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Arbitrum

Arbitrum: Scaling for Ethereum dApps – Complete Explanation

After several years of development, Arbitrum has been officially launched. More than 150 projects have applied for early access to the development system. The launch looks promising. Looking at the issues being resolved by Arbitrum, we can’t help but be pleased.

In this article we will explain what Arbitrum actually is, how it works and exactly what problems it solves. We also tell you more about why Ethereum 2.0 cannot solve these problems on its own, and thus requires the use of Arbitrum.

What is Arbitrum?

Arbitrum is a technical solution based on the underlying Ethereum blockchain . It is an ideal solution for many DeFi applications or applications that are open to the public, because it is not only based on a very reliable underlying blockchain, but because the technical solution also significantly increases the number of transactions per second. This can significantly reduce the costs associated with each transaction.

Arbitrum is the second generation of decentralized applications (dApps) based on the Ethereum blockchain. It is a tool offered to decentralized applications to help them migrate to a faster and more cost-efficient model. It is also a necessary upgrade for the proper functioning of some decentralized applications.

Unlike many other platforms, Arbitrum is not tied to a token, as is the case with Polygon , Solana or Optimism. The project is based on the underlying Ethereum blockchain. So this is a clear guarantee of long-term safety. The security of the Ethereum blockchain has long been proven. It is the second largest cryptocurrency in the world, and may become the largest when it completes its migration to the Proof-Of-Staking (PoS) consensus algorithm . 

The Ethereum blockchain is thus a real security guarantee for potential investors.

This is probably what attracts many DApps to bet on Arbitrum. Developing a decentralized application on this blockchain takes advantage of the security associated with Ethereum.

Bancor users seem to be delighted with the arrival on Arbitrum: without any changes to the smart contract , the bet has reduced the costs associated with each transaction by 270. No wonder they are happy about this.

It’s not just about satisfied Bancor users. Also, the users of the decentralized Mcdex application have experienced a 270-fold drop in transaction costs. This did not require any changes in the project code.

When we look at the Arbitrum sidechain website, we see that this project is very ambitious. The idea behind the project is to enable the users to build a decentralized application in just a few minutes.

The scalability problem

It is not news to anyone: the Ethereum blockchain is a victim of its own success. Indeed, the DeFi and NFT ecosystems are constantly attracting new users to Ethereum. Unfortunately, the current network infrastructure is not able to optimally handle this supply of users. 

As a result, the network experiences significant delays in processing transactions. As a result of this congestion, the cost of transferring or interacting with a decentralized application has skyrocketed. It is also not even sure whether Ethereum 2.0 will solve this problem. 

Layer 2 Solutions

Therefore, the developers had to fall back on other solutions to solve the congestion problem. Among these solutions we find the so-called second layer or layer 2 solutions.

This name comes from the fact that they allow for transactions outside the blockchain. This means that they move transactions to environments outside of the Ethereum blockchain that allow for transactions to be managed more cheaply and faster, while maintaining the security offered by the main Ethereum blockchain. 

To do this, a transaction that takes place on these off-chain solutions is verified and processed there before being published as a batch on Ethereum. This allows hundreds of transactions to be published on the Ethereum blockchain in a single transaction.

The Arbitrum project is therefore a so-called off-chain solution. Developed by the company Offchain Labs, Arbitrum is based on a technology called Optimistic Rollup. The solution has been developed since 2015 by Offchain Labs co-founders Ed Felten, Steven Goldfeder and Harry Kalodner.

With this technology, the three partners managed to raise a lot of funds. The company previously raised $20 million in a Series A round, followed by a $100 million Series B round, bringing the company’s total valuation to $1.2 billion. This number has only increased since then.

It took a while for the Arbitrum network to launch on the Ethereum mainnet, which happened a few weeks after the explosion of transaction fees. On this occasion, several DeFi applications were ported to the solution developed by Offchain Labs. One of the specific features of this solution is that it enables the execution of smart contracts.

Among these applications we find the giants of decentralized multichain exchanges, namely Sushiswap , Balancer , Curve and Uniswap . The ecosystem is also made up of other types of applications, from NFTs to bridges to transfer funds to other blockchains.

