What Is Arbitrum? 

Arbitrum is a blockchain protocol created for smart contract support. Arbitrum’s origin hails from Princeton University, as researchers were looking for new ways to process smart contracts more efficiently. Fast forward to today, and Arbitrum has over 600,000 users per month. 

Arbitrum was designed to overcome scalability challenges and enhance the Ethereum blockchain's performance. How does it achieve this? It’s a layer-2 scaling solution that processes transactions “off-chain.” Rather than validating and processing transactions as they come in, Arbitrum efficiently bundles the transactions when performing processing functions. 

Arbitrum using an optimistic approach to transaction validity, assuming transactions are valid unless fraud is proven, which improves efficiency but can introduce short-term finality delays. This prevents the congested network that has historically prevented Ethereum from scaling. If fraudulent activity does occur, the malicious activity will be raised and penalized, so users can rest assured that a system is in place to keep the blockchain secure. 

How does Arbitrum accomplish this? It uses Optimistic Rollups to boost Ethereum’s speed and scalability while helping maintain on-chain security.

Key Features of Arbitrum

Although Arbitrum has many key features, there are four reasons why Arbitrum is enabling Ethereum to overcome previous challenges:

Compatibility

Developers are able to work with existing smart contracts without interruptions, delay, or any modifications needed. This is essential for helping Ethereum to grow. Developers want a fast and efficient way to deploy existing contracts. This would otherwise be a deal-breaker for Arbitrum. 

Scalability

Arbitrum lifted the limits from the old days of 20-40 transactions per second. The ability to process transactions off-chain allows for much more throughput. Plus, more transactions can be processed per second, increasing the overall volume significantly.

Cost Efficiency

Lowering transaction fees is always an objective of users on the blockchain and a feature that garners attention. This can be achieved through off-chain processing, which places less computational burden on Ethereum. 

Security

Arbitrum utilizes a challenge-based verification system. This system provides users with the comfort of security that leverages Ethereum’s base-layer security through fraud proofs, though with some tradeoffs such as delayed finality. How Can Arbitrum Boost Crypto Scalability?

Despite the emergence of several promising Layer-1 blockchain networks, Ethereum remains the most popular blockchain protocol in the world in terms of usage and breadth of decentralized application (dApp) offerings. 

However, in part because of its popularity, Ethereum is often beset with high gas fees, transaction bottlenecks, and other on-chain inefficiencies that can sometimes inconvenience users and hinder innovation. 

The scalability constraints of Ethereum’s Layer-1 blockchain — many of which are being addressed in its Ethereum 2.0 update — have given rise to a variety of Ethereum Layer-2 blockchain projects. Ethereum Layer-2 solutions are designed to help scale the ecosystem by alleviating the Ethereum mainnet’s computational workload while taking advantage of its robust, decentralized security mechanisms.

One of Ethereum’s most promising Layer-2 solutions is Arbitrum, which is designed to boost Ethereum’s speed and scalability by securely offloading the bulk of the network’s transaction validation processes to a second-layer blockchain. 

Offchain Labs, the company behind Arbitrum, launched the Arbitrum One mainnet in August 2021, and the project’s $120 million USD Series B fundraising round was backed by a number of prominent investors, including Lightspeed Venture Partners, Polychain Capital, Pantera Capital, and Mark Cuban. Several leading decentralized finance (DeFi) protocols use Arbitrum One, including Aave, MakerDAO, Chainlink, and Uniswap.

How Does Arbitrum Use Optimistic Rollups To Scale Ethereum?

Arbitrum leverages Optimistic Rollups (ORs) to execute batches of Ethereum transactions on Arbitrum’s low-cost, scalable Layer-2 sidechain, which can then be verified and recorded on Ethereum’s mainnet ledger in a more simplified format. 

Rollups refer to the process of executing transactions initiated on Ethereum’s mainnet on another network and then recording the results of those transactions on the mainnet. This transaction diversion process is designed to increase Ethereum’s speed and efficiency in significant ways. 

More specifically, Arbitrum’s ORs allow for effective data compression: Arbitrum treats multiple Ethereum smart contracts as a single object when bridging onto its own chain, which can simplify the rollup process. 

