Ethereum remains one of the main pillars of the crypto economy, which has received a powerful impetus due to the rapid growth of the DeFisegment and the unresold hype around the NFT.
A huge variety of applications, an influx of new users, a revival of on-chain activity and negative effects associated with MEV have caused the Ethereum network to become overloaded. Transaction fees that have increased to unthinkable values have once again exposed the problem of scaling.
Ethereum’s long-term performance strategy relies on a completely different consensus mechanism and sharding. However, the current dynamics of market development and the competition imposed by new DeFi ecosystems require technologies focused on the short and medium term.
Various projects have stepped up efforts in creating layer two (L2) scaling solutions. Such technologies are designed to reduce the load on the network by grouping transactions and moving part of the calculations outside of Ethereum – to sidechains.
Developed by the Offchain Labs team, the Arbitrum solution almost instantly gained popularity – it was already integrated by large DeFi projects like Curve, SushiSwap, Uniswap and 1inch.
Cryplogger understood the features of Arbitrum, found out the reasons for the rapid growth of the ecosystem based on it, and also learned about the pitfalls of the newfangled solution.
- L2 technology from Arbitrum very quickly gained popularity among many DeFi projects due to its simple interface, EVMcompatibility, high speed and low commissions;
- second-level solutions are not immune to failures due to errors in the code, many Dapps based on them look raw, the amount of liquidity in them is relatively small;
- competition between L2 technologies is likely to grow, and the segment will continue to develop even after the launch of Ethereum 2.0.
Features of Arbitrum
There are two main ways to solve the ethereum scaling problem:
- On-line scaling is a change in the first level of the system, where, as in the case of Bitcoin, the main economic activity is now taking place. Example: the transition to Ethereum 2.0, which involves a change in the consensus mechanism and other fundamental changes.
- Second-level solutionsrunning on top of the blockchain. Their implementation does not require changes to the first level of the system (L1). L2 uses L1 security parameters and other pre-existing elements, including smart contracts.
Second-level solutions are designed to scale the network in the short and medium term. One of the promising and most advanced approaches to L2 scaling is Rollups. They reduce the load on the network by grouping transactions and moving some of the calculations outside of Ethereum – to sidechains.
There are two main types of Rollups: ZK-Rollups and Optimistic rollups. In the first case, cryptographic proofs (SNARKs) are generated, used to include transactions in the blockchain and reconcile the states of the underlying network and the second-level chain.
Optimistic rollups rely on “fraud proofs.” They “optimistically” assume by default that data published to the network is valid unless proven otherwise.
Arbitrum technology relies on fraud proofs and, therefore, the “optimistic” method of L2 scaling. This approach has several significant advantages:
- Optimistic rollups are compatible with the Ethereum Virtual Machine (EVM). This means that applications based on the first layer of the network can easily integrate Arbitrum’s L2 technology;
- high speed and low cost of transactions with low requirements for computing resources and security guarantees provided by the main Ethereum network.
Arbitrum is being developed by a team from New Jersey-based startup Offchain Labs. In April 2019, the project attracted $3.7 million in seed investments from Pantera Capital, Compound VC and Blocknation. The alpha version of the product in the same year attracted the interest of the venture division of the largest American exchange Coinbase, which invested an unnamed amount in the company.
According to Crunchbase, in the spring of 2021, Offchain Labs closed a $20 million Series A funding round.
In August, the company raised $100 million from Lightspeed Venture Partners, Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research and Mark Kuban, closing the Series B round.
The rise of Arbitrum’s popularity
A few months before the launch of the mainnet, UNI token holders supported the launch of Uniswap v3 based on Arbitrum. The founder of the decentralized exchange, Haden Adams, praised the potential and prospects of this L2 solution
Shortly before the launch of the mainnet, the social content platform Reddit announced the testing of the Arbitrum solution for its own Community Points program. In the future, the social network plans to move moons and BRICKS tokens to the main Ethereum network.
Among the major projects that have recently integrated Arbitrum is the 1inch Network DeFi project. According to its representatives, the support of the L2 solution reduced commissions and provided a higher speed of transactions.
Against the background of the deterioration of general market sentiment since the second half of September, there has been a slight decline in activity in the Arbitrum ecosystem – as of 30.09.2021, TVL is $ 1.37 billion (-41% over the past 7 days).
Shortly before the downturn, TVL’s weekly growth rate exceeded 2,000%.
