Beginner's Guide to Arbitrum

In this beginner's guide series, we explore Arbitrum, a layer 2 scaling solution for Ethereum.

Beginner's Guide to Arbitrum

What is Arbitrum?

Arbitrum is an Ethereum scaling solution based on optimistic rollups that aims to feel exactly like interacting with Ethereum, but with transactions costing a fraction of what they do. It is built by the team at Offchain Labs.

Why is there a need to build Arbitrum?

Ethereum is expensive to use.

A swap on Uniswap costs US$30 and a simple token transfer can cost $10. Furthermore, these gas prices aren't set in stone and they can fluctuate wildly especially during periods of high demand.

Ethereum fees. Source: Etherscan

As more users demand for precious block space on Ethereum, a number of scaling solutions are being explored outside of the main protocol layer. These include sidechains, channels, rollups and more.

Rollups are a way to scale Ethereum by moving the execution layer of transactions away from the main blockchain and rolling the transactions up in batches. Often, they compress the data and verify them off-chain before storing the state data on the main chain.

What are rollups?

In a rollup, all transactions are written on the Ethereum mainnet as calldata, but the actual computation and storage of the contract are done off-chain. This allows anyone to use all the available public information to determine the current correct state of the blockchain since they have the full history of the chain.

A validator posts an assertion about what the contract will do and the assertion rolls up all of the transaction calls and their results into a single on-chain transaction.

There are two main types of rollups - optimistic rollups and zero knowledge rollups. Arbitrum uses the former.

Why optimistic rollups?

Arbitrum operates a type of rollup that's optimistic in nature, where the state of the blockchain is advanced by any validator that posts a rollup block that it claims is correct without any proof.

Instead, a bond is posted by the validator making the assertion.

Once an optimistic assertion is posted, there is a time period where anyone can post their own bond and challenge the assertion if they think that it is invalid. This challenge is called a fraud proof.

During the challenge process, there are rounds of interactions to resolve the dispute. Arbitrum operates on a multi-round interactive rollup.

If the assertor is wrong, they will lose their bond. If the challenge period expires without a successful challenge, then the assertion is accepted and finalized.

Once the assertion is finalized, the transaction data is logged onto Ethereum.

What are the benefits of Arbitrum?

Arbitrum's launch is very welcomed by both developers and users alike:

  • Arbitrum has its security rooted in Ethereum, and any party can ensure correct and valid results based on the concept of fraud proofs.
  • Arbitrum supports Ethereum Virtual Machine (EVM) contracts with little to no modifications
  • The cost to use and transact on Arbitrum is extremely low

The experience of using Arbitrum is similar to Ethereum.

One of the biggest benefits of using Arbitrum is that the experience is extremely similar to using a dApp on Ethereum mainnet.

Since the codebase can be easily reused by developers, most of the dApp functionality should stay the same. Transactions can run on Layer 2, which is faster and cheaper, and have its state saved periodically on Layer 1.

Who uses Arbitrum?

The growth of Layer 2 scaling solutions like Arbitrum has been remarkable. As of April 2022, the number of unique addresses on Arbitrum has reached 520,000 and growing.

Arbitrum Unique addresses. Source: Arbiscan

The number of daily addresses on Arbitrum has also trended up since November 2021.

Arbitrum Daily Transactions. Source: Arbiscan

We would expect that transactions on Arbitrum will continue to grow over time as it further reduces gas costs of transacting on Arbitrum.

How much does it cost to transact on Arbitrum?

As of April 2022, it costs $0.84 to send ETH on Arbitrum, and this puts it at the top end of the range compared to its L2 competitors.

This is about 60% cheaper than transacting directly on Ethereum mainnet.

Cost to use Layer 2 solutions. Source: l2fees

How much does Arbitrum pay for Ethereum security?

According to L2fees, Arbitrum is the top payer among L2s for Ethereum security at US$121,000 daily. This is calculated as the amount in ETH paid to post proofs on Layer 1.

This graph below from Dune shows the daily gas used by the Arbitrum sequencer, which has been relatively stable.

Daily gas used by Arbitrum sequencer. Source: Dune

How do I deposit tokens into Arbitrum?

You can deposit tokens into Arbitrum in one of several ways.

Once you have deposited tokens into Arbitrum, you can connect your wallet and interact with apps.

How to setup MetaMask for Arbitrum Network
In this guide, we explain how to setup Metamask for Arbitrum network.

Are all tokens supported by Arbitrum?

Most tokens were created as an ERC-20 token on Ethereum Layer 1.

In order for that token to be available on Arbitrum, someone (e.g. the development team) must bridge that token from Layer 1 to Layer 2. The Arbitrum team maintains a list of bridged tokens on this token list.

What wallets support Arbitrum?

Arbitrum is supported by a wide array of wallets including:

  • DeBank
  • Coinbase Wallet
  • Huobi Wallet
  • Math Wallet
  • Rainbow Wallet
  • Zerion
  • Trust Wallet
  • Zapper

A list of supported wallets can be found on Arbitrum's portal.

How can I track my DeFi portfolio on Arbitrum?

You can track your DeFi portfolio on Arbitrum using one of the following supported portfolio trackers:

Where can I swap tokens on Arbitrum?

You can swap tokens on several DEXes on Arbitrum, including:

How do I withdraw tokens from Arbitrum?

You can withdraw tokens from Arbitrum in one of several ways.

For standard withdrawals using the official bridge, there is a waiting period currently set as 7 days to allow sufficient time for verifiers to detect fraud on Arbitrum. During this time, your funds are locked. After 7 days, you can click on the Claim button to receive your funds on Layer 1.

You can use alternate bridges above if you need faster withdrawals or withdrawals at lower cost.

What are the risks of using Arbitrum?

Arbitrum is experimental software, hence, bugs and risks may arise.

Some of the top risks of using Arbitrum include:

  • Failure of verifiers to check the published state resulting in stolen funds
  • The smart contract receives a malicious code upgrade
  • The Arbitrum Virtual Machine, which is independent from the Ethereum Virtual Machine, is used to execute transactions, may contain implementation bugs that can lead to loss of funds
  • Withdrawals from the system is initiated on L2 and that transaction takes several days to finalize. If during that time, the centralised validator goes down, users may not be able to exit the system resulting in frozen funds
  • The system employs a privileged centralised sequencer that has priority in submitting transaction batches and ordering transactions. It has the ability to front-run user transactions resulting in MEV extraction

Are there NFTs on Arbitrum?

Yes, there are.

While the NFT scene on Arbitrum is relatively young, it is growing rapidly. Popular NFTs on Arbitrum include Legions and Smol Brains. NFTs can be traded on the Treasure Marketplace.

Does Arbitrum have a token?

No, there isn't. The native token on Arbitrum is ETH.

What can I do on Arbitrum?

Check out the following article for yield farming opportunities on Arbitrum.

Guide to Yield Farming on Arbitrum
We explore some of the yield farming platforms on Arbitrum and where investors can provide liquidity for yield.