Arbitrum (ARB) Deep Dive: Infrastructure, ARB Ecosystem and Competitors

Ethereum is a congested highway, with network traffic frequently leading to traffic jams and inefficiencies. Arbitrum, a layer 2 network, serves as an alternative route, allowing users to route their transactions along an uncongested highway that ultimately reaches the same destination. 

In the battle for the layer 2 landscape, Arbitrum emerges as the trailblazer, carving a route for users to traverse the labyrinth of network congestion and high transaction costs. Relying upon rollup technology, Arbitrum enhances the efficiency and accessibility of Ethereum’s ecosystem, making way for more seamless interaction with decentralised applications. Still, in its juvenile stage, the Arbitrum network may grow to become the primary means of execution on the Ethereum network.  

What Is Arbitrum?

Arbitrum is a layer 2 solution built on top of the Ethereum blockchain that employs rollup technology to enhance the base layer’s performance, security, and scalability. Rollups are currently the predominant layer 2 solutions, used to bundle multiple transactions into a single batch that is then compressed and submitted onto the base layer as a single transaction. The batch is then verified by nodes on the base layer using fraud proofs. This approach significantly reduces the number of transactions executed and the amount of data stored on the Ethereum mainnet, decreasing congestion, enabling greater throughput and lowering gas fees for users. By leveraging rollup technology, Arbitrum enables decentralised applications (DApps) to run more efficiently, making them more accessible for users and developers alike. As a result, DApp developers can focus on creating innovative solutions and user experiences, while users benefit from reduced transaction costs and faster processing times.

While most rollups are relatively similar, existing as smart contracts on their chosen base layer (sovereign rollups take exception), they differ depending on their chosen fraud-proof. Zero-knowledge rollups (ZKRs) rely on zero-knowledge proofs, cryptographic techniques that allow a prover to demonstrate the validity of a claim without revealing the underlying information. This approach offers strong privacy and security, while also reducing the amount of on-chain data needed to verify transactions. In contrast, optimistic rollups utilise fraud proofs, an innocent until proven guilty technique where validators are presumed to be honest, and disputes can be resolved during a challenging period. This method allows for more straightforward implementation and can support more complex smart contracts. Although the type of rollup is categorised based on its fraud-proof mechanism, this is somewhat of a misnomer considering that fraud-proofing takes place on the base layer. Nevertheless, Arbitrum is an optimistic rollup solution, which offers a balance of security and efficiency. While ZKRs provide more robust privacy, optimistic rollups can support a wider range of applications thanks to their current compatibility with existing virtual machines, making them a better fit for a diverse ecosystem like Ethereum. 

The necessity of technologies like Arbitrum stems from the limitations of current blockchain networks, such as congestion, high gas fees, and scalability issues. As the Ethereum network continues to grow in popularity, its capacity to handle large volumes of transactions has become a critical concern. Layer 2 solutions, like Arbitrum, help alleviate these problems by offloading some of the transaction processing to a secondary layer, which then communicates with the base layer. This approach allows for increased throughput and reduced fees, enabling a more user-friendly experience and making blockchain technology more accessible to a broader audience. For example, compared to transacting on Ethereum, Arbitrum offers more than a 10-fold decrease in fees.

How Does Arbitrum Work?

Arbitrum consists of a number of components that, when combined, facilitate the functioning of the protocol. These components include those built on the rollup itself as well as those built on the base layer. The sequencer makes up the rollup itself, creating batches, computing state transitions and submitting batches to the base layer. Meanwhile, the bridge connects Arbitrum to Ethereum, facilitating the transfer of assets between the rollup and the base layer. Fraud proofs provide an avenue for validators on the base layer to challenge the integrity of a rollup batch, thereby ensuring that fraudulent transactions are not finalised. Lastly, the ARB ecosystem is enabled via four specific components that allow for the processing of smart contracts. Combined, these components make up the Arbitrum protocol, each of which is vital to its functioning. 

