some point Uniswap was responsible for 50% of Uniswap’s gas fees. Now that Uniswap is available on Arbitrum what does that imply for Ethereum validators.

Will they give up on validating transactions on Ethereum now that the fees they can earn are lower. Or will the increase in demand counterbalance the lower fees?

The reality is that no one knows how this will play out. Currently there seem to be a lot of demand for more capacity and Arbitrum can have a multiplier effect.

8.2 Composability

The other thing to consider is composability. If you have MakerDAO on one rollup and Uniswap on another they can’t talk to each other directly. You can think of rollups as separate chains when it comes to composability. Arbitrum is on Ethereum and pays for Ethereum security. But in terms of composability it is a separate chain. You don’t have synchronous calls between rollups. You only get synchronous within the same rollup.

This means that most defi protocols are going to go with multiple rollups. Projects will decide wether to go heavy on one rollup chains.

Finally you need to consider how Ethereum will evolve. In October 2022, Offchain labs, the company behind Arbitrum, acquired Prysmatic Labs. Prysmatic was one of the companies responsible for the Ethereum merge, i.e. the upgrade from proof-of-work to Proof-of-Stake which is now complete.

The next step for Ethereum is to process transactions in parallel through a process called sharding. Will there be a need for rollups once that happens? In Blockworks’ interview with Steven Goldfeder, Arbitrum’s founder, he says yes. “The phase that seems most likely to happen soon is to scale the data layer. Roll ups are multipliers. If you give me more data we will increase what you can do with that data… Ethereum 2.0 does have a scaling execution phase. But a lot of people are beginning to think that Ethereum 2.0 will scale data and rollups will be the execution layer”, he says.

9. Conclusion

Arbitrum is a layer 2 scaling solution for Ethereum that allows for faster, cheaper transactions while still being secured by Ethereum’s proof-of-work consensus mechanism. It works by allowing users to move some of their transactions off the main Ethereum blockchain and onto a separate, faster “sidechain” called Arbitrum. This can help to reduce congestion on the main Ethereum blockchain, as well as lower transaction fees.

Overall, Arbitrum is a promising solution for scaling Ethereum and I am excited to see how it evolves over time.

10. Helpful Resources

Here are the resources that helped me write this article

• Finematics YouTube explanation of Rollups.
• Portal.arbitrum.one shows which protocols are live.
• Arbitrum’s Dev docs introduction and starter guide
• Blockcrunch Podcast with Offchain labs founder Steven Goldfeder
• Empire’s podcast with Steven Goldfeder and Prysmatic’s Raul Jordan

That’s all folks!

Arbitrum FAQs