A Game-Changing Layer 2 Solution for Ethereum’s Scaling Woes

by Kadeem Clarke

Layer 2 solutions are ways to help Ethereum work better by reducing network congestion and transaction fees. Instead of making big changes to the way Ethereum works (called Layer 1 changes), Layer 2 projects are built on top of Ethereum. Some Layer 1 changes, like letting more transactions happen at once, could also help.

Right now, Ethereum has some problems with security and being decentralized enough, because of the way it works. Layer 2 solutions try to fix these problems while also making Ethereum work better.

Layer 2 is a name for all the different solutions people have come up with to make Ethereum work better. Some examples of Layer 2 solutions are Arbitrum and Eth 2.0. These solutions should help make Ethereum faster and cheaper to use.

Arbitrum

The Arbitrum team

Offchain Labs, founded by Ed Felten, Steven Goldfeder, and Harry Kalodner, is responsible for developing Arbitrum.

They announced the launch of the long-awaited Arbitrum One mainnet on August 31, 2021. Top DeFi platforms like Aave, Balancer, Band Protocol, Curve, Sushiswap, and Uniswap already use Arbitrum or are considering doing so to boost throughput and reduce fees for their users.
They also disclosed that a series B funding round, led by Lightspeed Venture Partners, netted them $120 million. This results in a $1.2 billion valuation for the business. Pantera, Compound, Blocknation, Coinbase Ventures, and others are notable investors in Offchain Labs.

What is Arbitrum?

By increasing the speed and scalability of Ethereum smart contracts and adding more privacy features, Arbitrum is a layer 2 solution created to enhance its functionality.

The platform’s goal is to make it simple for developers to use Ethereum’s top-notch layer 1 security while running unaltered Ethereum Virtual Machine (EVM) contracts and transactions on a second layer.
It is designed to address some of the drawbacks of existing Ethereum-based smart contracts, including their low efficiency and high execution costs, which have harmed the Ethereum user experience and frequently make transacting expensive.
To record batches of submitted transactions on the Ethereum main chain and execute them on affordable, scalable layer 2 sidechains while relying on Ethereum to ensure correct results, Arbitrum uses a method known as transaction rollups.
This procedure enables new classes of potent layer 2-based dApps while offloading most of the computational and storage burden Ethereum currently faces.

Arbitrum Architecture

There are three main components in the Arbitrum system:

The compiler

The EthBridge

Validators

Together, these three elements enable Arbitrum to be quick and interoperable.

The Arbitrum compiler combines a collection of contracts into a single executable file that the Arbitrum network architecture can use.

These contracts can communicate between the Ethereum primary chain and the Arbitrum side chain thanks to the EthBridge, which also provides security by resolving potential conflicts between validators. Validators run code and make sure the network functions properly.

From the developers’ standpoint, Arbitrum presents a fresh option to current L2 solutions available on the market, offering a distinctive combination of advantages, including trustless security, compatibility with Ethereum, scalability, and minimal cost.

No other L2 solution offers the same advantages at the cost basis Arbitrum operates on, claims the development team behind Arbitrum, Offchain Labs.

Arbitrum TVL

Despite a general decline in DeFi apps’ TVL in 2022, Arbitrum didn’t completely collapse and made it through.

L2s are currently regularly processing more transactions than Ethereum L1 and are starting to solidify their position as Ethereum’s leading scaling solutions.

With a sizable group of cutting-edge applications and robust communities, Arbitrum is emerging as the dominant L2 for DeFi in a roll-up landscape marked by increased competition.

With $1.1 billion in TVL, Arbitrum has the fifth-largest amount of any L1 or L2 and holds a 2.5% share of the total amount of TVL across all networks. Additionally, the network holds a 62% share of TVL in L2s.

Since last year, Arbitrum has significantly increased its market share by only 1% among all chains. This increase is probably due to the network’s expanding number of applications, like the perpetual exchange GMX.

Active Addresses

Arbitrum averaged 614,279 Monthly Active Addresses in Q4, and 728.7% Q/Q and Y/Y growth, respectively.