The Arbitrum Sequencer

The Arbitrum sequencer is the crucial component of the Arbitrum protocol, making up the rollup itself. It is primarily responsible for ordering incoming transactions based on a first-come, first-served basis. As of now, Offchain Labs operates the sequencer as a centralised component, however,  has specified its future plans to transition to a committee-based sequencer using a fair distributed sequencing protocol in the future. It is important to note that the sequencer does not have the authority to prevent the chain from making progress or to exclude any specific transaction from being processed.

The sequencer makes its transaction ordering available through two methods. The first is a real-time feed of sequenced transactions, to which any party can subscribe. This feed serves as the sequencer’s commitment to record transactions in a specific order. If there is any deviation from the promised sequence, it would be due to malfunction, malicious intent by the sequencer, or a deep reorganisation of the base layer chain. The second method involves posting the transaction sequence as Ethereum call data. The sequencer gathers consecutive transactions, compresses them using a general-purpose compression algorithm and sends the result to the Nitro network’s (Nitro being an upgrade explained in a subsequent section) inbox contract on the base layer. These batches represent the definitive transaction ordering; once the sequencer’s transaction to the inbox reaches finality on the base layer, the Nitro network’s transaction sequence is considered final as well.

In addition to submitting transactions directly to the sequencer, users have another option, the delayed inbox. This alternative serves two purposes; firstly, it enables base layer contracts that cannot generate the necessary digital signatures to submit transactions and secondly, it offers a backup method for submitting transactions if the sequencer starts censoring valid ones. Transactions are added to the delayed inbox by invoking a method on the Nitro network’s inbox contracts, which maintain a queue of timestamped transactions. The sequencer can then include the first message in the delayed inbox queue in its sequence.

An honest sequencer will include a message from the delayed inbox after a brief delay, typically around 10 minutes, to ensure that the message’s arrival will not be affected by a reorganisation of the base layer chain. However, if a message remains in the Delayed Inbox for a certain threshold time period (currently 24 hours), anyone can force its inclusion in the chain’s inbox, thus guaranteeing its execution. This forced inclusion prevents censorship by the sequencer and would only be necessary if the sequencer is malicious or experiences extended downtime.

The Nitro Upgrade

Arbitrum Nitro is a recent upgrade from Arbitrum Classic to the underlying tech stack employed by Arbitrum. Advanced call data compression is a crucial feature of the Arbitrum Nitro upgrade, as it addresses one of the significant pain points in blockchain technology; high costs associated with posting data to the base layer. By losslessly compressing data before posting it on Ethereum, Nitro effectively minimises data size without sacrificing data integrity, which in turn reduces costs for users. This is especially important in the context of DApps and smart contracts, where data size can quickly grow, leading to increased transaction costs. By mitigating these costs, Arbitrum Nitro helps make DApps more accessible and economically viable, paving the way for the broader adoption of blockchain technology in various industries.

The separation of contexts for common execution and fault proving is another critical improvement in the Arbitrum Nitro upgrade. In traditional systems, these two processes are typically undertaken within the same context, leading to performance bottlenecks, slower transaction processing times, and higher fees. By allowing for different contexts for execution and proving, Nitro effectively streamlines the system, enabling base layer nodes to perform more efficiently. This enhancement results in faster transaction processing times and lower fees for users, significantly improving the overall user experience and making the Arbitrum network more competitive in the rapidly evolving blockchain landscape.

Enhanced interoperability between Ethereum and Arbitrum is a cornerstone of the Nitro upgrade. By offering tighter synchronisation with base layer block numbers and comprehensive support for all Ethereum precompiles, Arbitrum Nitro ensures seamless communication between the two layers, which is vital for the smooth functioning of DApps and smart contracts that span both layers. Additionally, the support for transaction tracing and better gas compatibility further strengthens the synergy between Ethereum and Arbitrum, allowing developers to build more complex applications while leveraging the benefits of both layers. This enhanced interoperability positions Arbitrum as a leading layer 2 scaling solution for Ethereum, fostering innovation and driving the expansion of the blockchain ARB ecosystem.

