Ethereum’s thorny scalability problem lights a fire under blockchain entrepreneurs who want to make change happen faster. That’s why at least until full sharding is in place, we’ll continue to witness burgeoning layer 2 solutions. One of the strongest players is Arbitrum.
At the time of writing, Arbitrum is the number of layer 2 solution in terms of the total value locked in its protocol, which is approx. $2.47 B.
Its adoption in the NFT space is also growing largely due to its low minting and transaction costs. As per an analysis by data intelligence company Nansen in April 2022, the Arbitrum NFT marketplace Treasure plays a vital role in this, thanks to its free minting model. Nansen further notes that of the 19.3k unique wallets that conducted NFT-related transactions on Arbitrum, a volume of 73.5k ETH came from the Treasure marketplace, accounting for 96.8% of total Arbitrum transactions.
Thus, it’s no surprise that the layer 2 solution, developed by Offchain Labs, was recently added to OpenSea’s list of compatible blockchains.
Let’s look at how the underlying technology helps achieve these outcomes.
Arbitrum Nitro: an optimistic rollup system
Arbitrum uses a technology called optimistic rollups to speed up transactions. Data from hundreds of transactions collected on the Arbitrum rollup chain is transmitted to the Ethereum mainnet in batches. This not only increases network throughput but also reduces costs.
This optimistic rollup system is known as Arbitrum Nitro. It’s basically a widely used fork, known as Geth, that helps to convert Ethereum into a trustless layer 2. In other words, Arbitrum Nitro’s code is very similar to that of Ethereum.
How does dispute resolution work?
In an optimistic rollup, all transaction batches are assumed to be legitimate unless a network participant reports fraud. Therefore, there’s a dispute period between the time that transactions are processed in the rollup and the time they’re accepted on the mainnet.
In Arbitrum, this period is one week during which validators and network participants are incentivized to monitor and report fraud.
Arbitrum has high EVM compatibility.
The Ethereum Virtual Machine (EVM) is a virtual computation engine that corresponds to the part of Ethereum that executes smart contracts. It compiles different types of smart contract codes into a readable format called Bytecode. This format allows other chains to write contracts that Ethereum nodes can read.
The rollup system of Arbitrum is compatible with EVM at the bytecode level. In this regard, it is particularly advantageous for developers because they can use common languages like Solidity and Vyper to enable compilation.
Arbitrum One vs. Arbitrum Nova
Arbitrum’s rollup chain mentioned so far is called Arbitrum One. It’s fully decentralized, trustless, and permissionless. Here, since all data is submitted to the layer 1 blockchain (Ethereum), anyone can join the network as a validator. Arbitrum One is used by many blockchain companies, including Ox, 1Inch, and Aave. You can find the full list here.
On the other hand, developing dApps using this approach is costly. Some applications may not require this level of decentralization and security. Hence Arbitrum introduced another solution: Nova.
Arbitrum Nova uses AnyTrust protocol which is also built with Nitro. However, instead of submitting all batches to the layer 1 chain, which accounts for the highest costs due to Ethereum’s gas fees, it manages the data off-chain. If every transaction is genuine and there’s no fraud, this system charges the users significantly low fees. In the event of scams, AnyTrust falls back on Arbitrum One and deploys rollups.
There are also many applications that use Arbitrum Nova. They range from Coinbase Wallet to FTX. You can view the complete list here.