The L2 is on pace to exceed that number in January 2023, as it’s currently set to clock in at 631,633 Monthly Active Addresses for the month.

This increase in users coincides with increased liquidity within the Arbitrum ecosystem and follows Nitro, a much-awaited network upgrade in August 2022 that sped up and increased transaction throughput. Due to the drop in gas prices, bots may be used to farm a potential Arbitrum token airdrop for some post-Nitro growth.

Transactions

The number of transactions in Arbitrum has increased alongside the number of users, with Q4 growth representing 199.6% and 1904.2% Q/Q and Y/Y, respectively.

Similar to active addresses, the deployment of Nitro in August 2022 has resulted in a notable increase in transactions, probably partly due to airdrop farming. Since October 2022, 52.7% of all transactions validated on Ethereum L1 during that time have been processed by Arbitrum.

Gas fees

Arbitrum uses ArbGas to track the execution cost on a chain. Every Arbitrum VM instruction has an ArbGas cost, and a calculation’s cost is the sum of all the instructions’ ArbGas fees in relation to Ethereum’s gas limit.

This indicates that Arbitrum has a much lower gas fee than ETH and that there is no hard limit on ArbGas. Although it is initially set to zero, the fee is typically charged to cover the costs incurred by the validators of the Arbitrum chain.

Additionally, ArbGas is charged for the AVM’s proofreading of each instruction. Therefore, it’s critical to determine how much L1 gas the EthBridge will need to ensure that it never exceeds the allowed limit. Furthermore, since it enables us to safely determine the chain’s speed limit, estimating the emulation time is essential for rollup chain throughput.

In contrast to Ethereum gas, which performs a similar function on Ethereum, ArbGas tries to estimate emulation on AVM. For instance, access to storage is very expensive on Ethereum because a storage right creates a commitment for all Ethereum miners that may last for a long time.

Arbitrum token

There isn’t a token for Arbitrum yet. However, Arbitrum will likely launch an Arbitrum native token in the future, given that its rival Optimism launched its OP token through an airdrop.

The Arbitrum token will also likely be used to decentralize key elements of the network, such as the sequencer and validators.

Given that these functions are currently centralized and pose the biggest risk to Arbitrum, doing this is essential for the company’s long-term health.

Arbitrum Ecosystem

The Best DEXes on Arbitrum

The top decentralized exchanges (DEX) on Arbitrum are:

SushiSwap: a Uniswap fork.
GMX: a decentralized spot and perpetual exchange.
Curve: a massive stablecoin exchange.
Uniswap: the pioneer of the AMM mechanism.
Balancer: a competitor of SushiSwap and Uniswap.

The Leading Arbitrum Bridge

Synapse is one of the most important bridges to Arbitrum besides the official Arbitrum bridge, allowing users to send ETH and ERC-20 tokens to a layer 2 scaling solution called Arbitrum One. Simply send a transaction to one of EthBridge’s Inbox contracts if you want to send one using Arbitrum.

Top Lending Protocols on Arbitrum

The top lending protocols on Arbitrum are:

dForce: a DeFi infrastructure protocol.
Stargate Finance: a fully composable liquidity protocol.
Aave: a popular money market.
Vesta Finance: a lending protocol.

DApps on Arbitrum

Some of the leading dApps on Arbitrum include:

Dopex: a decentralized options protocol.
Beefy Finance: a yield aggregator.
Sperax USD: a hybrid algorithmic and crypto-collateralized stablecoin.
Jones DAO: an options liquidity protocol.