Further, once these transactions are processed, the only data sent back to the Ethereum mainnet is the transactions’ “calldata,” which contains the hashes of the confirmed rollup blocks instead of the blocks themselves. Since calldata is much smaller than the actual transactions they are derived from, they are easily processed by the Ethereum mainnet.

What Are Optimistic Outcomes? 

Arbitrum’s rollup process is considered “optimistic” in the sense that the transactions processed through Arbitrum are considered valid/truthful at the time of transaction. That being said, any Arbitrum validator is able to post a rollup block and confirm the validity of other blocks. This means that as long as there is one honest validator involved with a transaction batch, the Arbitrum crypto network will function as intended.

Validator subsets: Developers who decide to run their dApps on Arbitrum can choose their own set of validators to execute their consensus work. This means that a validator may not be involved with any other dApp running on Arbitrum, unlike validators on the Ethereum mainnet, which are responsible for validating transactions for every dApp on the network. 

In other words, Arbitrum’s localized validator configuration requires less communication between nodes, which results in faster processing speeds and helps the network resist collusion and other common cyberattacks.

While Arbitrum’s Optimistic Rollups can provide several benefits to the Ethereum network, there are some valid criticisms of this type of setup. Perhaps most significantly, there is a lag between when Arbitrum processes transactions and when they reach finality on the Ethereum mainnet. Arbitrum provides a one-week period for transactions to be challenged. 

This means that transactions in a suspicious bundle can remain in limbo for a week before they’re verified and released, which can significantly inconvenience dApp operators and end users alike in the rare case of a dispute.

AnyTrust: The Arbitrum Crypto Guarantee

The processes outlined above form the basis of Arbitrum’s consensus mechanism, known as AnyTrust Guarantee. In essence, AnyTrust requires unanimous agreement among all chosen validators in order for a new transaction block to get accepted, and even a single disagreeing validator will trigger a re-evaluation of the involved block.

Anyone (that’s technically capable) can become an Arbitrum crypto validator by running an open-source code from their local machine. However, only validators who stake ether (ETH) are allowed to propose new rollup blocks. This way, validators who act dishonestly can be penalized by having a portion of their staked funds burned and distributed to honest validators. 

The required staking amounts for each block changes automatically in order to help ensure that in the event a validator acts dishonestly, the funds recouped through their staked funds will be able to offset the losses of the compromised blocks.

Arbitrum validators who do not stake ETH can still participate in securing the network. These “watchtower validators” do not take part in block formation, but are able to observe this process and alert other validators if they detect any suspicious behavior.

Unlock the future of money on Gemini

Start your crypto journey in minutes on the trusted crypto-native finance platform

Get started

What Are the Limitations of Arbitrum?

While Arbitrum is effective at scaling Ethereum, it is not without limitations. It’s important to understand the challenges and limitations of any technology.  

Centralized Sequencer

Reliance on one sequencer for processing transactions does leave users open to some risk with the centralization. Although this promotes low latency and speedy transactions, if the sequencer is down, the lack of a backup system creates downtime. 

Additionally, if transactions are censored, a single centralized sequencer can create a challenge. Ironically, even though the blockchain system and cryptocurrency as a whole are intended to create trust due to a decentralized system, using a centralized sequencer can create some trust issues with users. 

A decentralized system is part of the appeal of cryptocurrency and the blockchain, so this can be seen as a negative aspect of Arbitrum. 

Delayed Finality and Withdrawal Times

One aspect that can frustrate users is the lengthy withdrawal times when switching from Arbitrum to Ethereum. Not only do some see this as wasted time, but it negatively impacts liquidity movement. 

Some would argue that the delayed finality is a worthy trade-off, given the scalability that Arbitrum achieves for Ethereum. 

Security Dependency on Ethereum

As we discussed earlier, Arbitrum assumes transactions are valid, and not fraudulent, but still has a way of discovering the fraudulence and addressing it through penalties. When the issue of proving fraud arises, Arbitrum must depend on Ethereum to resolve the dispute, as it utilizes Ethereum’s base layer for this effort. 

This co-dependence on Ethereum could cause dispute resolution to be delayed if Ethereum was over-congested or otherwise unable to efficiently perform the proof of fraud. 

High Costs of Fraud-Proof Verification

One of the challenges with Ethereum is the high gas fees. In fact, this is one of the many reasons that Arbitrum was created. 

