The biggest trend in blockchain technology is decentralized finance (DeFi). Many people believe this will take over traditional finance. The DeFi app (DApps), powered by smart contract, allows for permissionless financial operations, such as stablecoin trading or decentralized lending. Yield farming, DEX, Decentralized exchanges, DeFi insurance and liquidity mining. All of these can be done within a peer to peer network, without intermediaries. The Ethereum blockchain is the foundation of this entire DeFi ecosystem. It processes billions of transactions per year, powers nearly 3,000 DApps and holds $107 billion total value (TVL). Ethereum’s exponential growth brings about scalability issues, and it seems that even Ethereum 2.0 won’t be scalable enough long-term. Because the Ethereum network only supports 15 transactions per minute, the transaction times are limited and transactions get more frequent, so gas fees can increase during times of congestion.
Vitalik Buterin and his team believe that the Ethereum 2.0 upgrade, the shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS), can address Ethereum’s scalability, enabling Ethereum to handle 1,000s of transactions per second. Even though the update won’t be complete until late 2022 there are many other methods of scaling Ethereum. Sidechains and Layer 2 networks can be built over Ethereum as a Layer 1 network. This will allow it to enhance its capabilities.
The Arbitrum network, an Ethereum Layer 2 (L2) solution is another example. It also relies on Ethereum to protect its users. Learn everything you can about Arbitrum and its Wallet.
What exactly is arbitrum?
Optimistic Rollup
Many innovations such as Sidechains scaling Ethereum and Rollups were developed to lower transaction fees and reduce time on Ethereum’s network. They are becoming increasingly popular, as the total value locked in layer 2 protocols (TVL), is at its highest ever high.
Sidechains are a way to scale Ethereum. They create separate blockchains, which run in parallel with the Ethereum mainnet and operate separately. Security of their blockchains is a challenge for Sidechains. This requires extra effort. Rollups can avoid the challenge of securing their blockchains by borrowing security from the Ethereum layer 1. This creates layer 2s which are more independent and effective ecosystems, built on top Ethereum and sharing its security.
Two types of rollups exist: Optimistic and Zero-Knowledge. Although both rollups aim to scale Ethereum by processing transactions in layer 2 and submitting them back to Ethereum with the results, there is a difference in the way they validate transactions.
In an optimistic rollup framework, transactions are “rolled up” or bundled together and executed away from the leading Ethereum network before sending the updated transaction data back to Ethereum. These transactions are considered true and valid unless proven to be fraudulent, similar to the justice system, which relies on the principle of “Innocent unless proven guilty.”
Within seven days, any node on the blockchain can invalidate or challenge the rolled up transactions. If the block and the transactions are proven wrong or fraudulent, the block’s bond is slashed; instead, if proven to be true, the challenger node’s bond is slashed from the main blockchain. The proposed rolled up block is added to the Ethereum main blockchain if there aren’t any challenges in seven days.
Arbitrum Rollup
Arbitrum, a Layer 2 network of blockchains, deploys rollup scaling solutions to the Ethereum Layer 1 network. ArbOS is the operating system that handles transactions on Arbitrum, but the Ethereum network governs security and safety. Arbitrum networks use the best Layer 1 as well Layer 2 scaling methods. This greatly improves transaction scalability, reduces transaction fees, and provides security and safety for the Ethereum network.
Arbitrum was built on Ethereum. It supports the same Remote Procedure Call interface. It is very similar to Ethereum in terms of the developer experience. Arbitrum was also designed to make it easier, quicker, and cheaper for developers to build decentralized apps (DApps)
Arbitrum has a unique characteristic: it takes only a few rounds to solve disputes or challenges. Arbitrum has Multi-Round Interactive Optimistic Rolleup as well as on-chain smart contracts referees for challenges.
Arbitrum History and its Advantages
OFFCHAIN LABS was the startup that launched Arbitrum, a blockchain-based platform dedicated to creating innovative scaling solutions for Ethereum. Offchain Labs, Inc. was founded by Princeton University’s Research Department and is located in New York. They focus on enterprise-grade software and mass scaleability. Offchain Labs was founded in 2018 by Steven Goldfeder and Harry Kalodner. It offers 13 technologies services and products including Google Fonts and Google Analytics.
Arbitrum, which has over 500 DApps, is the biggest L2 per Total Value Locked since its inception. Arbitrum’s Ethereum Virtual Machine allows developers to easily migrate DApps to Arbitrum from Ethereum. Not all DApps that were built on Ethereum will work with Arbitrum. In some instances, it may be necessary for developers to make changes to their apps and projects to allow Arbitrum to function properly.
The Arbitrum network hosts some of the most important DApps, including AAVE, UNISWAP and 1INCH.
Arbitrum Pros
- Transaction costs can be reduced by between 90 and 95 percent when compared with the Ethereum network.
- It provides Trustless Security – smart contracts can be easily verified and executed.
- It is a scaling solution for Ethereum that makes DApp development easy, quick, and secure.
- EVM compatibility allows developers to release their products across both ecosystems, and have them accessible from one of the preferred ones.
- Decentralized finance makes it much easier for people looking for alternative financial models to traditional banking.
- There is no gas tax
Arbitrum therefore has the largest L2 per Total Value Locked. As of today, Layer 2 solutions’ TVL stands at approximately USD5.7 billion. Arbitrum shares are valued at more than 50% of that TVL. This is a testament to the trust Arbitrum ecosystem has earned from Ethereum users.
Arbitrum Services
Arbitrum’s low gas costs have allowed the ecosystem to grow rapidly ever since it was launched. Arbitrum is a popular choice among Layer 2 solutions due to its security and ease of migration. Arbitrum One Portal allows for the full ecosystem to access it. So let’s look into the services Arbitrum offers.
