And if the upheaval of the Ethereum blockchain was not The Merge, but its layers 2 of scalability, in particular the one that is a hit at the moment: Arbitrum? This is a layer 2 solution for Ethereum. It allows faster and more economical transactions on the Ethereum blockchain. This decentralized blockchain is experiencing rapid growth to the point of gradually establishing itself as a must in the cryptosphere. Let’s take a look at this new technology whose adoption is exponential. What is this ? How it works ? What’s the point ? What are these results? How to explain its success? What is his risk? Why is it upsetting the Ethereum Killers?
What is it about ?
Arbitrum is a layer 2 solution aspiring to decongest the Ethereum network and reduce its gas fees. Simply put, a layer 2 manages blockchain transactions in an external network. It then communicates the final results to the main blockchain (layer 1). A layer 2 solution can decongest the network, increase the speed of transactions, and even reduce transaction costs. The Lightning Network is an essential layer 2 for the Bitcoin blockchain. As for Arbitrum, it is becoming one for the Ethereum blockchain.
Why is Arbitrum necessary for Ethereum?
Despite the prevailing belief, The Merge of the Ethereum blockchain has not brought down network transaction fees. Arbitrum is therefore a protocol allowing reduce the cost and increase the speed of transactions of ETH. Thus, Arbitrum is the solution to Ethereum’s greatest torment: scalability. Indeed, the Ethereum blockchain is characterized by its security and decentralized management. However, in accordance with the “blockchain trilemma” theory, a blockchain can only ensure two of the following three qualities: decentralization, security and scalability. This theory was also popularized by the famous founder of the network, Vitalik Buterin.
And this problem is all the more worrying as the use of the Ethereum network is exponential with the increasing number of smart contracts, dApps, NFTs and DeFi tools on the network. In fact, its transaction fees have naturally exploded, even reaching 50 dollars in 2021. Arbitrum was created with the aim of thwart this price spike. This technology is used to improve the capabilities of smart contracts of the Ethereum network, increase speed and reduce transaction costs. This is why Vitalik Buterin declared in November 2021 on Discord Arbitrum: “You are a central part of the solution, and it’s great to see all the progress being made.”
How does Arbitrum work?
Simply put, Arbitrum is an independent technology built as an overlay of Ethereum. Arbitrum manages network transactions with a protocol named Optimistic Rollup. This technology is a migration solution for decentralized applications (dApps) running on Ethereum. Rather than validating transactions on layer 1 (Ethereum), Arbitrum collects groups of transactions, assembles them into one, confirms it and forwards it to layer 1. Thus, Arbitrum is the optimal technology for many DeFi applications, because it is based on Ethereum (a very secure blockchain), while dramatically increasing the amount of transactions per second (which lowers transaction costs). Transaction cost can be up to 50 times lower with Arbitrum than using only layer 1 (the Ethereum blockchain).
In addition, the conversion of smart contracts from Ethereum to Arbitrum, i.e. the transition from the programming language EVM (Ethereum Virtual Machine) to AVM (Arbitrum Virtual Machine), is completely automatic. In other words, it is very easy to integrate the Arbitrum solution to any system. Also, there is no cryptocurrency associated with Arbitrum.
The secret of Arbitrum’s success: its technological system of fraud proof
Additionally, Arbitrum is recognized for his system of fraud proof very elaborate. Concretely, a small part of a problematic transaction is automatically identified, isolated and submitted to Ethereum miners, who check whether or not it is fraudulent. Since this system of fraud proof focuses only on the small part of the transaction that is potentially problematic, it is a lot faster and cheaper. At most, Arbitrum can process 40,000 transactions per second.
Arbitrum is increasingly establishing itself in the middle of layers 2 for the Ethereum blockchain
There are currently a host of layer 2 players aiming to improve scalability, such as Polygon, Optimism and StarkNet. However, Arbitrum is the fastest growing solution in recent times. The above graph of l2beat on the evolution of Total Value Locked on Arbitrum rightly attests to this. TVL (Total Locked Value) is an indicator of the success and growth of DeFi protocols and blockchains. It is the sum of cryptocurrencies allocated to a protocol, a platform or a smart contract. Currently, Arbitrum’s TVL is $6.23 billion.
More precisely, Wu Blockchain claimed in the above tweet that Arbitrum has seen a steady influx of stablecoins onto its solution. According to them, USDC flows increased by 31%, while those of USDT and DAI grew by 45% and 65% respectively. According to DefiLlamathe total capitalization of stablecoins on Arbitrum reaches $1.3 billion and consists of 67.5% USDC.
Arbitrum knows fastest growing user base among major blockchains, according to the media CoinDesk. The growth of transactions on this network is so spectacular that it has reached almost 50% of daily ETH transactions in January.
What is the risk of Arbitrum?
Like all blockchains in smart contractsusers can theoretically lose funds due to a flaw in the smart contracts on which the platform is based. Moreover, as we reported to you in September 2022, an ethical hacker from the Immunefi bug bounty platform had detected a vulnerability that could have compromised nearly $250 million!
Arbitrum embodies the paradigm shift from Ethereum
What is particularly interesting with Arbitrum and Ethereum layer 2 is that we are witnessing a paradigm shift.
- Initially, the Ethereum blockchain, introduced in 2015, was a real revolution. It is no longer just a support for the ETH token, it is source code serving as the foundation for tons of smart contractsdApps, NFTs and other DeFi tools.
- Secondly, the Ethereum blockchain came up against a growing problem of scalability (and higher gas costs) as it is adopted. Blockchains competing with Ethereum, the “Ethereum Killers”, such as Cardano, Solana, Tezos or Polkadot, have appeared to theoretically propose a network similar to Ethereum, but decongested, with lower transaction fees or a lower carbon impact.
- Thirdly, the “Ethereum Killer” have developed, but failed to replace the Ethereum blockchain, due to issues specific to each of these blockchains. This is how new projects have germinated. They aim to improving the Ethereum blockchain rather than replacing it. These projects are Ethereum layer 2 like Arbitrum, Polygon and Optimism.
In short, Arbitrum is a technological solution that overlaps the Ethereum blockchain in order to increase its transaction processing speed and reduce transaction costs. Ethereum’s scalability issue is one of the biggest challenges in the cryptocurrency industry. Layer 2 Arbitrum may be the solution finally found to this obstacle…
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