The fact is that fraud-proof verification is expensive, and when a transaction is challenged to prove validity, this creates high gas fees on Ethereum’s mainnet. 

Verifiers will always be needed to keep Arbitrum secure, and the high costs could make it difficult to attract and maintain honest verifiers. Since this is a mechanism of the Arbitrum system, this necessity could become a challenge, depending on the volume of fraudulent transactions that occur over time. 

Developer Complexity and Compatibility

We all know that developers don’t want to be slowed down, and they typically favor technology that they already know or is easy to learn. Although Arbitrum is EVM-compatible, additional work can sometimes be necessary for interaction with smart contracts. 

For some developers, learning AVM (Arbitrum Virtual Machine) can take some time, and this could prevent adoption. 

Limitations With Other Rollups

We’ve discussed some limitations with Arbitrum, but when it comes to inter-rollup communication, such as Optimism, Arbitrum is not yet mature and sophisticated enough to enable this type of interoperability. This can have a negative impact on user experience and mostly has an effect when dealing with cross chain dApps or DeFi protocols. 

Now that we’ve covered some of the limitations and challenges with Arbitrum, let’s compare Arbitrum and Optimism. 

Arbitrum vs. Optimism: Key Differences

Unlike many other Ethereum Layer-2 solutions, Arbitrum does not have its own native utility token and therefore did not conduct a token sale. However, Arbitrum is often compared to other Layer-2 projects and bears some resemblance to Optimism. 

Both projects utilize Optimistic Rollups and have the same general goal of improving Ethereum’s speed and scalability, but there are a few notable differences between Arbitrum and Optimism.

Arbitrum and Optimism are both based on the Optimistic Rollup model, but developed independently. The two projects continue to diverge, their differences will likely grow. That said, both projects utilize similar base technologies, have seen significant success, and adhere much more closely to Ethereum’s underlying design than projects like Polygon (MATIC) and Nahmii (NII).

Native ETH support: Optimism uses wETH, the ERC-20 compatible version of ETH, whereas Arbitrum is designed to offer native ETH support. As a result, Arbitrum is considered to be one of the most Ethereum Virtual Machine (EVM)-compatible rollups. 

At the same time, Ethereum’s block gas limits don’t affect Arbitrum, since Arbitrum crypto transactions will never be entirely executed on Ethereum’s mainnet. By contrast, the gas fees involved with Optimism are tied to the Ethereum mainnet’s gas limits.

Transaction State Execution 

Arbitrum features multi-round fraud proofs to verify transactions, meaning it subdivides the disputed transaction block into smaller validation tasks that are then separately resolved on-chain. 

By contrast, Optimism uses single round fraud proofs, where validators must re-execute a disputed transaction in its entirety.

Speed 

The differences in Arbitrum and Optimism’s transaction verification processes have potential impacts on transaction costs and speed. Generally speaking, Arbitrum has a higher transaction capacity than Optimism, which can translate to better on-chain efficiency in many cases.

Unlocking More Ethereum Layer-2 Potential

Most criticisms of the Ethereum network regarding scale and speed refer to its current base-layer blockchain and fail to account for Layer-2 solutions like Arbitrum, which have made significant headway in increasing the scalability, throughput, and overall efficiency of the Ethereum ecosystem.

Optimistic Rollups can be an effective way to ensure that Ethereum’s mainchain does not need to verify every detail of every transaction and that the mainchain can instead function as the central hub of a vast and complex ecosystem. 

The Arbitrum crypto scalability project is one of the most promising Layer-2 solutions and was designed to unlock more of Ethereum’s potential. Since launching its mainnet, the project has already seen considerable adoption, both among established DeFi players and smaller independent developers.

Summary

Arbitrum is a credible Layer 2 scaling solution with roots in academia that was created for the sole reason of improving both performance and scalability on the Ethereum blockchain. 

Cryptocurrency users are optimistic about the solution Arbitrium provides and the improvement of transaction speed and scalable features. The future seems bright for Arbitrium, and users favor the compatibility and security it provides, in conjunction with Ethereum, a trusted and proven source. 

Ready to try Layer 2? Trade Arbitrum-supported assets on Gemini.