The Arbitrum Bridge

The Arbitrum Nitro network offers advanced cross-chain messaging capabilities that form the foundation for creating a Token Bridge. This innovative application enables the seamless and efficient transfer of assets between the base layer and Arbitrum, significantly enhancing the interoperability between the two networks. Developed and released by the Offchain Labs team, the token bridge, informally referred to as the canonical bridge, operates like any other application on the Arbitrum network. It is essential to note that Arbitrum Nitro, like Ethereum, does not inherently recognize tokens or any specific token standard, enabling a flexible approach to bridging tokens between the two chains.

The token bridge’s primary function is to facilitate the deposit and withdrawal of fungible tokens, streamlining the process for users and developers alike. To deposit N tokens, a user sends a transaction to the base layer that performs two simultaneous operations: transferring N tokens to a base layer smart contract called the token gateway, and creating a retriable transaction that mints N tokens of an Arbitrum counterpart token contract. The token gateway contract locks up tokens on the base layer and subsequently tells the counterpart contract on Arbitrum that the user has the right to mint said tokens on the Arbitrum network. When the user bridges back to the base layer, this process is reversed, with the tokens being burned and subsequently unlocked from the token gateway on the base layer. These two token contracts are counterparts because they guarantee that a holder of a token on the Arbitrum network can initiate a withdrawal, ensuring the tokens’ value remains consistent across the networks. 

The potential of the token bridge extends beyond its current implementation, with many additional features being theoretically possible. These include non-fungible token (NFT) bridging, which would enable unique assets such as digital art or collectibles to be transferred between Ethereum and Nitro networks. Atomic swaps for fast rollup to base layer withdrawals could also be implemented, allowing users to quickly move funds back to the Ethereum network without waiting for lengthy withdrawal processes. Furthermore, bridging tokens natively deployed on Arbitrum back to the base layer would provide an additional layer of flexibility for developers and users alike.

Arbitrum Fraud Proofs

Fraud proofs play a crucial role in ensuring the security and integrity of rollup-based transactions. To protect against attacks and maintain the integrity of the rollup state, Arbitrum employs interactive, multi-round fraud proofs. These fraud proofs serve as a vital line of defence against potential attack vectors. The interactive fraud proofs in Arbitrum provide a robust mechanism to mitigate such attacks. In the case of a dispute, the asserter (the party making the assertion) and the challenger (the party challenging the assertion) work together, overseen by a base layer verifier contract, to resolve the dispute. The dispute resolution process is iterative, with the challenger requesting the asserter to divide the assertion into two assertions. This dividing process continues until both parties reach an assertion representing a small enough operation that can be executed on Ethereum. Once the dispute has been narrowed down to a single operation, the base layer verifier contract executes the operation and determines which party was lying. If the challenger’s claim is found to be correct, the asserter’s stake will be slashed, with a portion of the slashed stake awarded to the challenger and the remaining part burned. This mechanism serves to deter frivolous challenges, which could otherwise delay withdrawals of assets from the rollup to the base layer.

Interactive fraud proofs offer several advantages over their non-interactive counterparts. Firstly, they minimise the work required by the base layer, as most of the dispute resolution process occurs off-chain. Secondly, they allow for the execution of rollup transactions that exceed the Ethereum gas limits, enabling greater flexibility in the types of transactions that can be processed. Finally, the interactive nature of the fraud proofs permits more flexibility in implementation, allowing rollups to add instructions that do not exist in the Ethereum Virtual Machine (EVM). By employing interactive fraud proofs, Arbitrum aims to provide a secure and efficient solution for scaling Ethereum, while continuing to work towards achieving true decentralisation. 

The Arbitrum Ecosystem

The Arbitrum ARB ecosystem is composed of four key components that contribute to its functioning; the Verifier, the Key, the Virtual Machine (VM), and the Manager. The Verifier is a crucial element or distributed protocol that validates transactions and manages the dissemination of approved transactions. In the Arbitrum network, the Key plays a significant role as the protocol participant responsible for managing funds and initiating transactions. The public key’s hash serves as a reliable identification mark, and the Key also assists in proposing transactions by signing them with the corresponding private keys.

