What is Arbitrum? The Layer 2 Concept for Ethereum
How Arbitrum helps the Ethereum blockchain solve its biggest problems
Of course, anyone interested in Crypro and blockchain applications knows that the Ethereum blockchain has become increasingly popular in recent years. However, the project still has a few weaknesses clinging to it that are challenging this triumph. However, smart Layer 2-based solutions like Arbitrum show new perspectives – also for investors.
What is behind the Layer 2 application?
For the implementation of smart contracts, Ethereum has become the most important blockchain by far. The millions of transactions in wallets and applications every day represent a huge stress test for the network of the second largest cryptocurrency. Even with the upgrade known as Ethereum 2.0, scaling has not been solved. Layer 2 solutions can compensate for this weakness.
The open source solution Arbitrum can be understood as a higher level (Layer 2) to which the transactions are outsourced. This not only brings relieve to the main blockchain so that more and more people can use Ethereum applications. Another advantage of Layer 2 transactions is that they are much faster and at the same time cheaper than on the main net.
There are different approaches behind Layer 2 technologies. The characteristic feature of Arbitrum is the Optimistic Rollups. These provide a kind of seperation of concerns between the Ethereum main chain and the Layer 2 side chain. While Ethereum is primarily used to ensure the correctness of the results, the actual transaction processing takes place primarily on the second layer.
The layer 2 solution allows each verifier to create a rollup block and in turn confirm that other blocks are valid. The process ensures that code is executed as intended. In this way, it provides protection against price fixing and other manipulation attempts.
How did Arbitrum come about and what is its significance?
The Arbitrum project was the brainchild of two ambitious PhD students, Harry Kalodner, Steven Goldfeder, and computer science professor Ed Felten. The three are united by the goal of developing the most robust Layer 2 solution possible. To this end, they founded the company Offchain Labs in 2018. Over the years, the developers managed to win over more and more people to their cause and steadily expanded their team. The list of well-known investors has grown longer and longer over time. It includes, for example, Redpoint Ventures, Pantera Capital or Mark Cuban.
Not only the financing round in September 2021, which raised more than 100 million dollars, underlines the quality of the project, which is anything but a niche player. In a very short time, it has become the largest layer 2 solution on the market. This development is not likely to stop in 2023, primarily because of the clearly more favorable transaction costs, which are only about one tenth of a conventional Ethereum transaction. If you add up the transactions of the two large Layer 2 developers Arbitrum and Optimism, you arrive at a figure of 1.4 million transactions daily. In contrast, only about 1.1 million transactions are processed per day via the Ethereum mainchain.
What are the areas of application for Arbitrum?
Arbitrum applications can basically be interesting anywhere the Ethereum blockchain is used. Lowest possible fees and a high transaction speed are advantages that few users voluntarily forgo. The layer 2 solution for Decentralized Finance (“DeFi”) could mean a boost, as this application area is largely based on the Ethereum network.
With the Nova update, Offchain Labs has also developed a chain specifically for social and gaming apps. Reddit, for example, is one of these apps. The well-known Internet forum uses the new technology for its community posts. Diverse applications like these make it easy for users to benefit from the possibilities of the Ethereum blockchain in ever greater numbers.
To assess the attractiveness of the Arbitrum ecosystem, it is also worth looking at the NFT space, where many new projects have emerged in recent months despite a cautious market environment. If interest in the non-fungible tokens picks up and gas prices on the Ethereum mainnet pick up, there is a strong case to be made that NFT platforms could increasingly opt for the low-cost arbitrum applications.
What are the priorities in the development of Arbitrum?
Even before the project went live on August 31, 2021, it enjoyed widespread interest. This can be seen in the more than 400 applications that were whitelisted before the launch.
A significant step for further development was the Nitro update in August 2022. Until then, the Layer 2 solution only allowed throttled transaction throughput. This restriction, which was intended to ensure the stability and performance of the network, was lifted with the Nitro update.
Now, not only are significantly more transactions possible, but also more compressed and thus cheaper ones. The bulk of the upgrade consists of a new prover, which ensures that Arbitrum applications can also be written and compiled with standard languages. This makes working with them much easier and more intuitive.
An important piece of the puzzle for reducing costs is AnyTrust technology, on which the Nova update is based. Thanks to it, it is no longer necessary to send data to the mainnet. This benefits applications with a high transaction throughput in particular.
The rollup technology is still very young and faces challenges, which is reflected in regular updates. However, the development teams are confident that they can overcome all these challenges and decentralize the project more and more in the future. Incidents like the one on September 14, 2021, when the Layer 2 application was down for about 45 minutes due to an error while demand was high, should then be a thing of the past.
How can I invest in Arbitrum?
At the moment, it is not yet possible to invest directly in the Arbitrum project. The developers have so far concentrated fully on advancing the Layer 2 solution, while not attaching any particular importance to their own token. However, Arbitrum airdrops are planned for the future, through which users could directly participate in the new cryptocurrency for the first time.
Until that happens, however, there are already ways to invest indirectly in the Arbitrum ecosystem today. One area that has been gaining momentum lately is DeFi. If you are interested in decentralized financial ecosystems and want to buy assets on Arbitrum using your MetaMask, the DFX Exchange is the place to go.