What Are Scaling Solutions?
Here’s a brief blockchain primer: blockchains confirm transactions by relying on independent networks of validators, who earn cryptocurrencies for processing batches of transactions. Ethereum is by far and away the most popular blockchain for smart contracts, but its network of validators is slow and expensive.
To solve this problem, technologists created so-called scaling solutions that tried to speed up the Ethereum blockchain. These scaling solutions process transactions elsewhere, then report back to the Ethereum blockchain. These “elsewhere” networks are called “Layer-2” blockchains.
One such method of processing transactions elsewhere is the “rollup.” These protocols collect several hundred transactions, perform a computational magic trick that confirms these transactions, and then tell the Ethereum blockchain that all these transactions are valid and to confirm them, once and for all, on the trustworthy Ethereum chain.
Rollup chains operate parallel to Ethereum and support their own decentralized finance (DeFi) ecosystems. Users “bridge” funds from Ethereum into a rollup chain, play around in its DeFi casino, and then bridge whatever remains back into Ethereum. Playing around in the DeFi casino is a lot cheaper on the rollup chain than on Ethereum, as each individual transaction is a lot cheaper.
How Does Arbitrum Work?
Arbitrum is a rollup network. Further, it is a so-called “optimistic” rollup, meaning that it assumes that all the transactions in the rollup are valid, allowing users to dispute this if they believe otherwise. On optimistic rollups, transactions are innocent until proven guilty.
Aside from that, Arbitrum is pretty similar in its architecture to Ethereum: it supports the Ethereum Virtual Machine, making it easy for developers to launch decentralized applications on the chain.
Digging deeper, the Arbitrum network is actually composed of multiple chains with varying levels of decentralization. “Arbitrum One” is the Arbitrum rollup chain, while Arbitrum “Nova” runs on a piece of technology called AnyTrust, where developers can play around with decentralization and transaction costs.
Arbitrum’s main competitor is Optimism. Of the two, Arbitrum is the larger protocol. According to Arbitrum’s website, it has a total of $6.7 billion in cryptocurrency locked up in its platform (denoted by total value locked, or TVL), and has a market share of 67.1%, with 3.9 million users. DeFi Llama, an independent data site, knocks Arbitrum’s TVL down to $2.23 billion and Optimism’s to $922 million.
Arbitrum has also generated excitement from investors in the cryptocurrency world. Since its founding in 2018, Offchain Labs, the company behind Arbitrum, has raised $123.7 million from a number of crypto-native financiers including eGirl Capital and Delphi Digital.
In March 2023, Arbitrum launched a cryptocurrency token, ARB, to its users in a distribution mechanism known as an airdrop. The token is used for governance, decentralizing the protocol away from its creators, Offchain Labs. This means that Arbitrum will be governed by a decentralized autonomous organization, or DAO.
Users claimed over $1 billion worth of the airdropped token shortly after launch. A few weeks after its launch, it settled at a market cap of about $1.5 billion, making it the 37th most popular cryptocurrency by market capitalization, according to CoinMarketCap. The token launch came just under a year after Optimism airdropped a governance token (OP) of its own. Arbitrum’s launch was about twice as successful as that of OP, which in March 2023 held a market cap of $715 million.