5/ Amount of Bridged ETH to Arbitrum— 🎮 Play Intern (@playtern) September 18, 2021
In the past 2 weeks, the amount of ETH that has been bridged over to @arbitrum has continued to increase
+2014% in the past 7 days with about 660k ETH bridged
Data sources: @l2beatcom @nansen_ai pic.twitter.com/PFHnSvujeB
Nevertheless, Arbitrum is still significantly superior in TVL to its L2 competitors.
Twitter-analyst Play Intern is confident that the reason for the growth of the Arbitrum ecosystem was the attractive interest rates of profitable farming programs, as well as the hopes of users for token energy.
A significant role was also played by the high speed and low cost of transactions. According to the L2 Feesservice, the commissions in the Arbitrum network are several times lower than in Ethereum.
6/ So what caused this surge of inflows?— 🎮 Play Intern (@playtern) September 18, 2021
Initially, I believe this could be attributed to the crazily high yields of pool 0 "risk-free" yield farms that sprung up on @arbitrum
Another is perhaps users anticipating an airdrop similar to that of the $GB airdrop for AVAX bridgers pic.twitter.com/kolUiQ6rQn
In the first half of September, Arbitrum’s share of TVL of L1/L2 bridges increased from 0.47% to 32%, becoming comparable to that of Polygon.
0/ In today’s Delphi Daily, we dove deep into @arbitrum— Delphi Digital (@Delphi_Digital) September 15, 2021
We looked at Arbitrum’s bridge activity, its correlation with Ethereum gas, and it's spectacular past two weeks.
For a more detailed look 🧵👇 pic.twitter.com/LU5Sa5T3yX
The rapid rise of Arbitrum indicators coincided with a sharp decline in the median price of gas in the Ethereum network.
4/ It’s no surprise that WETH/ETH, USDC, USDT, DAI, and WBTC account for nearly 90% of asset value being bridged on Ethereum.— Delphi Digital (@Delphi_Digital) September 15, 2021
The reason for this is pretty obvious: liquidity for these assets on Ethereum’s DeFi layer is extremely deep, in part due to their large market caps. pic.twitter.com/do5SlqVi9I
“Theoretically, L2 solutions like Arbitrum largely scale the bandwidth of Ethereum,” the Delphi Digital researchers emphasized.
Experts noted that the future of second-level solutions looks promising.
5/ Arbitrum’s take-off in early Sept. coincides with a sharp decrease in the median gas price on Ethereum mainnet.— Delphi Digital (@Delphi_Digital) September 15, 2021
Theoretically L2s like Arbitrum scale Ethereum’s throughput to a great degree. pic.twitter.com/l46i2RDyOF
On the project portal you can see a list of DeFi services that have integrated Arbitrum. Aave, Loopring, Zerion and other well-known platforms are going to do this in the near future.
The DeFi Llama website has more than 20 projects in the field of decentralized finance, working on the basis of this L2-solution. Their combined TVL is about $1 billion.
In this segment, as well as in the DeFi market as a whole, Curve is the leader. It competes with SushiSwap, which supports many other protocols.
In addition to these DEXs,Arbitrum also employs Balancer, DODO, Swapr and Uniswap.
The image below shows some of the derivatives and synthetic asset platforms using this advanced L2 solution:
Landing protocols on Arbitrum are also appearing, which are also important for the industry.
There are already quite a few gaming and NFT applications. Below are some of them:
It is difficult to imagine a modern DeFi ecosystem without all sorts of profitability optimizers and other services that attract users with liquidity mining programs.
Arbitrum-based meme token platforms enrich the already diverse Palette of DeFi.
Bridges leading to Arbitrum
The Arbitrum One Bridge tool allows users to transfer ETH and ERC-20 tokens to the second-level network in a few clicks.
To use this crosschain bridge, you first need to add the Arbitrum One network to MetaMask. The screenshot below shows the corresponding settings of the Web3 wallet.
However, it is much easier and faster to use the Chainlistservice, where you need to select the desired network, click Connect Wallet, and then click the permission button in MetaMask.
After that, you need to connect the wallet to the Arbitrum Token Bridge and select an asset for cross-chase operation.
Finally, you need to enter the number of coins, click the Deposit button and confirm the operation in MetaMask.
The full guide to migrating Ethereum assets to Arbitrum is available here.
It is important to note that although the migration of assets to L2 does not take much time, it will take seven days to withdraw funds to the main network. This is perhaps the main drawback of second-level solutions based on Optimistic rollups.
