What is Arbitrum?
Created in August 2021 by Offchain Labs by Ed Felten (The former Deputy CTO of the United States and Chief Technologist at the FTC), Steven Goldfeder and Harry Kalodner, Arbitrum is a Layer 2 solution that improves Ethereum smart contracts performance by increasing Ethereum’s transactional throughput through the implementation of rollups. Arbitrum rolls up multiple smart contracts or transactions into one and then submits them to Ethereum for settlement on the Layer 1, known as the Consensus Layer. Another uniqueness of Arbitrum is that it is compatible with the Ethereum Virtual Machine (EVM), allowing dApps developers to integrate with zero modifications. What does this mean? It means that the Arbitrum does not implement the EVM itself. Instead, it implements a compatible subset small enough to be able to identify inconsistent state changes inside of the transactions within the Rollup, when fraud proofs are submitted.
Arbitrum One
Similar to the subject of Part One of our Layer 2 Guide, Optimism, Arbitrum One is a type of technology known as an optimistic rollup. It allows Ethereum smart contracts to scale by passing messages between smart contracts on the Ethereum main chain known as the Consensus Layer and those on the Arbitrum Layer 2 chain. Much of the transaction processing is completed on the second layer and the results of this are recorded on the main chain, which reduces the load on the Ethereum Layer 1, drastically improving speed and efficiency.
It’s optimistic in the sense that any validator is able to post a rollup block and confirm the validity of other blocks, while the term rollup is used to describe how public information can be used to reconstruct a complete history of the chain from an optimized log of events. The Arbitrum protocol ensures that code will run correctly (i.e. as intended) so long as any validator is honest, helping the network resist collusion and other forms of attack. Transactions are sent to the sequencer and then published. Transactions published by the sequencer are considered valid directly on the mainnet and are named optimistic from there. So Optimistic Rollups are optimistic in the sense that they can publish transactions on Ethereum without the need to publish a proof unless there is a dispute over a fake transaction. Transactions broadcast to the mainnet have a waiting period of a certain amount of time to prevent erroneous transactions by sequencers. During this period, a provider can object to the published transactions by submitting a Fraud Proof, forcing the system to make the relevant transaction invalid and penalizing the Sequencer who published the erroneous transaction. The platform also has its own custom virtual machine, aptly named the Arbitrum Virtual Machine (AVM). This is the execution environment for Arbitrum smart contracts and exists above the set of smart contracts that interfaces with the Arbitrum chain known as the ETHBridge. Ethereum compatible smart contracts are automatically translated to run on the AVM.
Arbitrum Nitro is an upgrade to the Arbitrum One L2 which replaces the custom-designed AVM with a Web Assembly (WASM) target that will take care of fraud proofs. That means the L2 Arbitrum engine can be written and compiled using standard languages and tools, replacing the custom-designed language and compiler used in previous Arbitrum versions. This will also make the entire system more compatible with EVM. Another change is that EVM-emulator is being replaced by Geth which is the most run Ethereum client today. This upgrade will be rolled out seamlessly and is estimated to increase execution speeds by 20-50x and considerably reduce transaction costs.
Arbitrum Nova and AnyTrust
Separate from Arbitrum One, the optimistic rollup Layer 2 from Arbitrum, Offchain Labs has also announced that it is launching Arbitrum Nova, a separate chain built using AnyTrust Technology.
Nova is our new chain built on top of our AnyTrust technology, whereas Arbitrum One is our existing chain built on our optimistic rollup technology. The key technical differentiator is that whereas Arbitrum One puts all transaction data on Ethereum all the time, Nova makes use of a data availability committee. In doing so, Nova achieves significant cost savings by first sending the data to the committee and only falls back to putting data on-chain if the committee fails to do its job. Nova is an entirely new chain with a different set of assumptions and is designed for gaming, social applications and more cost-sensitive use cases. - Offchain Labs
Nova is fully EVM compatible, and once Arbitrum One migrates to Nitro as outlined in the section above, developing on both chains will feel exactly the same for developers. As for how the chains operate, there are two key differences.
