What Is Arbitrum (ARB)?

By Lipsa Das

While the Ethereum network is the smart contract network of choice for many, it can be slow and expensive at specific times and for certain uses. In cases of high activity, the limitations of Ethereum become apparent, with transactions getting stuck and news headlines featuring 3-figure gas fees. Furthermore, when attempting to solve the problem of scalability, a blockchain’s decentralization and security are impacted too. This is what’s known as the “blockchain trilemma”.

Layer 2 scaling solutions are the solution to this problem. Without getting too technical, layer two solutions offer ways to use Layer 1 blockchains in a way the mainnet’s technology would not allow.  Basically, they help users enjoy the security of Ethereum without paying an arm and a leg to use it. One such solution is Arbitrum.

In this article, Ledger Academy will unpack what Arbitrum is: From its ARB token and how it works to how it differs from their Layer 2 solutions like Optimism. Let’s get started.

What Is Arbitrum?

Arbitrum is a Layer 2 scaling solution for the Ethereum blockchain that powers fast smart contract transactions while reducing transaction costs.

Layer 2 solutions can scale the base Layer 1 blockchain by delegating complex computational tasks, such as transaction processing and data storage to the second chain. In short, the Layer 2 blockchain executes the smart contract, and the Layer 1 blockchain stores the data. If you want to know more about how the mainnet works, check out our article on what is Ethereum.

In the context of Ethereum, Arbitrum handles blockchain transaction processing and batching, reducing congestion and cost from the main network. 

For instance, DeFi projects like Sushiswap and Aave use Arbitrum in the hood to offer efficient swaps with lower gas fees.

How Does Arbitrum Work?

Abritrum’s Layer 2 solution uses blockchain rollups to achieve efficient transaction processing. Rollups use a 2-layer architecture to process transactions off-chain before settling them on-chain. The benefit is that the blockchain no longer needs to validate separate transactions – it can directly confirm a “rolled up” batch of transactions.

This scaling solution differs from other Layer 2s, such as sidechains, since rollups typically derive their security from the main blockchain. 

Arbitrum’s scaling solution uses a particular type of roll-up called optimistic rollups.

What Is an Optimistic Rollup?

Optimistic rollups process transactions off-chain like other roll-ups but add compression techniques while bundling the transactions. This compression helps reduce gas fees and optimizes block space, by storing only necessary data on the Ethereum blockchain. Thus, optimistic rollups allow the main chain to process more transactions while requiring less space.

Optimistic rollups rely on an optimistic assumption that most transactions are valid. They only execute a costly verification process when there is a dispute. Network participants can raise disputes for faulty blocks in a week.  If any faulty blocks are present, the validator that approved them loses their collateral. However, this complex fraud detection process also means processing withdrawals from the chain needs a week.

Arbitrum Ecosystem’s Features

According to the 2023 Developer Report, the Arbitrum chain is one of the fastest-growing Layer 2 solutions, with over 50% YoY growth in developer headcount. Due to this exponential growth in development, the Arbitrum ecosystem now comprises many different elements. Let’s look at the major products — Arbitrum, Nitro, and Nova — and how they differ.

What is Arbitrum One?

Launched on August 31st, 2021, Arbitrum One is the official mainnet of the Arbitrum crypto ecosystem. It powers the entire ecosystem and processes transactions on the Arbitrum Virtual Machine (AVM), an extension compatible with the Ethereum Virtual Machine (EVM).

The team behind Arbitrum, Offchain Labs, is a New-York based Ethereum startup, co-founded in 2018. To further it;s growth, it secured $120 million in a Series B funding round in September 2021. Some of their notable investors include Alameda Research, Pantera Capital, and Lightspeed Venture Partners.

What Is Arbitrum Nitro?

Arbitrum Nitro is a major technical upgrade to the underlying tech of Arbitrum One’s ecosystem. With Nitro, it becomes faster, more EVM-compatible, and cheaper. Nitro achieves this by introducing interactive proofs that run over the WASM code used by Arbitrum.

With Nitro, developers can also use standardized EVM-compatible languages and run unmodified EVM contracts. This has opened up the development scope on it and attracted more developers.

Arbitrum One officially migrated to Nitro on August 31st 2022, one year after its public launch.

What Is Arbitrum Nova?

Arbitrum Nova is a new chain focusing on reducing individual transaction costs by reducing the data storage on the Ethereum blockchain. Transaction data is available with third parties on the “data availability committee” — a handful of storage providers such as Infura and Google Cloud.

In contrast to Arbitrum One, which stores full transaction data on Ethereum, Nova only uses Ethereum to store data signatures from these companies. This, of course, makes Nova more centralized. Thus, Nova sacrifices some of the security of the Ethereum blockchain to reduce transaction fees and increase scalability.

Arbitrum Nova is especially useful for games and social dApps with higher volume of transactions but low individual transaction value. One example is Reddit’s community points program which uses Nova to reward community participation.

Arbitrum Token: What is ARB?

The Arbitrum token, $ARB, is the native ERC-20 compatible governance token for the Arbitrum blockchain. You can use $ARB to transfer value, as an investment, or to vote on governance decisions.

One of the most anticipated airdrops of 2023, $ARB had strict eligibility criteria to qualify “active” users. You had to fulfill at least 3 of these 6 conditions to claim $ARB ERC token: 

1. Bridge assets to either Arbitrum One or Nova
2. Perform transactions on Arbitrum regularly at least two months before the snapshot in February 2023
3. Interact with at least 4 Arbitrum smart contracts or perform 4 transactions on the network
4. Overall transaction value should be least $10,000 
5. Deposit a minimum of $10,000 on Arbitrum One
6. Use the social chain, Arbitrum Nova for at least 3 transactions

To find out more about airdrops, check out the Ledger Academy article on what is an airdrop.