Despite a relatively quiet start, Arbitrum experienced a strong rise in popularity after this, when the number of unique addresses increased by a factor of 100 in 20 days, from 1,500 to more than 150,000. At the same time, the TVL (amount of crypto deposited on the various Arbitrum protocols) had also exploded, eventually reaching an all-time high of $1.81 billion. This value has since fallen significantly, mainly due to the decline in the price of Bitcoin (BTC) and other cryptocurrencies. See below image of a 2 layer scaling.

Problems with Arbitrum

In practice, it is the projects Abracadabra, Sushiswap and Curve that attract the most cryptocurrencies on Arbitrum and make up the majority of the TVL of the layer 2 solution. Unlike Ethereum, where Uniswap is huge, here it only comes in seventh place.

Despite a successful launch and growing momentum, not all went well for Arbitrum. For example, in September 2021, it made headlines after experiencing stability issues, almost at the same time as the Solana blockchain (SOL).

In fact, the Arbitrum network sequencer went offline for about 45 minutes. While this did not endanger the users’ resources at any point, transactions could not be validated during this period. Of course, this doesn’t give users a lot of confidence.

“Arbitrum One is still in beta, and we will do our best to keep downtime to a minimum. However, as we stated in our launch announcement, we want to warn users that further outages are possible during these early days,” the Arbitrum publication said, reflecting on the incident.

In practice, it appears that the sequencer was unable to keep up with the excessive influx of transactions to be processed. However, the project teams pointed out that only the sequencer was affected, but the network continued to function. 

“Since the sequencer is the only one that can submit transactions without delay, failure of the sequencer will lead to downtime for the users. But the Arbitrum network can withstand prolonged sequencer failures, and even permanent sequencer failure (if at all possible) would not prevent the blockchain from continuing to operate after a delay.” the publication. 

Why is Arbitrum the best solution?

Let’s discuss why Arbitrum is the best solution to the problem we just discussed.

  1. A 100% scalable solution

Ethereum is a very secure solution, but its capacity is too limited (only a few transactions per second). The widespread adoption of cryptocurrencies around the world requires more capacity to be supported on the network. Currently, the credit card network is estimated to generate an average of 56,000 transactions per second.

It should be clear that blockchains must be able to exceed this number in order to compete with monetary systems. The Arbitrum sidechain provides an answer to this problem. Arbitrum is a solution that clearly exceeds the compute and storage limits of the underlying blockchain.

  1. Very low transaction costs

Arbitrum’s transaction costs are very low: up to 50 times lower than on the first tier of the system. Arbitrum offers low storage costs for calculations, regardless of the number of resources used.

This makes it much more attractive for people to start using cryptocurrencies. This is partly because it can also be used for microtransactions. These are low-cost purchases. The problem is often that the transaction costs exceed the value of the transaction. This problem therefore does not arise with Arbitrum.

  1. 100% automatic contract conversion: strong portability

The conversion of contracts is 100% automatic. You don’t have to learn a new computer language. The tool provides technical documentation to facilitate the integration of new applications. The Arbitrum tool converts your existing contracts into Arbitrum contracts. Arbitrum is thus 100% portable. The tool works with Web3, Ethers and Go-Ethereum. That way, the tool adapts to your system and you don’t have to rewrite the front-end.

The transfer of tokens between layer 1 and Arbitrum is 100% transparent and secure. Your old tokens are fully supported by Arbitrum.

  1. Security

Unlike other tools that do not necessarily provide the same level of security as the underlying blockchain, Arbitrum is as reliable and secure as Ethereum. This is often a big problem, because there are more and more smart contracts that have not been shown to be secure.

  1. High degree of privacy

If you are looking for smart private contracts, Arbitrum is for you. The way the tool works ensures that only the developers or validators of a sidechain can see your code. However, transactions performed on the network are visible.

The Arbitrum project also brings together some exceptional engineers. The tool’s founder and CTO is none other than Ed Felton, formerly a professor at the prestigious Princeton University.

  1. A well-stocked technical documentation

Also not unimportant is the documentation of the project. More and more often we come across scam projects. A characteristic of these projects is that they do not publish any documentation. However, they do make several promises that they subsequently fail to keep.

Arbitrum publishes a lot of documentation about the project. Because of this we can say that it is a very reliable project. In addition, it also ensures that the project can be further developed: everyone can contribute.

Is Arbitrum better than other Layer 2 solutions?

