One of the most important trends in blockchain is DeFi. Many believe that it will replace traditional finance. Smart contracts enable DeFi apps (DApps), which are powered by decentralized finance, permissionless financial operations like efficient stablecoin trade, Yield Farming or Decentralized lending, DEX (Decentralized Exchanges), DEX insurance, liquidity mining and other such functions to take place within a peer network. 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. The Ethereum network can only process 15 transactions per second. As transactions increase, gas fees and transaction times will also rise during network 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, or Layer 2 networks built on top Ethereum can be used to complement and increase the network’s capacity.
One such Ethereum Layer-2 solution (L2) is the Arbitrum network. This layer relies also on Ethereum security. Continue reading to find out everything about Arbitrum, and the Arbitrum wallet.
What exactly is arbitrum?
Optimistic Rollup
Some innovations like Sidechains and Rollups to scale Ethereum were introduced to help reduce transaction fees. 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. Layer 2s are now more efficient independent ecosystems that build on Ethereum, sharing their security.
Rollups can be either optimistic or 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 is Layer 2 Blockchain and employs optimistic rollup scaling strategies over the Ethereum Layer 1 network. The Arbitrum network’s operating system is called ArbOS. However, the Ethereum network still governs the transaction security and safety. Arbitrum uses both Layer 1 and Layer 2, the most advanced scaling options. This dramatically improves the scalability and security of transactions, while also reducing transaction fees.
Arbitrum, which is built upon Ethereum, supports the same Remote procedure Call (RPC), interface. The user experience for developers is identical to Ethereum. 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 employs Multi-Round Interactive Optimistic Rollerup (MRIO) and smart contract referees on-chain in the event of challenges.
Arbitrum History and Advantages
OFFCHAIN LABS was the startup that launched Arbitrum, a blockchain-based platform dedicated to creating innovative scaling solutions for Ethereum. Offchain Labs, Inc. is a New York-based startup that originated from Princeton University’s research division. It focuses on enterprise-grade apps and mass scaling. 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 is now the most popular L2 per Total Value Locked and has more than 500 DApps on it since its initial launch. Arbitrum utilizes Ethereum Virtual Machine (EVM) which makes it simple for developers to move their DApps between Ethereum and Arbitrum. It is important to remember that not all DApps created on Ethereum work automatically on Arbitrum. Developers may need to change their apps or projects in order to be able to use Arbitrum.
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.
- This scaling solution makes DApp development simple, secure, and fast.
- Developers can launch products in both environments and then access the other via EVM compatibility.
- This makes decentralized financing much more available to those who are looking for an alternative to traditional finance.
- There is no gas tax
Arbitrum therefore has the largest L2 per Total Value Locked. The TVL for Layer 2 solutions stands at around USD5.7 billion. Arbitrum’s share of this TVL is USD2.90 billion. This is more than half of the TVL. This is an indication of the trust that Arbitrum ecosystem users have shown in it.
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 is the gateway to the whole ecosystem. So let’s look into the services Arbitrum offers.
Arbitrum DApps
DApps that are built with Arbitrum use the Solidity programming language. They then get compiled using an open-source Arbitrum compiler. Arbitrum DApps typically only use the main blockchain when they are launched and currency transfers in or out of Arbitrum. Most interactions, however, take place off-chain. This allows for fast turnaround times and completeness. Arbitrum DApps maintain high privacy levels with cryptographic hashes published on-chain of the DApp’s state. 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 offers one of the most extensive collections of DApps such as UniSwap and AAVE. Arbitrum has many other DApps that will ensure you have all the crypto solutions you need.
Arbitrum is faster than Ethereum and scales smart contracts based on Ethereum. Arbitrum’s fees are also lower than Ethereum. DeFi can be adopted much quicker and wider thanks to the platform. 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
Bridging is one of the biggest problems when migrating project tokens, DApps etc. from Ethereum to different blockchains and Layer 2. As more products and services interact, the importance of bridging between blockchains grows. DeFi tokens often must migrate from one system to the other. Arbitrum can access almost all major bridges and on-ramps, including Binance, Anyswap. Bybit. BoringDAO. Crypto.com. FTX. This makes it easy to transfer tokens between projects and blockchains. Arbitrum Rollup allows users to freely and easily place their crypto where they wish, without limitations.
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 has not been made available for Arbitrum yet. 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
In the same way, the Arbitrum network can be connected to any wallet of your choosing.
Tools
Arbitrum offers a wide range of tools to help developers develop and migrate projects. Chainlink, Etherscan and Tether are some of the most used tools that allow developers to build products on Arbitrum’s network.
Crypto taxes
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
You can interact with Arbitrum One or the RinkArby testingnet using the same node providers that you use on Ethereum. Alchemy and ANKR are some of the most popular node providers. These include Infura, Quicknode (and others), Quicknode (and others), etc. You can find detailed information about setting up an account, and how to interact with networks on their websites.
Risks associated with Arbitrum
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-to use manner. Users can use it to create and interact with smart contract with low transaction fees, as compared with Ethereum. Arbitrum’s popularity is not yet established, so there are still some disadvantages and risks associated with its use. 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 reports that the system is in Beta Mainnet according to the information available on Arbitrum One Portal. 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. Many people have to wait for weeks before their tokens can be released.
- Even though Arbitrum uses Ethereum’s security measures, it’s not immune to malicious attacks and hacks.
Conclusion
Arbitrum One’s mainnet beta launched in May 2021. Since then, hundreds of projects have been building on it. The innovative Arbitrum Rollup technology allows developers to create DApps in familiar languages and with the same tools as Ethereum. Arbitrum One’s high throughput means that transactions can be confirmed faster.
You can use Arbitrum to create decentralized applications instead of Ethereum for many reasons, including the security and ease-of-use of the consensus algorithm as well as the low development costs and friendliness of 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 is still a little more centralized than its developers want it to, but the Arbitrum team are determined to make it completely decentralized so it can be self-sustaining. 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.