What is Arbitrum and why do we need it?
Well, in the last twenty-four hours, Ethereum cleared 1.2 million transactions worth $4.5 billion. The dollar value of the average transaction was $3,730 and the average fee was $3.53. Paying $3.53 to send $3,730 isn’t a big deal, the problem is that sending a $10 transaction can also cost $3.53.
The Ethereum base layer can currently only scale to about 15 transactions per second (TPS), so when network usage is high the fees can get prohibitively expensive. If it is going to maintain the status of the world’s preeminent decentralized smart contract platform, Ethereum has to scale so that everyone can afford to use it.
All About Arbitrum
Arbitrum is an optimistic rollup which is a type of Ethereum layer two scaling solution. And because Arbitrum also depends on Ethereum for security, the two networks are very closely linked.
In the next section we’ll provide a simplified explanation of how Arbitrum works. However, to really understand it you’re going to need a full pot of coffee and a couple of hours of study. Arbitrum is a complex protocol that’s been in development for several years, it isn’t a rickety DeFi project that got slapped together over a Red Bull-fueled weekend.
How does Arbitrum work?
Arbitrum takes data storage and computation and moves it off of the Ethereum mainchain. By processing transactions in a separate environment, via the ArbOS, Arbitrum can clear transactions more quickly and it’s not affected by network congestion on Ethereum. Arbitrum transactions are expected to cost about 1/10th or less of what they would cost on the Ethereum mainchain.
To take advantage of Arbitrum’s fast transactions and low fees, an Ethereum user has to send their ETH or ERC20 token to the Arbitrum deposit contract. Once the deposit transaction is confirmed, the user can access their coins from within the Arbitrum ecosystem.
It’s important to differentiate between the Arbitrum and Ethereum ecosystem. Projects that are currently running on Ethereum are not automatically included in Arbitrum. Developers have to build their application into Arbitrum if they want it to work there.
In the beginning only a small subset of all Ethereum dapps will exist in Arbitrum. If a lot of people begin using the layer two application, it will incentivize more developers to move their projects across. As more projects launch in Arbitrum it will improve the ecosystem and make it even more useful as an Ethereum scaling solution.
Withdrawing crypto from Arbitrum
No matter how useful Arbitrum is, at some point most users will want to withdraw their crypto back to the Ethereum base layer. The withdrawal mechanism from Arbitrum to Ethereum is the beating heart of the protocol since it protects against fraudulent transactions.
To get their crypto out, a user must initiate a withdrawal request. Once the request is initiated, it can take up to two weeks for the funds to be released on the Ethereum base layer.
The delay is necessary since it gives Arbitrum nodes a chance to check that all of the transactions are valid and that a user is not trying to exit the protocol having made an invalid transaction.
Once enough time has elapsed the crypto is released from the deposit contract and is returned to the user’s wallet on Ethereum.
To access Arbitrum a user:
- Deposits ETH or an ERC20 token in the Arbitrum deposit contract
- Shortly afterward they can access their crypto in the Arbitrum ecosystem
- Once in Arbitrum the user can interact with any protocol that’s already built there (most transactions will be 90 or 95% cheaper than they would be on Ethereum)
- To get their funds out of Arbitrum a user must submit a withdrawal request. The withdrawal period can be as long as two weeks, after which time the crypto is unlocked from the Arbitrum deposit contract and returned to the user’s Ethereum wallet
Which projects are building on Arbitrum?
One of Arbitrum’s key advantages is that it uses the EVM (Ethereum Virtual Machine) architecture. Because it’s EVM compatible, it’s easy for Ethereum developers to port their dapps over. Most projects can launch using the same code they’re using on Ethereum. This allows them to get their applications up and running in just a week or two.
While the gas fees will be incredibly low for Uniswap on Arbitrum, the exchange won’t inherit any of the liquidity providers from the base layer. LPs will have to decide whether to provide liquidity on Ethereum or on Arbitrum, so gaining sufficient second-layer liquidity could take a while.
A few of the other projects that are launching on Arbitrum include Bancor, Arbiswap and MCDEX. If the Arbirum user base continues to grow, dozens of new projects will build on the protocol in the coming months and years. Eventually, the Arbitrum ecosystem could become almost as diverse as what’s available on the Ethereum base layer.
Does Arbitrum have a token?
There is no Arbitrum token. Arbitrum uses the Ethereum base layer for security and does not have its own token. All transaction fees for Arbitrum are paid in ETH. There is no ARB token and anyone who claims to be selling an Arbitrum token is a scammer.
Arbitrum vs. Polygon
Arbitrum and Polygon (MATIC) are two popular Ethereum scaling solutions. Let’s look at what they have in common and how Arbitrum and Polygon different.
How is Arbitrum different from Polygon
The primary difference between Arbitrum and Polygon is the security mechanism. Arbitrum is secured by the Ethereum base layer and does not have its own token. Polygon is secured by its own Proof of Stake consensus mechanism, where stakers lock up the MATIC token to get a reward for validating transactions.
Transaction fees on Arbitrum are slightly higher than Polygon, although the fees on both networks are significantly cheaper than Ethereum base layer fees.
In terms of decentralization, you can make a good argument that Arbitrum is more decentralized since it’s secured by Ethereum’s widely distributed network of miners (or stakers, once Ethereum staking goes live). Polygon is secured by MATIC staking, which is a smaller pool of capital versus the miners who are securing Ethereum.
Polygon’s main advantage is fast withdrawals. Unlike Arbitrum where withdrawals can take two weeks, withdrawals on Polygon using the Proof of Stake bridge take just three hours.
Have Arbitrum and Polygon already improved Ethereum scalability?
Arbitrum and Polygon haven’t yet noticeably improved the scalability of the Ethereum network. As of June 2021 Arbitrum is still only open to developers, Ethereum users cannot access the network. Ethereum users can access Polygon but there hasn’t been enough traffic yet to make a noticeable reduction in Ethereum’s network congestion.
The low fees we’re currently experiencing on Ethereum are likely the result of two factors. One key factor is that we’re in a mini bear market, which reduces the demand for transactions. The second factor that’s reducing fees is the adoption of flash bots, which are a way for sophisticated traders to pay miners directly without having to bid up gas prices for everyone.
For a deep dive on Arbitrum the following resources should prove helpful:
- Arbitrum in under 10 minutes
- The official guide to Arbitrum
- Arbitrum explained in 7 Tweets
- Bankless Podcast: Arbitrum Launch with the Arbitrum Team
Arbitrum’s Next Year
Arbitrum is the product of years of effort by a dedicated team of developers who believe in scaling Ethereum. It’s a decentralized protocol that doesn’t have a token and inherits all of its security directly from the Ethereum base layer.
It will be exciting to watch Arbitrum in the coming year to see what is Arbitrum exactly, how many users adopt it, which projects decide to build on it, and also to see how the differences between Arbitrum and Polygon play out in their future success.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.