Arbitrum has many advantages over other Layer 2 solutions. Let’s take a look at which areas Arbitrum is better in so you can understand why this project might be the ideal solution for Ethereum’s scalability.

First, Arbitrum does not publish the source code of the smart contracts. This can be seen as an advantage or a disadvantage. We see this as an undeniable advantage, because it promotes our own development projects. This confidentiality is sometimes necessary to maintain non-reproducible source code. This improves the security of the application.

Another big advantage of the solution is that the decentralized application can also choose its own validators. The tool only requires one honest validator to ensure the correct functioning of a decentralized application. This is an advantage that other Layer 2 systems do not offer. Only the validators approved by the decentralized application do the work to calculate and form a consensus for each smart contract. This allows a significant increase in contract throughput and storage capacity, as bandwidth is not limited by a consensus algorithm.

Arbitrum allows the execution of arbitrary smart contracts, unlike the Plasma solution. The system is more secure than the Optimism solution because the anti-fraud system is based on several levels. The tool is also compatible with the Ethereum blockchain. This is of course a guarantee of safety for the users.

More about Offchain Labs

Offchain Labs is a New York-based company that develops Arbitrum. As we mentioned earlier, Offchain Labs raised $120 million through a Series B round led by Lightspeed Venture Partners. Lightspeed co-founder Ravi Mhatre had joined the Offchain Labs board of directors as part of the deal. The round included Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research and Mark Cuban.

Arbitrum processes transactions on a sidechain using Optimistic Rollups technology. It then ingests them in batches on Ethereum’s main network. Projects using Optimistic Rollups for their second-tier networks must verify the validity of their transactions and then publish the transaction details on Ethereum. If these projects intentionally or unintentionally accept an invalid transaction, it can be challenged by any Ethereum user.

Arbitrum and Optimism, which are both Ethereum scaling solutions, use Optimistic Rollups. However, their anti-fraud logic is different. Optimism limits the size of smart contracts to what can be run back on Ethereum. Arbitrum allows users to split smart contracts into different parts and prove fraud at the level of a single contract statement.

The Arbitrum solution is the first scalability solution developed by Offchain Labs, but the company is also working on other similar projects. The $120 million in new funding will enable the company to acquire the resources and make the investments necessary for its development, Goldfeder said: “We will use the newly raised capital to expand our team and continue to invest heavily. in R& ;D.”

Offchain Labs currently has a team of 14 people. The majority of future hires will be in engineering, although the company is recruiting in all areas. In addition, this funding round makes Offchain Labs a new unicorn in the cryptosphere valued at $1.2 billion. The company’s total funding currently stands at $124 million.

Second-tier scalability solutions are currently needed for an Ethereum that still cannot solve the problems of high transaction costs, despite several updates already being made.

Can’t Ethereum Scale Itself?

Let’s go back to basics. Because why is it so difficult for Ethereum to scale up? There are a lot of projects that want to solve this problem. We might wonder if it’s not just possible for the problem to be tackled at the roots and solved by Ethereum itself.

Ethereum 2.0

The problem can be tackled with Ethereum, and it is already happening. The blockchain is in the process of switching to Ethereum 2.0. This is the most important update that the blockchain will get to date.

At launch, Ethereum was based on a consensus algorithm similar to Bitcoin, namely the Proof of Work (PoW). This was a logical choice as it was the most widely used and consensus mechanism at the time.

But as far back as 2015, the year the Ethereum protocol was launched, the developers already had in mind the idea of ​​a transition from Proof of Work to Proof of Stake .

For example, Vinay Gupta said in 2015: “Proof of Work implies the inefficient conversion of electricity into heat, Ether and grid stability, and we would like to not heat the atmosphere with our software more than is absolutely necessary. Unless we buy carbon offsets for every Ether created (is that such a bad idea?), we need an algorithmic solution: the infamous Proof of Stake.”

The promises of Proof of Stake are therefore many: more speed, efficiency and accessibility. On top of that comes the resistance to the mining ecosystem’s cartels around some key players – although this cartels may then try to switch to the striker’s side. However, Ethereum is still in its infancy. As a result, the Proof of Work was maintained and the Proof of Stake is being postponed until a later update: Ethereum 2.0.