New projects on Arbitrum

Here is a list of high-quality, not yet launched projects:

GammaSwap – an oracle-free volatility DEX launching on Arbitrum. Users can expect long volatility (gamma) by shorting LP pairs and earning the reward from impermanent loss.
Contango – a unique decentralized market offering expirable and contracts to buy or sell an asset at a set price and date in the future. Contango achieves that without order books or liquidity pools.
Vertex – a vertically organized decentralized EXchange. It has a unique AMM-Orderbook mix, great UI/UX, long-term sustainable tokenomics, and is good for different traders.
STFX, Single Trade Finance Exchange – a DeFi and SocialFi protocol for short-term asset management.
Rage Trade – a double-legged trading protocol on the Ethereum and Arbitrum mainnet. Rage has a unique feature that enables users to recycle the liquidity they used on other protocols on its platform.
Orbital – developed by the teams behind PlutusDAO and Dopex and will integrate with both protocols. There’s a lot of competition between native Arbitrum DEXs, but these teams have a strong track record in the space.

Recently launched projects

Token: $Y2K – Y2K Finance is a suite of products designed for exotic peg derivatives that will allow market participants to hedge or speculate on the risk of a particular pegged asset (or basket ) from ‘fair implied market value.’
Token: $JONES – Jones DAO is a yield, strategy, and liquidity protocol with vaults that enable 1-click access to institutional-grade strategies. These strategies unlock liquidity and capital efficiency for DeFi through yield-bearing tokens.

FARM.XYZ on Arbitrum

FARM.XYZ chose Arbitrum…

On their official Twitter account, they provided several threads about why did they choose Arbitrum; the reasons for that are:

Scalability: Arbitrum’s layer-2 scaling solution allows for high throughput and low latency, making it well-suited for handling large transactions.
Security: Arbitrum uses a combination of secure multiparty computation and roll-up technology to provide strong security guarantees for smart contracts and transactions.
Interoperability: Arbitrum is designed to be compatible with multiple blockchain networks, allowing for easy integration with existing DeFi protocols and platforms.
Flexibility: Arbitrum allows for creating a private or semi-private chain, enabling the use of confidential smart contracts and enhancing the users’ privacy.
Cost-efficiency: Arbitrum’s off-chain architecture reduces the cost of executing smart contracts and transactions, making it more cost-effective than a layer-1 blockchain.

Compliance: Arbitrum provides a way to include compliance checks in a smart contract, allowing for the creation of regulated DeFi applications.

The first $SHIB on Arbitrum

It isn’t just memes; NitroShiba released two new products:

Leash Protocol – helps users check to lock safety levels by giving out a score from 0 to 100%. It is the first step towards providing tangible security for the Arbitrum ecosystem. It is an automated real-time risk assessment system for liquidity locks.
Nitrolocker – allows projects to lock liquidity quickly and easily

https://twitter.com/NitroShiba/status/1603432271058378758/photo/1

Arbitrum is experiencing a micro-cap season; the question is which projects will skyrocket and which will be doomed.

What Makes Arbitrum Unique?

The project aims to create an intuitive platform that programmers can use to launch highly effective and scalable smart contracts compatible with Ethereum.

But it’s not the only platform trying to get around Ethereum’s limitations; at least a dozen more aim to provide equivalent functionality.

So what makes Arbitrum unique from the competition?

It has several distinctive qualities, such as:

High EVM compatibility

Robust developer tooling

Low fees

Fairly launched

Well-developed ecosystem

However, Arbitrum aims to solve this blockchain trilemma by implementing Optimistic Rollups that satisfy all these three elements. Since Arbitrum is the most advanced L2 platform, it will continue to take in the most recent technological developments to scale the platform and encourage its growth.

The Future of Arbitrum

While increasing its TVL share in DeFi, Arbitrum is also expanding its user base and transaction volume.

With other networks like Optimism and games like OPCraft that are developed on unique L2s using the OP Stack, Arbitrum is well-positioned to compete in the gaming market.

Due to the network effects created by its extensive DeFi ecosystem, Arbitrum should be able to keep or even increase its lead over other L2s in TVL. Only once Arbitrum’s token has been launched should incentive programs strengthen this lead.

The elephant in the room is the Arbitrum token. Offchain Labs will almost certainly release one at some point to maintain equality with other tokenized L2s like Optimism, StarkWare, and eventually zkEVMs like those from Polygon, zkSync, and Scroll.

Although there are still network centralization risks, Arbitrum seems prepared to build on its strong applications base and keep growing in 2023.