Arbitrum: Enhancing Ethereum’s Speed and Scalability

How Can Arbitrum Boost Crypto Scalability?

Despite the emergence of several promising Layer-1 blockchain networks, Ethereum remains the most popular blockchain protocol in the world in terms of usage and breadth of decentralized application (dApp) offerings. However, in part because of its popularity, Ethereum is often beset with high gas fees, transaction bottlenecks, and other on-chain inefficiencies that can sometimes inconvenience users and hinder innovation. The scalability constraints of Ethereum’s Layer-1 blockchain — many of which are being addressed in its Ethereum 2.0 update — have given rise to a variety of Ethereum Layer-2 blockchain projects. Ethereum Layer-2 solutions are designed to help scale the ecosystem by alleviating the Ethereum mainnet’s computational workload while taking advantage of its robust, decentralized security mechanisms.

One of Ethereum’s most promising Layer-2 solutions is Arbitrum, which is designed to boost Ethereum’s speed and scalability by securely offloading the bulk of the network’s transaction validation processes to a second-layer blockchain. Offchain Labs, the company behind Arbitrum, launched the Arbitrum One mainnet in August 2021, and the project’s $120 million USD Series B fundraising round was backed by a number of prominent investors, including Lightspeed Venture Partners, Polychain Capital, Pantera Capital, and Mark Cuban. Several leading decentralized finance (DeFi) protocols use Arbitrum One, including Aave, MakerDAO, Chainlink, and Uniswap.

Optimistic Rollups via Arbitrum: Scalable Private Smart Contracts

Arbitrum leverages Optimistic Rollups (ORs) to execute batches of Ethereum transactions on Arbitrum’s low-cost, scalable Layer-2 sidechain, which can then be verified and recorded on Ethereum’s mainnet ledger in a more simplified format. Rollups refer to the process of executing transactions initiated on Ethereum’s mainnet on another network, and then recording the results of those transactions on the mainnet. This transaction diversion process is designed to increase Ethereum’s speed and efficiency in significant ways. More specifically, Arbitrum’s ORs allow for:

Effective data compression: Arbitrum treats multiple Ethereum smart contracts as a single object when bridging onto its own chain, which can simplify the rollup process. Further, once these transactions are processed, the only data sent back to the Ethereum mainnet is the transactions’ “calldata,” which contains the hashes of the confirmed rollup blocks instead of the blocks themselves. Since calldata is much smaller than the actual transactions they are derived from, they are easily processed by the Ethereum mainnet.

Optimistic outcomes: Arbitrum’s rollup process is considered “optimistic” in the sense that the transactions processed through Arbitrum are considered valid/truthful at the time of transaction. That being said, any Arbitrum validator is able to post a rollup block and confirm the validity of other blocks, meaning that as long as there is one honest validator involved with a transaction batch, the Arbitrum crypto network will function as intended.

Validator subsets: Developers who decide to run their dApps on Arbitrum can choose their own set of validators to execute their consensus work. This means that a validator may not be involved with any other dApp running on Arbitrum, unlike validators on the Ethereum mainnet, which are responsible for validating transactions for every dApp on the network. In other words, Arbitrum’s localized validator configuration requires less communication between nodes, which results in faster processing speeds and helps the network resist collusion and other common cyberattacks.

While Arbitrum’s Optimistic Rollups can provide several benefits to the Ethereum network, there are some valid criticisms to this type of setup. Perhaps most significantly, there is a lag between when transactions are processed by Arbitrum and when they reach finality on the Ethereum mainnet, and Arbitrum provides a one-week period for transactions to be challenged. This means that transactions in a suspicious bundle can remain in limbo for a week before they’re verified and released, which can significantly inconvenience dApp operators and end users alike in the rare case of a dispute.

AnyTrust: The Arbitrum Crypto Guarantee

The processes outlined above form the basis of Arbitrum’s consensus mechanism, known as AnyTrust Guarantee. In essence, AnyTrust requires unanimous agreement among all chosen validators in order for a new transaction block to get accepted, and even a single disagreeing validator will trigger a re-evaluation of the involved block.

Anyone can become an Arbitrum crypto validator by running an open-source code from their local machine, although only validators who stake ether (ETH) are allowed to propose new rollup blocks. This way, validators who act dishonestly can be penalized by having a portion of their staked funds burned and distributed to honest validators. The required staking amounts for each block changes automatically in order to help ensure that in the event a validator acts dishonestly, the funds recouped through their staked funds will be able to offset the losses of the compromised blocks.

Arbitrum validators who do not stake ETH can still participate in securing the network. These “watchtower validators” do not take part in block formation, but are able to observe this process and alert other validators if they detect any suspicious behavior.

Arbitrum vs. Optimism

Unlike many other Ethereum Layer-2 solutions, Arbitrum does not have its own native utility token and therefore did not conduct a token sale. However, Arbitrum is often compared to other Layer-2 projects and bears some resemblance to Optimism. Both projects utilize Optimistic Rollups and have the same general goal of improving Ethereum’s speed and scalability, but there are a few notable differences between Arbitrum and Optimism.

Arbitrum is based on a fork of Optimism, and as the two projects continue to diverge, their differences will likely grow. That said, both projects utilize similar base technologies, have seen significant success, and adhere much more closely to Ethereum’s underlying design than projects like Polygon (MATIC) and Nahmii (NII).

Native ETH support: Optimism uses wETH, the ERC-20 compatible version of ETH, whereas Arbitrum is designed to offer native ETH support. As a result, Arbitrum is considered to be one of the most Ethereum Virtual Machine (EVM)-compatible rollups. At the same time, Ethereum’s block gas limits don’t affect Arbitrum, since Arbitrum crypto transactions will never be entirely executed on Ethereum’s mainnet. By contrast, the gas fees involved with Optimism are tied to the Ethereum mainnet’s gas limits.

Transaction state execution: Arbitrum features multi-round fraud proofs to verify transactions, meaning it subdivides the disputed transaction block into smaller validation tasks that are then separately resolved on-chain. By contrast, Optimism uses single round fraud proofs, where validators must re-execute a disputed transaction in its entirety.

Speed: The differences in Arbitrum and Optimism’s transaction verification processes have potential impacts on transaction costs and speed, and, generally speaking, Arbitrum has a higher transaction capacity than Optimism, which can translate to better on-chain efficiency in many cases.

Unlocking More Ethereum Layer-2 Potential

Most criticisms of the Ethereum network in regards to scale and speed refer to its current base-layer blockchain and fail to account for Layer-2 solutions like Arbitrum, which have made significant headway in increasing the scalability, throughput, and overall efficiency of the Ethereum ecosystem.

Optimistic Rollups can be an effective way to ensure that Ethereum’s mainchain does not need to verify every detail of every transaction, and that the mainchain can instead function as the central hub of a vast and complex ecosystem. The Arbitrum crypto scalability project is one of the most promising Layer-2 solutions and was designed to unlock more of Ethereum’s potential. Since launching its mainnet, the project has already seen considerable adoption, both among established DeFi players and smaller independent developers.