Arbitrum is a layer 2 (L2) chain built on Ethereum that helps solve the congestion problem on the Ethereum main net. The network was developed by a New-York based company called Offchain labs.
The Arbitrum chain is a scaling solution used to confirm transactions on the main Ethereum network. The chain does this by recording Ethereum transactions and then relaying them to the Ethereum main chain at a later point. By doing this, it solves the congestion problem on the main net.
History of Arbitrum
Arbitrum was founded by Offchain Labs in 2018. Offchain Labs itself was founded in 2018 by Ed Felten, Harry Kalodner, and Steven Goldfeder.
Felten was a Computer Science and Public Relations professor at Princeton before he started building Offchain Labs. He also served as the Deputy Chief Technology officer of the White House between 2015 and 2017. After leaving his position at the White House, Felten went on to found Offchain Labs.
According to Felten, the idea behind Offchain Labs came to him while he was an academic at Princeton. He says that he’d started working on it back then, and only started doing it full-time after leaving his White House position.
Since Felten started Offchain Labs, the company has received a lot of support. It has gotten investment from crypto juggernauts such as Coinbase Ventures, Panthera, and Blocknation since its inception.
But what is Arbitrium, and how does it work?
How Does Arbitrum Work?
A big problem of the Ethereum blockchain is speed. The blockchain can only facilitate a certain number of transactions at a time, and when this number is exceeded, other transactions form a queue. This could lead to some inconvenient situations.
For example, some dApps, such as Farmers World require transactions to be completed in real-time. If these transactions aren’t completed in real-time (or a close approximation), they could render the dApp worthless. The congestion on Ethereum means that these transactions could be delayed by a considerable period of time.
Such dApps now have to endure that delay because of Ethereum’s popularity. There are more dApps on Ethereum now, and transaction delays have only grown. That means more transactions are being loaded into the chain, and it’s taking even more time for these transactions to be completed.
There are two proposed solutions for this congestion problem on the Ethereum chain. The first solution to this problem is to embrace sharding. That is, the Ethereum chain will be split into multiple shards, which should theoretically increase the capacity of the chain to complete transactions.
However, sharding the Ethereum network is a long and complicated process. While it already exists right now, it’s not yet at a scale where it will necessarily impact transaction time. This means that dApps that want faster transaction time need to look for another immediate solution.
The second solution for this decongestion is off-chain data confirmation. This means relaying the smart contracts to an off-chain solution that confirms it and then adds it to the Ethereum chain at a later date.
This method of confirming transactions is called roll-up. According to Ethereum, rollup solutions perform transactions outside the Ethereum blockchain and then post the data to the chain where consensus is reached.
This means that certain transactions can be confirmed in real-time, while consensus over the transaction will be reached on the Ethereum main chain at a later point. Since the transaction data is included in the layer 1 blocks, the transactions retain an equal level of safety as directly confirmed transactions.
These rollups are performed by layer 2 chains, and Arbitrum is one such chain.
The Ethereum Merge and Gas Fees
In late 2022, Ethereum took a huge step towards sharding by completing the Ethereum merge. This merge was theoretically supposed to reduce congestion on the Ethereum chain and make it easier to confirm transactions through it. However, Ethereum’s congestion problem has remained despite the merge. This means that Arbitrum and layers like it will probably become even more popular.
Arbitrum doesn’t just solve the decongestion problem on Ethereum, it also solves the gas fees problem too. The bigger the congestion on the ETH network, the higher the gas fee one has to pay for quick transactions. However, Arbitrum solves that problem because contracts are now validated in batches.
The Optimistic Arbitrum
There are two types of transaction rollup chains, and they differ because of their security models.
The first is the zero-knowledge rollups. The zero-knowledge rollups perform the computation of transactions off-chain and then submit it to the layer 1 chain through a validity proof. The summary data submitted to the chain from the rollup only defines the changes that should be made to the Ethereum state and cryptographic proof that those changes are correct and valid.
Optimistic rollups, on the other hand, submits the data assuming it is correct by default. Hence, the validity of the data is only double-checked if there’s someone challenges it. To ascertain the validity of the transaction, a fraud-proof is automatically run on the changed data.
Arbitrum is an optimistic rollup chain, which means that data is submitted with the assumption that it is valid by default. Because of Arbitrum’s optimistic data outlook, it has important advantages over zero-knowledge layer 2 chains.
For one, optimistic rollups are cheaper than zero-knowledge solutions. The gas fees are often lower per transaction batch, and the network also has lower off-chain computation costs.
Secondly, optimistic rollups are directly compatible with the Ethereum Virtual Machine (EVM). This means that even layer 1 applications can easily connect to Arbitrum and enjoy faster confirmation times.
The Arbitrum Coin?
Layer 2 solutions usually have native coins that are used to compensate validators. However, Arbitrum doesn’t have a native coin. According to Ed Felten, the co-founder of Offchain labs, there is no plan to launch a separate Arbitrum token.
This means there is no direct way to invest in Arbitrum. However, there’s been a few changes to the position of Offchain Labs when it comes to minting an Arbitrum Coin. In April 2022, a cofounder of Offchain labs, Steven Goldfeder, posted a tweet that insinuated that an “Arbi” coin is in the works. This tweet was most likely a response to Arbitrum’s competitor, Optimism, releasing an OP token.
However, it may not be advisable for Arbitrum to drop a token right now. The bear market is still ravaging the crypto ecosystem despite Bitcoin’s recent recovery, and things are still a bit uncertain. While no one can say what Offchain Labs will do for sure, it’s likely that they hold off any potential token drop until the market recovers.
On the Flipside
- Vitalik Buterin has argued that layer 2 chains may be the permanent solution to Ethereum’s congestion problems, rather than a stopgap.
- Arbitrum doesn’t have a token. This means that it’s impossible for small retail investors to invest in it.
Why You Should Care
Layer 2 chains like Arbitrum are one of the most exciting developments in crypto in recent times. This is because they could be the permanent solution to Ethereum’s congestion problem. Since Ethereum’s congestion problem is a big stumbling block to crypto adoption, solving it could be big news for the crypto ecosystem.
Arbitrum is a layer 2 chain built on the Ethereum main net. The goal of Arbitrum is to solve the congestion problem on Ethereum by computing transactions off-chain and confirming the transactions on Ethereum in batches at a later date. Chains like Arbitrum that store data off-chain are called layer 2 scaling solutions.
No, Arbitrum doesn’t currently have a token. While there might be a token in the works, the chain currently doesn’t have a native coin.
Since Arbitrum does not currently have a token, it’s impossible to invest in it. Retail investors have no direct exposure to the chain and cannot buy into it from any exchange. Even if Arbitrum does eventually release a token, it’s important to carry out extensive research before investing.
The cryptocurrency market is an extremely volatile one, and investing in it can be very risky. That’s why potential investors need to carry out a lot of research before buying any token.
Arbitrum does not have a token, so retail investors cannot invest in it. However, if it ever has a token, it could be a good investment because it has a strong use case. It is important to remember that the crypto market is extremely volatile.
A strong competitor could erase Arbitrum’s entire market in mere months. Something could even be wrong with Arbitrum’s tech itself. That’s why it’s important for retail investors to only invest after performing their due diligence.