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And if the upheaval of the Ethereum blockchain was not The Merge, but its 2 layers of scalability, especially the one that is 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 growing rapidly until it is gradually becoming a necessity in the cryptosphere. Let’s take a look at this new technology whose adoption is exponential. What is this ? How does it work? What is the point? What are these results? How to explain his success? What is his risk? Why is it upset for the Ethereum Killers?
What about it?
Arbitrum is layer 2 solution trying to decongest the Ethereum network and reduce its gas fees. Simply put, 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 defragment 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, Merger of the Ethereum blockchain did not bring down network transaction fees. So Arbitrum is a protocol that allows reduce the cost and increase the speed of transactions of ETH. So, Arbitrum is the solution to Ethereum’s biggest pain: scalability. In fact, the Ethereum blockchain is characterized by its security and decentralized management. However, according to the “blockchain trilemma” theory, 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 even more worrisome because the use of the Ethereum network is exponential with the increase in the number of subjects smart contracts, dApps, NFTs and DeFi tools on the network. In fact, its transaction fees have experienced a natural explosion, even reaching 50 dollars in 2021. Arbitrum was created with the aim resist this price spike. This technology is used to improve the capabilities of smart contracts of the Ethereum network, increasing speed and reducing transaction costs. That’s why Vitalik Buterin declared in November 2021 on Discord Arbitrum: “You’re an integral 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 designated protocol Hopeful rollup. This technology is a migration solution for decentralized applications (dApps) running on Ethereum. Instead of validating transactions on layer 1 (Ethereum), Arbitrum collects groups of transactions, aggregates them into one, confirms it and forwards it to layer 1. Therefore, Arbitrum is the best technology for many DeFi applications, because it is based on Ethereum (very secure blockchain), and a significant increase in the number of transactions per second (which lowers transaction costs). Transaction cost can be up to 50 times lower with Arbitrum is to use 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 fully automatic. In other words, it is very easy to integrate Arbitrum solution with any system. Also, there is no cryptocurrency related to Arbitrum.
The secret to Arbitrum’s success: its technology system proof of fraud
In addition, Arbitrum is recognized for his system of proof of fraud very complicated. Concretely, a small part of problematic transaction is automatically identified, isolated and submitted to the Ethereum miners, who check whether it is fraudulent or not. Since this system of proof of fraud just focus on the small part of the transaction that could be a problem, it is enough faster and cheaper. At most, Arbitrum can process 40,000 transactions per second.
Arbitrum is increasingly establishing itself in the middle of the 2 tiers for the Ethereum blockchain
Currently there are many layer 2 players that aim to improve scalability, such as Polygon, Optimism and StarkNet. However, Arbitrum has been the fastest growing solution in recent years. The graph above from l2beat on the evolution of the Full Value Locked this should be certified by Arbitrum. TVL (Total Locked Value) is an indicator of the success and growth of DeFi and blockchain protocols. It is the sum of cryptocurrencies allocated to a protocol, platform or smart contract. Arbitrum’s TVL currently stands at $6.23 billion.
Specifically, Wu Blockchain claimed in the tweet above that Arbitrum has seen a steady influx of stables on its solution. According to them, USDT flows increased by 31%, while USDT and DAI flows increased by 45% and 65% respectively. According to DefiLlama, the total capitalization of stablecoins on Arbitrum reaches $1.3 billion and is composed of 67.5% USDC.
Arbitrum know the fastest growing user base among the major blockchains, according to CoinDesk media. The growth of transactions on this network is so great that it has almost reached its peak 50% of daily ETH transactions in January.
What is the risk of Arbitrum?
Like all blockchains i smart contractsusers can theoretically lose funds due to a fault in the smart contracts on which the platform is based. In addition, as we reported to you in September 2022, an ethical hacker from the Immune bug bounty platform had discovered a vulnerability that could put nearly $250 million at risk!
Arbitrum embodies the paradigm shift from Ethereum
What is particularly interesting with Arbitrum and Ethereum layer 2 is that we are witnessing paradigm shift.
- First, there was the Ethereum blockchain, which was introduced in 2015 a real revolution. There is no longer just support for the ETH token, as is source code serving as the basis for tons of smart contractsdApps, NFTs and other DeFi tools.
- Secondly, the Ethereum blockchain came up against a growing problem with scalability (and higher gas costs) as it is taken. Blockchains compete with Ethereum, the “Ethereum Killers”, like Cardano, Solana, Tezos or Polkadot, which in theory suggests a network like Ethereum, but decongested, with lower transaction fees or a lower carbon impact.
- Thirdly, there is the “Ethereum Killer” developed, but the replacement of the Ethereum blockchain failed, due to issues specific to each of these blockchains. This is how new projects emerged. It is their aim improving the Ethereum blockchain rather than replacing it. These projects are Ethereum layer 2 such as Arbitrum, Polygon and Dóchas.
In short, Arbitrum is a technology solution that leverages the Ethereum blockchain 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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A student who worked in a technology unicorn and investment funds. I am passionate about entrepreneurship and business. My papers deal with cryptocurrencies and related technologies with a business eye. Indeed, I am convinced that cryptocurrencies, blockchain, NFTs and the metaverse are revolutionizing many sectors and presenting unprecedented opportunities.
The views and opinions expressed in this article are the sole responsibility of the author, and should not be considered investment advice. Do your own research before making any investment decision.