Firstly, with Arbitrum Nova there is now a minimal trust assumption added to the process of handling transaction data — specifically an assumption that at least two committee members are honest. Instead of the sequencer batching and posting all calldata to L1, it shares data with the committee. The committee then signs Data Availability certificates (a.k.a. DACerts) for batches of transactions and only these certs are posted to L1, which results in much smaller storage requirements on the base layer.
AnyTrust operates by a committee of nodes and only needs a minimal assumption of how many committee members are honest, rather than a byzantine fault tolerance (BFT). The Committee is responsible for the continuous availability and use of data. Suppose there are 20 committee members and at least two of them are honest. If 19 out of 20 committee members sign that the data is available, it is understood that at least one of the honest members has signed that the data is available, and the data is considered correct. But what if all or part of the committee does not signify that the data is available? In this case, AnyTrust works like a Rollup until the committee is honest again, using a “Fallback to Rollup” feature. The need for honesty of 14 out of 20 members in standard BFT chains has been reduced to 2 out of 20 with the fictionalized AnyTrust chain.
Secondly, and most appealing to developers, as a result of the using the DAC, transactions on Nova will have significantly lower transaction fees compared to Arbitrum One. While Arbitrum One is already up to 97% cheaper than Ethereum for many transaction types, Nova will significantly lower than Arbitrum One’s cost. This makes Nova is perfect for projects with cost-sensitive, high transaction volume expectations like play to earn games that frequently mint new items or currency or have a high level of micro-transactions or social projects with many different levers for on-chain interaction. As these types of projects scale, the need to drive transaction costs even lower becomes a top priority, and having a chain that supports that kind of growth is what we are looking to achieve with Nova. Of course, as Arbitrum Nova matures we’ll continue to add improvements that will drive costs down even further.
Early Adoption
Although Arbitrum is fairly new and does not yet have a native token incentivizing people to use the system, Arbitrum is the largest Layer 2 in terms of Total Value Locked within the Ethereum Ecosystem, and is also the largest contributer of fees to Ethereum for its security. As of writing, Arbitrum One contributes approximately $23,000 in daily fees to Ethereum for running on top of it.
The numbers also show that Arbitrum is currently generating more transaction fees on its network than many Layer 1s with market caps well over $1 Billion, such as Cardano, Dogecoin, Near, and Polkadot.
Looking Forward
Despite this remarkable growth of Arbitrum, it should be noted that the protocol is not decentralized, as currently the sequencer is centralized (though the team says it is also trustless) and there are risks that users should be aware of, and many of these risks arise from the current centralization of the network, such as downtime and censorship. That said, the team has made it known that the plan is eventually to decentralize the sequencer and make the network fully decentralized.
“Decentralizing the sequencer of the Arbitrum protocol has been a long-term goal of ours to increase trust-minimization and provide users strong guarantees for minimizing MEV.” Steven Goldfeder, Co-founder of Offchain Labs.
Potential Token?
Although there is no official confirmation, an Arbitrum airdrop makes sense. Validating on Arbitrum is already permissionless and their own token could make rewards more attractive, but the team has openly stated that their intention is to rely on Ether and not a native token for transaction gas. So if the token would not be used for gas within the network, what would it do? Similarly to the Optimism token, Arbtrum token could be used for decentralized governance, which would involve both users and protocols as owners.
Enter: The Odyssey. Arbitrum Odyssey is a multi-week initiative for exploring the Arbitrum ecosystem with exclusive NFTs as rewards. Of course, no Arbitrum airdrop is promised. But understanding that the NFTs act as a sort of proof that you have used the Arbitrum Ecosystem, and understanding that it would be quite easy to filter wallets by those who have earned the NFTs and those who have not, it would make sense that The Odyssey is a wallet farming tactic to identify who to airdrop future tokens to.
You can learn more about the tasks you can complete and later claim an NFT via Galaxy. Keep in mind that there is a cost associated with completing these tasks, and there is no guarantee of an airdrop.
Not financial, legal or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. All opinions expressed are solely those of the individual author. This newsletter is not legal advice and does not create an attorney-client relationship. This newsletter does not constitute tax advice. Talk to your independent attorney and/or accountant for any questions specific to you. Always do your own research and use caution when interacting with smart contracts or the blockchain.