You can bypass the seven-day period with the help of crosschain bridges from third-party developers, which involve the payment of small additional commissions.
One such tool is Celer Network’s cBRIDGE. According to Play Intern observations, the crosschain operation takes about 15 minutes.
2/ 🌉 BRIDGES— 🎮 Play Intern (@playtern) September 18, 2021
By now most of us are already familiar with how to bridge via https://t.co/eS6ymoIwG0
👉 https://t.co/WtRSPm1ni9 to easily switch networks
👉 Straightforward bridging, bare bones UI
👉 7 day withdrawal period (similar to @0xPolygon plasma bridge) pic.twitter.com/pLFYouuXn3
The bridge supports not only Ethereum and Arbitrum, but also Binance Smart Chain, Avalanche, Polygon, xDai, OKExChain, Huobi ECO Chain, Optimism and Fantom.
Another similar tool is xPollinate. The Connext project working on it attracted considerable investments from ConsenSys, Coinbase Ventures, Huobi and Polychain Capital.
Similar functionality is wielded by Hop.Exchange, Synapse Bridge, The Mosaic tool by Composable Finance, and AnySwap.
Other useful resources include:
- Arbiscan is the blockchain browser for Arbitrum One;
- Inside Arbitrum is a technical documentation from Offchain Labs.
On September 14, Arbitrum experienced a 45-minute glitch due to an error in the Sequencer contract. During this time, the network did not process transactions.
The developers assured users that their funds are safe.
“A Sequencer cannot steal funds or forge transactions because every transaction it processes has a digital signature of the user, which is verified by the Arbitrum chain. User funds were not at risk, “the representatives of the project emphasized.
They also reported that the Arbitrum network is resilient to long-term Sequencer failures.
“Users have the ability to bypass the Sequencer and send transactions directly to Ethereum for deferred inclusion in the Arbitrum chain, and this capability was fully preserved during the incident,” the developers explained.
The project team warned of possible repeated failures, as Arbitrum One is still in beta testing.
As already mentioned, the architecture of Arbitrum and many other second-tier solutions involves a seven-day period for withdrawing funds to the main network. However, there are many third-party services to help circumvent this limitation, albeit with some additional transaction costs for users.
Many Arbitrum applications may look somewhat crude and have low liquidity. This is not surprising, since the ecosystem is still at the dawn of its development.
Despite these and other potential drawbacks, the future of L2 solutions looks promising. The creator of Ethereum, Vitalik Buterin, proposed to transfer non-fungiplatable tokens issued on the Ethereum blockchain to the ecosystem of second-level solutions.
“To reduce commissions, we need to move NFT to a second-tier ecosystem. However, to do this ‘right’, good L2 interoperability standards are needed so that the ecosystem does not get hung up on one particular solution,” Buterin wrote.
You can use existing solutions like Arbitrum for migration. However, according to Buterin, this approach has a number of significant drawbacks:
- All major EVM-enabled rollup platforms have backdoors and other security issues, so it’s risky to rely on a single solution.
- the NFT ecosystem may become too large to work in one L2;
- the NFT ecosystem is not closed – it needs to interact with other projects on Ethereum.
As a possible option, Buterin proposed a system that allows you to transfer tokens between rollup platforms or underlying chains by issuing wrapped tokens.
According to the Etherscan service, the OpenSea NFT marketplace is the largest gas consumer on the Ethereum network.
Second-tier solutions may well coexist with sharding within Ethereum 2.0, which theoretically will allow thousands or even millions of transactions per second to be processed in the future.
“Once Phase 1 arrives and Rollups move into the Eth2 ecosystem using sharding to store data, we will rise to a theoretical maximum of ~100,000 TPS,” Vitalik Buterin said in a paper titled “Rollup-Oriented Ethereum Roadmap.”
Complex systems based on smart contracts are not without drawbacks. Users should take into account the possible risks, because many protocols are still only in the initial stages of development.
However, there is no reason to doubt that the number of platforms based on L2 solutions will constantly increase, and the competition between them will become tougher. In the struggle for users and the TVL projects generated by them, they will come up with all new liquidity mining programs and conduct energyrops.
Against the backdrop of the still pressing problem of scaling the ether, the prospects of Arbitrum and other similar L2 technologies seem significant. Their development is unlikely to be hindered by the approaching full launch of Ethereum 2.0 – second-level solutions will only increase the efficiency of the already productive PoS blockchain.