As the years go by, Ethereum is reaching its limits in terms of transaction processing capacity. This phenomenon has consequences such as a significant increase in fees or network paralysis. In fact, it is imperative to rethink the system to enable it to process more data.

Other technical improvements such as sharding have also been added to the Ethereum 2.0 project over time. The Ethereum Foundation published the Ethereum 2.0 deposit agreement on November 4. This was the foundation stone in the building that this update represents. However, this did not mark the final launch of Ethereum 2.0, but the beginning of a series of successive updates, divided into 3 phases that could stretch over several years.

Phase 0: the beacon chain

Phase 0 went into effect on November 4, 2020 and represents the first phase of the transition to Ethereum 2.0. In practice, phase 0 is the phase in which the beacon chain is introduced. The beacon chain is the central blockchain of the Ethereum 2.0 network. The beacon chain has two main tasks:

  • To ensure the consensus system, namely Proof of Stake;
  • To ensure synchronization between the shards.

So, as we just saw, it is the beacon chain that will initiate the transition to the Proof of Stake. However, this will not be launched until the deposit contract (the contract that was deployed on November 4) has deposited 524,288 ETH by 16,384 future validators.

At the earliest, the developers announced that block production on the beacon chain could start as early as December 1. This was postponed. It is something that we will see more often in the transition to Ethereum 2.0.

In reality, the beacon chain was not of much use. There was no functionality related to transfers or smart contracts. This chain had only made it possible to initiate Proof of Stake on Ethereum 2.0.

Phase 1: the shard chain

Once the beacon chain is operational, phase 0 will give way to phase 1, which will introduce the shard chain. Shard chains have the special feature that they make it possible to divide the network into a large number of sub-networks, each of which is responsible for the independent processing of their data.

The state and data of these different sub-networks are then synchronized by the Beacon chain, which acts as the backbone of the system and ensures the consistency of the data.

Shards provide many benefits, such as facilitating access to full nodes by reducing the necessary hardware requirements. It can also increase the number of transactions per second that the blockchain can process.

Phase 1 of Ethereum 2.0 is expected to be released sometime in 2021, according to information published by the Ethereum Foundation. There was also a delay here. It took quite a while before Phase 1 was launched.

Phase 2: The Docker

Once the Shards are rolled out and functional, Ethereum 2.0 will enter the third and final phase of its rollout, which is Phase 2, titled “The Docker”. This last phase is the most important of the transition. As you may have noticed, there was no mention of Ethereum 2.0 in phases 0 and 1.

During the phase 0 and phase 1 rollout, Ethereum and Ethereum 2.0 will effectively be two separate blockchains running in parallel. Phase 2 thus aims to integrate the “old” Ethereum, often referred to as Ethereum 1.0, into the new version of Ethereum 2.0.

To do this, Ethereum 1.0 will be integrated into Ethereum 2.0 in the form of a Shard. Ethereum 1.0 will thus become a subnetwork of Ethereum 2.0. This integration will mean the end of Proof of Work for Ethereum and the generalization of Proof of Stake.

It is also at this stage that transfers and all logic related to smart contracts will be introduced on Ethereum 2.0, as the official website explains: “This upgrade will make the other shards similar to the mainnet: they will be able to process transactions and smart contracts and not just provide more data.”

This final phase is scheduled for 2021/2022 according to information published by the Ethereum Foundation. Again, any delays in the previous stages will no doubt lead to delays in this stage. That is why it is important to take this information with a grain of salt.

Conclusion

Arbitrum is a tool that promotes the adoption of a more advanced and faster consensus algorithm. One of the many possibilities is that smart contracts do not have to be rewritten. This allows developers to switch to Arbitrum at lightning speed without too many problems. Another feature is that founders of a dApp can choose the validators themselves.

In addition, of course, it also solves the problems that Ethereum has been running into for a long time. Scalability in particular is a stumbling block for the world’s second largest cryptocurrency. This resulted in users having to pay extremely high transaction costs to the network. Of course, that does not promote the use of the blockchain.

More and more projects are interested in Arbitrum. This is of course partly due to the fact that Ethereum 2.0 is taking a very long time. Until now, each phase has been postponed, so there is a good chance that the next phase will also be postponed. In addition, it is not even certain whether the problems will really be solved with Ethereum 2.0. Until then, we can at least make Arbitrum, which offers a nice solution to the problems of Ethereum.

 

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