What Is Arbitrum and Why Does It Matter?

Arbitrum Guide: Why Optimistic Rollups will make Ethereum scalable for the masses

Hey DEFI TIMES community,

The layer-two ecosystem is one fire. It's one of the major reasons why Ethereum gas fees have significantly decreased over the last couple of weeks.

I will say it over and over again: Learning how to use any second layer solution now is like learning how to use Ethereum in early 2020 - the opportunities are endless.

We covered so many L2s and side chains in this newsletter, but there's one project that we didn't talk about a lot: Arbitrum.

Arbitrum is probably one of the most promising L2 solutions out there - it's the main competitor to Optimism as the project also builds optimistic rollups. Once optimistic rollups launch their mainnet in 2021, many people believe that they will be one of the last pieces of the puzzle to make Ethereum scalable - Do we even need sharding?

Optimism enjoyed most of the attention in the past months, but Arbitrum seems just as game-changing!

Today, we dive into how Arbitrum works and why it matters for Ethereum in the short and long run!


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What Is Arbitrum?

Arbitrum is a second-layer solution building on Ethereum that supports Turing-complete smart contracts. It leverages optimistic rollups to achieve fast and cheap transactions. In fact, developers can write their code in Solidity, which means that Arbitrum is completely EVM-compatible.

On the official Artbitrum website, Offchain Labs introduces the project like this:

Arbitrum Rollup can scale any Ethereum contract. It's the ideal scaling solution for many DeFi apps and any application which is open to public participation. Arbitrum Rollup contracts enjoy the fully trustless security of the underlying blockchain, all while simultaneously increasing the dapp's capacity and greatly reducing costs.

By being interoperable with Ethereum, we can exchange information of any kind between the rollup and Ethereum. 

Arbitrum leverages Ethereum's security - meaning that Ethereum secures every transaction on the rollup. While being somewhat independent, Arbitrum relies on Ethereum's trustlessness. That means Arbitrum combines the best of both worlds: The scalability of a second-layer solution and the security of the Ethereum blockchain.

How does the rollup publish information to Ethereum? One of the best explanations I have seen comes from Ethhub:

The name Optimistic Rollups originates from how the solution works. 'Optimistic' is used because aggregators publish only the bare minimum information needed with no proofs, assuming the aggregators run without commiting frauds, and only providing proofs in case of fraud. 'Rollups' is used because transactions are commited to main chain in bundles (that is, they are rolled-up).

Aggregators publish only the minimum amount of information on Ethereum. Why? Because Ethereum is costly and you want to store the least amount of data possible there - Arbitrum takes this to another level because aggregators store transactions in bundles (they are "rolled up").

If you want to use Arbitrum, you deposit your tokens/funds into their smart contract, wait for the confirmation, and you are ready to go. Any transaction on the rollup is fast, cheap, and instant. No waiting, not high gas fees - a true scalable Ethereum experience!

Every transaction is just as secure as on Ethereum - no worries about centralization. Once your transaction has gone through, nobody will be able to reverse it. It's forever stored on Ethereum!

And now that we have got the basics right, let's see how it works in practice.

Unique Selling Proposition

  • Low costs: It costs only a fraction of the transaction fees you would pay on Ethereum. This applies to both computational and storage costs. In addition, Arbitrum has low fixed on-chain costs.

  • Interoperable: Any tokens can be transferred from Ethereum to the Arbitrum rollup instantly - no hurdles involved. Any token, that exists, is supported on Arbitrum.

  • High Capacity: Arbitrum supercharges dApps; On Arbitrum rollups, we can achieve much more computational throughput than on the Ethereum main chain.

  • Guaranteed Correctness: Arbitrum guarantees correctness and is fully trustless because it uses Ethereum to store the final transactions in bundles.

  • Instant porting: Arbitrum doesn't use a whole different programming language. The Arbitrum toolchain automatically reads your Solidity smart contracts and rewrites them. Developers don't need to learn another language, and the transition is seamless.

  • Private channels and sidechains: Arbitrum channels and side chains are completely private, making it possible that nobody can see the app's code or state (except the participants or the validators). You can see only public transactions (i.e., payments) from the outside.

To Put It Simply...

Arbitrum rollups are private, scalable, fast, and cheap second-layer solutions that are completely easy to use. You just need to send your funds to the smart contracts, and you are ready to go. Developers can easily deploy code on the rollup because the smart contracts can ready Solidity - no hurdles involved. The rollup can process hundreds to thousands of transactions per second, while Ethereum can only support up to 10 transactions per second. 

Arbitrum doesn't make any trade-offs in terms of decentralization because it leverages Ethereum security. Every computation is also stored on Ethereum - taking advantage of the best of both worlds: scalability and security.

The Trade-Offs

Despite all the advantages of Arbitrum Optimistic Rollups, we cannot avoid certain trade-offs that might limit the UX. First of all, Optimistic rollups need more data published to Ethereum per transaction than other scaling solutions like Plasma, which makes Arbitrum less scalable than Plasma chains.

In addition, Arbitrum depends on participants to monitor the Rollup contract and validate the transactions to be safe from block producer fraud - no proofs are published, which assumes that aggregators commit no frauds. There is a trust component involved, which leads us to another trade-off that might be the biggest one in limiting the UX.

Optimistic rollups have a much longer withdrawal period than zK-Rollups. The reason is that we need to rely on fraud proofs instead of validity proofs like zk-rollups. The withdrawal period can be up to one week.

Of course, these are just problems - and problems can be solved. For example, secondary markets can shorten the long withdrawal periods.

Conclusion

Optimistic rollups might solve the gas fee problem in the medium and long term, and Arbitrum is one of the most promising projects building them.

Arbitrum has certain advantages over competitors like Optimism. For example, Arbitrum is completely EVM compatible because the Arbitrum toolchain reads developers Solidity smart contracts and rewrites them automatically. This is not as easy with Optimism.

All in all, Arbitrum will deliver a private and secure scaling solution, which might launch very soon!

Are you ready to go layer two?


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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.


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