Arbitrum DApps
DApps created using Arbitrum, like Ethereum are written using Solidity and then compile using the open-source Arbitrum editor. Arbitrum DApps use only the mainchain when starting and for currency transfer. All other interactions take place off-chain. It is therefore fast and easy to complete and return. Arbitrum DApps maintain high privacy levels with cryptographic hashes of DApp state being posted on-chain. This means that only the participants who validate the execution of a DApp have information about the DApp’s code and storage. Developers can also choose their own validaters and decide what information they share with users.
Arbitrum boasts one of largest collections of popular DApps like UniSwap. AAVE.ANKR. DAI. MakerDao. Yield Protocol. Yearn.Finance. Arbitrum’s many DApps ensure that you are never out of options for crypto-related needs.
Arbitrum fees are lower than those on Ethereum. This makes DeFi adoption much easier and more widespread. DeFi serves two purposes: to empower and to make financial services more accessible to everyone, not just those with the necessary technical skills or financial means. Arbitrum allows it to be done in a way that is not possible with any other Layer 2 option.
NFT Marketplaces
NFTs are taking the world by storm – almost all major companies worldwide have announced that they are looking to integrate NFTs into their ecosystem. This includes tech giants Meta and Google. Arbitrum gives you access to the upcoming NFT markets like Stratos and TofuNFT. This is an alternative to expensive marketplaces like OpenSea. It allows new artists to monetize art and not have to invest large sums of cash upfront.
Bridges and On-Ramps
The issue of bridging is a major problem when migrating tokens, projects, DApps, and other Blockchains to Ethereum. With more products being released and interconnected, bridges between different blockchains are becoming more crucial. In the DeFi space tokens that were built using one platform often have to be transferred to another. Arbitrum can access almost all major bridges and on-ramps, including Binance, Anyswap. Bybit. BoringDAO. Crypto.com. FTX. These bridges allow for seamless transaction and transition between different tokens or projects on various blockchains. Arbitrum Rollup gives users freedom to place their crypto wherever they like without restrictions.
Mobile wallets
To protect your crypto from hackers and secure your private keys, it’s important to select a proper cryptocurrency wallet. Many wallets support Arbitrum. These include MetaMask (Coinbase Wallet), Huobi Wallet and Trust Wallet. CoinStats Wallet does not currently support Arbitrum. Since Metamask is the most popular wallet in use, let’s learn how to connect Arbitrum to your Metamask wallet in our Arbitrum tutorial.
Add Arbitrum Metamask to Wallet
- Navigate to Metamask Extension in your web browser.
- Please click on Ethereum MainnetAt the top of Metamask wallet.
- Choose Add Network.
- Please enter the details below
You can also connect arbitrum to the wallets you choose.
Tool
Arbitrum has a variety of tools that allow developers to develop, migrate and maintain large numbers of projects. Chainlink, Etherscan and Tether are some of the most used tools that allow developers to build products on Arbitrum’s network.
Cryptotaxes
While trading in cryptocurrencies, it’s essential to understand that you might be required to pay taxes on crypto, depending on your location. Just like any property transaction, cryptocurrency transactions can be taxed by law. If you don’t have the time or skills to calculate how much taxes are due, you can use the CryptoTaxCalculator or Koinly on Arbitrum to help you quickly calculate your taxes and continue trading in peace.
Node providers
The same trusted node providers can be used to interact with Arbitrum One, the RinkArby testnet and other networks as Ethereum. Alchemy is one of many major node suppliers that can help you build on Arbitrum. You can find detailed information about setting up an account, and how to interact with networks on their websites.
Arbitrum comes with risks
Arbitrum, a layer-2 scaling solution for smart contracts that can be used to create low-cost smart contract with high throughput and security in an easy and trustworthy manner is called Arbitrum. With a lower transaction fee than Ethereum, users can deploy smart contracts and interact with them. Arbitrum, even though it is a popular platform, has some limitations and dangers. These include:
- Arbitrum doesn’t have its own native token; instead, it uses Ethereum, which can be viewed as a disadvantage. Since the system hasn’t issued its own token, new people and developers lack the incentive to use it. This project requires more decentralization. It would be easy to create a native token.
- OffChain Labs, and information from Arbitrum One Portal indicate that the system remains in Beta Mainnet. The system’s central nature means that it will remain in Beta Mainnet until decentralized.
- The long challenge period that is required for transactions using Optimistic or Arbitrum Rollup solutions, means funds will be held for several weeks as the challenge continues. It takes many individuals a while to withdraw tokens.
- Even though Arbitrum uses Ethereum’s security measures, it’s not immune to malicious attacks and hacks.
Conclusion
Arbitrum One gained immense popularity with thousands of projects utilizing the network since the beta launch in May 2021. Developers can use the Arbitrum Rollup technology to deploy DApps using familiar programming languages and tools at much less cost than Ethereum. Arbitrum One has a high throughput, which means transactions can be verified much quicker.
To build decentralized apps, there are many benefits to using Arbitrum over Ethereum. These include the security provided by the consensus algorithm and the ease of use for developers.
Arbitrum is an important player in the cryptocurrency market. It will grow more as Layer 2 solutions are discovered due to Layer 1 issues. Arbitrum may be a little less centralized than it should, however the Arbitrum developers are trying to get it fully decentralized and self-sustainable. Arbitrum could reach even greater heights if it creates its native token. As with all crypto or blockchain projects, arbitrum investing comes with risk. Do your research and get your advice. Only invest in Arbitrum what you are able to afford.