ARB Tokenomics

The initial supply for the $ARB launch is 10 billion, with a 2% yearly inflation rate. In March 2023, 12.75% of this total supply was split between eligible users and DAOs. This equates to a rough circulating supply of about 1.275 billion $ARB.

Here’s the complete breakdown of the current token allocation for $ARB:

• Investors receive 17.53%
• DAOs in the Arbitrum Ecosystem receive 1.13%
• Individual Wallets receive 11.62%
• DAO Treasury receives 42.78%
• Team and Future Team + Advisors receive 26.94%.

Note: The Arbitrum DAO, or the decentralized governance body for it, can change these allocation numbers by voting on them.

Token Utility

Apart from being used to transfer value on the Arbitrum blockchain, $ARB token grants you a seat at the governance table of the Arbitrum DAO. The DAO makes crucial decisions on the protocols’ working, such as how they should allocate funds, investments in the ecosystem, and even technical changes. 

The network makes these decisions through proposals on an open forum like Snapshot.org where users can connect their wallets and cast their votes. For instance, treasury proposals outline exactly when and why the team needs the funds and their entire plan. Then, if the proposal passes, on-chain smart contracts automatically execute the necessary transactions.

Apart from governance decisions, $ARB holders can also vote on electing members for the Security Council — a 12-member team in charge of the treasury wallet.

How Does Arbitrum Compare To Other Chains?

The race to build the best scaling solution for Ethereum is heating up — with Layer 2 solutions like Arbitrum, Optimism, and Metis emerging as top contenders. Although most of these solutions operate with the same goal — reducing transaction fees and times — they accomplish it with different mechanisms. In this section, let’s look at what makes it unique from other solutions.

Arbitrum vs. Other Layer 2s: What’s the difference

Two of the most popular Ethereum layer two scaling solutions so far include optimistic roll-ups and ZK-rollups. Developers and ecosystem projects currently prefer optimistic roll-ups like Arbitrum but ZK-rollups like zkSync are quickly catching up. 

Arbitrum offers a more established ecosystem of dApps and complex smart contracts due to its Virtual Machine. 

On the other hand, ZK rollups use zero-knowledge cryptographic proofs. With these proofs, you can guarantee the validity of all cryptocurrency transactions without any optimistic assumptions. In other words, the network verifies every block hash to confirm it is right. While the up-front computation is more with zk-rollups, confirmation times are way faster. Popular ZK rollup projects include ZkSync and Starkware.

ZkSync offers stronger privacy guarantees and faster withdrawal times. Other zk-rollups like Starkware, have similar benefits, such as ZkSync but differ in proof size, verification or prover time etc.

Arbitrum Vs Optimism: What’s the Difference?

While Arbitrum and Optimism are optimistic rollups focusing on finding faulty blocks, they implement the technology slightly differently. Optimistic rollups mainly depend on the Ethereum chain for security while Arbitrum has its own. It has its own Virtual Machine, while Optimism uses Ethereum’s Virtual Machine partly.

Another key difference is that Optimism relies on a single “fraud proof” which makes it fast but can be easier to fake. Arbitrum, on the other hand, requires multiple proofs to confirm valid transactions. 

How To Use Arbitrum Network Securely

Now, you can safely send and recieve ARB directly through Ledger Live. This makes transferring your ARB assets easy and secure.

However, to use many apps in Arbitrum’s ecosystem, you’ll need to connect via a third-party wallet such as  Metamask. For the full guide, read this support article on how to use Arbitrum One via a Ledger. But these are the steps in shorthand:

1. If you don’t have a wallet, install Metamask to your browser and create a new wallet.
2. Connect your physical Ledger wallet to your Metamask account through the “connect hardware wallet option” Make sure you follow the steps correctly, as if you accidentally import your Ledger wallet into metamask, your funds will be at stake.
3. Go to your Ledger wallet on Metamask and click “Add Network” 
4. Select Arbitrum One. Approve it and you’re ready to interact with the network!

However, before interacting with the network, you might want some ARB.

How to Buy ARB

Buying ARB on a decentralized exchange is pretty straightforward.

The first step is to send your $ETH from the Layer 1 blockchain, Ethereum to Arbitrum via a bridge. Once you bridge your assets to it, you can use Sushiswap, an Arbitrum-based exchange, to convert your Ethereum to $ARB via its user-friendly swap interface.

Note: You can technically bridge any cryptocurrency present on the Arbitrum network to buy $ARB, such as $USDC etc, but you’ll still need some $ETH to pay the transaction fees.

However, you need to understand that buying new cryptocurrencies like $ARB (well, actually any cryptocurrency) can be volatile. 

New cryptocurrencies typically have fewer backers — which means a single person with a large amount of $ARB can greatly impact the price. Further, newer cryptocurrencies are prone to speculation and uncertainty — causing sudden price changes that can be difficult to predict. 

It’s important to do your research while buying any cryptocurrency — pay close attention to the team’s track record, use cases of the currency, and the risk-to-reward ratio for buying a newer currency.

Staying Secure While Navigating the Arbitrum Network

While Layer 2 solutions like Arbitrum are very exciting, remember they are also very new. Bridging from one network to another introduces more blockchain and third-party touchpoints — which hackers can target. 

Therefore, it’s a good idea to always add an extra layer of safety for your funds with a hardware wallet like Ledger. Ledger’s devices ensure that your private key is always protected while you explore the exciting world of Layer 2 blockchains. 

Choose security, choose Ledger.