The VM is a vital component of the Arbitrum protocol that stores the necessary data and code to define the actions of the VM. Arbitrum employs a customised VM architecture known as the Arbitrum Virtual Machine (AVM). The VM’s creator assigns a group of Managers to the relevant VM. These Managers are responsible for monitoring the VM’s progress and ensuring that it operates according to expectations. As part of their role, Managers help verifiers advance a VM’s state at a significantly lower cost. In cases of disagreement between Managers, verifiers can use the bisection technique to resolve conflicts.

Arbitrum’s functioning relies on the efficient cooperation between these four components. By allowing parties involved in the VM’s conclusion to select candidates for managerial roles or guarantee direct management, the system can impose reasonable constraints on a group of Managers, which is generally considered appropriate for various contracts. The unique aspect of Arbitrum’s operation is that not all validators need to simulate the functionality of each VM. Instead, they only need to verify the hash of the VM rather than its full state, making the process more efficient. When two Managers disagree about the behaviour of a VM, the bisection process is activated, allowing for fair resolution of conflicts. Overall, Arbitrum’s inner workings and the interplay between its key components enable it to provide a more scalable, secure, and cost-effective solution for Ethereum-based DApps.

The ARB Token

The Arbitrum token, known as ARB, is the native governance token for the Arbitrum ecosystem. Its primary purpose is to facilitate decentralised decision-making within the network via the network’s decentralised autonomous organisation (DAO). This will enable direct changes to the platform’s core code, subject to time delays for audits and other safety measures. This move toward decentralised governance is designed to empower token holders to contribute to the platform’s development and operation. This change is aimed at ensuring that the Arbitrum ecosystem remains competitive and adaptable in the fast-paced world of layer 2 scaling solutions.

ARB’s introduction not only enhances decentralisation within the ARB ecosystem but also strengthens the platform’s ability to respond to community needs and preferences. Token holders will have the power to vote on vital decisions via the Arbitrum DAO, such as technology upgrades, revenue allocation, and other core protocol-level aspects. By distributing the ARB token to eligible community members via an airdrop, Arbitrum aims to foster increased community engagement and ensure that the future direction of the platform is driven by its users. As the Arbitrum ecosystem continues to evolve, the ARB token will play a pivotal role in shaping its trajectory, ensuring that the platform’s direction remains in accordance with user values.

How Does Arbitrum Compare To Its Competitors?

Presently, Arbitrum dominates the Ethereum layer 2 markets, possessing a 66% market share based on total value locked (TVL) in the network and even surpassing Ethereum in terms of daily transactions at the time of writing. Nevertheless, several competitors such as Optimism and Polygon have emerged looking to take over the layer 2 ecosystem. In terms of technical details, they differ in several aspects, including consensus mechanisms, transaction speed, and ARB ecosystem size. Polygon relies on a Proof of Stake (PoS) consensus mechanism, which enables higher scalability and lower gas fees. On the other hand, Arbitrum and Optimism do not have their consensus mechanisms; instead, they leverage Ethereum’s consensus mechanism for their operations. This decision provides them with greater decentralisation, as they are secured by Ethereum’s widely distributed network of miners. In contrast, Polygon’s security comes from MATIC staking, representing a smaller pool of capital compared to Ethereum’s miners.

Transaction speed is another crucial aspect to consider when comparing these three layer 2 solutions. Polygon leads the race in this regard, with the capability to process up to 65,000 transactions per second (tps). Arbitrum follows, with a capacity of 40,000 tps. Optimism lags behind, capable of processing up to 2,000 tps. Despite its lower transaction speed, Optimism does offer certain advantages, such as EVM equivalence, thereby not only supporting the execution of Ethereum-based smart contracts but also replicating the exact same behaviour as the Ethereum network. Arbitrum, in turn, boasts high EVM compatibility, making it a more seamless option for developers already familiar with Ethereum. 

The ecosystems of these three platforms also vary significantly in size and diversity. Polygon, established in 2017 , has the largest ecosystem with more than 19,000 DApps built on its platform, offering a wide array of applications in various categories. Arbitrum, introduced in 2021, currently hosts 228 projects, with popular categories including swapping and lending. Some notable projects built on Arbitrum include GMX, Curve, Cream Finance, and Uniswap. Optimism, also established in 2021, has a smaller ecosystem, with prominent projects such as Synthetix and Lyra. The smaller ecosystems of Arbitrum and Optimism may be partially attributed to their more recent establishment compared to Polygon.

In terms of token withdrawals, Polygon outperforms its competitors with a much shorter withdrawal time of just 3 hours via the PoS bridge. Withdrawals on Arbitrum take at least 7 days, while those on Optimism, similarly, can take 7 days or more. This difference in withdrawal time can have a significant impact on users’ experiences, with faster withdrawals being an attractive feature for those seeking liquidity. Moreover, the architecture of these platforms differs, with Polygon employing a multi-layer architecture that includes a joint PoS and Heimdall architecture for increased scalability and power. Arbitrum utilises the AVM architecture, whereas Optimism relies on an Optimistic architecture. The choice of architecture influences the platforms’ capabilities, such as scalability, security, and compatibility with Ethereum.

Conclusion

Arbitrum has emerged as the leading figure within the ecosystem of Ethereum layer 2s. Offering an efficient and secure solution to address network congestion and high transaction costs, Arbitrum streamlines the execution of transactions. With the numerous components coming together to make up the Arbitrum protocol, the network is undergoing continual improvement. Although still in its early stages, Arbitrum’s impact on the Ethereum ecosystem is undeniable, and its future looks promising as it strives to become the primary means of execution on the Ethereum network.

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FAQs

What is Arbitrum and How Does it Work?

Arbitrum is a layer 2 solution built on top of the Ethereum blockchain that employs rollup technology to enhance the base layer’s performance, security, and scalability. It bundles multiple transactions into a single batch that is then compressed and submitted onto the base layer as a single transaction. This approach significantly reduces the number of transactions executed and the amount of data stored on the Ethereum mainnet, decreasing congestion, enabling greater throughput and lowering gas fees for users.

What is the Role of the Arbitrum Sequencer?

The Arbitrum sequencer is the crucial component of the Arbitrum protocol, making up the rollup itself. It is primarily responsible for ordering incoming transactions based on a first-come, first-served basis. The sequencer makes its transaction ordering available through two methods: a real-time feed of sequenced transactions and posting the transaction sequence as Ethereum call data.

What is the Arbitrum Nitro Upgrade?

Arbitrum Nitro is a recent upgrade from Arbitrum Classic to the underlying tech stack employed by Arbitrum. It offers advanced call data compression, separation of contexts for common execution and fault proving, and enhanced interoperability between Ethereum and Arbitrum. These improvements streamline the system, enabling base layer nodes to perform more efficiently, resulting in faster transaction processing times and lower fees for users.

What is the Arbitrum Bridge?

The Arbitrum Nitro network offers advanced cross-chain messaging capabilities that form the foundation for creating a Token Bridge. This innovative application enables the seamless and efficient transfer of assets between the base layer and Arbitrum, significantly enhancing the interoperability between the two networks.

How Does Arbitrum Compare To Its Competitors?

Arbitrum dominates the Ethereum layer 2 markets, possessing a 66% market share based on total value locked (TVL) in the network. However, several competitors such as Optimism and Polygon have emerged looking to take over the layer 2 ecosystem. They differ in several aspects, including consensus mechanisms, transaction speed, and ecosystem size. For example, Polygon leads in transaction speed, with the capability to process up to 65,000 transactions per second (tps), while Arbitrum follows, with a capacity of 40,000 tps.