An introduction to Arbitrum and its Layer 2 scaling solutions.
Gas fees on Ethereum are pretty high right now. As in all-time highs. The following showcases the gas fees of the last three years and the fees now are consistently much higher than during the 2017 ICO boom.
What’s causing all of this?
First, let’s dive into why fees exist in the first place. Blockchains consist of blocks of transactions that are chained together. Each block has a certain amount of transactions that it can hold. In order for a transaction to be included in the next block, miners have to pick the transactions that they’d like to include, typically those with the highest fees for maximum profitability. When there are a lot of transactions happening on-chain, such as the current situation, the fees rise as there are more transactions bidding to be included in the next block.
Now that the basics are covered, the question is how exactly should base chains scale in order to deal with high fees? An easy solution is to increase the block space, but that reduces decentralization and acts as a mere temporary fix. The real answer to solving this fundamental problem is scaling off-chain. That’s where solutions such as optimistic rollups come into play.
What is an optimistic rollup?
An optimistic rollup is essentially a Layer 2 chain that’s tied to a Layer 1 contract. This allows for the data and computation of a contract to be moved off-chain and “rolled up.” The L2 chain advances by posting a “rollup block” which includes the results of multiple calls that happened on the L2 chain, such as state changes and payments, as a single transaction on-chain. Other users on the base chain can validate what is happening on the L2 chain by checking the calldata that is posted on-chain which contains all the hashes of outputs and contract state along with all the transaction calls and data from the L2 chain. One optimistic rollup protocol that is very promising is Arbitrum Rollup, which is highly optimized to increase capacity and lower costs by drastically reducing a contract’s on-chain footprint.
What is Arbitrum?
Arbitrum is a Layer 2 platform that allows the computation and storage of smart contracts to be moved off-chain in a fully trustless manner. At the moment, it only supports Ethereum contracts, but other chains will be supported in the future. This type of platform effectively turns base chains into purely settlement layers meant for tracking smart contracts and resolving disputes that may occur on the L2 chains. In practice, this results in an order-of-magnitude increase in transactions per second along with a considerable reduction in the fees associated with them since the scalability of Arbitrum is independent of the base chain. Although the capacity of the Arbitrum Rollup chain is much larger than the base chain (10–100x more than Ethereum), calldata must still be posted on-chain, which means that the capacity of the Arbitrum chain is still tied to the block space of the base chain.
How Arbitrum Rollup chains interact with the base chain | Credit:@kyleodesign
Looking at this graphic, a developer has a contract on an Arbitrum Rollup chain that is connected to a Layer 1 chain such as Ethereum (or some other supported chain in the future) and they want to scale independently of the base chain. They can use Arbitrum to scale while continuing to interoperate with the base chain. This means that if they have a token on the base chain, they don’t have to recreate or migrate it to the Arbitrum chain as it can interoperate with the base chain natively.
In this manner, developers can focus less on the constraints of any specific base chain and concentrate completely on their application. This type of abstraction also works very well in systems like Chainlink, where the abstraction comes in the form of developers focusing on building their smart contracts rather than constructing an oracle mechanism from scratch.
For an in-depth look at how Arbitrum Rollup works from a technical perspective, check out this article.
“At present, most of the gaming industry on Ethereum cannot afford to run heavy computational processes on-chain. Games traditionally require thousands of in-game interactions, especially strategy-based games that can generate upwards of one hundred thousand transactions on Ethereum to properly function. Arbitrum allows gaming projects to use Ethereum as a settlement layer, while processing highly complex operations off-chain that retain high levels of transparency and security.”
This is a quote from an article detailing how Arbitrum works in conjunction with the Chainlink network. Smart contracts have been confined to the external world until liberated by decentralized oracle networks like Chainlink, but when will they be emancipated from the scalability and cost issues that base chains are currently facing? This excerpt showcases the real capabilities that a platform like Arbitrum could have on the broader blockchain space.
How Arbitrum Sidechains interact with the base chain | Credit:@kyleodesign
Although optimistic rollups are a great way to scale in the short term, eventually hundreds of millions of people will be using these networks. This requires even more scaling than rollups can provide, which is where sidechains come into play. Because optimistic rollups still have to post calldata on-chain, the scalability of L2 platforms like Arbitrum is still limited by the block space of the base chain.
Arbitrum Sidechains are similar to Arbitrum Rollup but are different in that only a permissioned set of validators are agreeing on the state of the VM. This allows for practically no data to be put on-chain because the permissioned set of validators can come to an agreement off-chain. When they can’t reach a unanimous agreement off-chain, the protocol then reverts to Arbitrum Rollup. Scheduled to be released early next year, Arbitrum Sidechains would allow for a whopping 40,000 TPS and a 1,000x cost advantage over using Ethereum at the base layer.
Arbitrum Sidechains also provide the AnyTrust guarantee, which essentially states that as long as any one validator is honest and available, the L2 chain is guaranteed to execute correctly according to its code and guaranteed to make progress. Unlike in a state channel, off-chain progress does not require unanimous consent, and liveness is preserved as long as there is a single honest validator.
Think about the paradox behind the idea of trading decentralized assets on centralized exchanges. Decentralized exchanges have been laggards in comparison to centralized exchanges in many aspects due to the cost of each transaction being far too high on base chains. What will happen when the costs related to running the smart contracts of decentralized exchanges on L2 are thousands of times cheaper than they cost now? What happens when the trust of using those contracts on L2 equalizes to the trust of doing the same on the base chain?
In the long run, smart contracts will be running through Layer 2 solutions like Arbitrum which will allow them to be scalable and cost-efficient. Base chains will become back-end systems used solely for settlements which eliminate the need to have a smart contract locked into a specific base chain. Once a smart contract is live on Arbitrum, such as on their new component called ArbOS which provides an interface that looks exactly like the base chain, developers could use the L1 chain they want without worrying about the scalability of that chain, allowing them to focus solely on the contract that they’re building.
More information on Arbitrum
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Special thanks to Offchain Labs CEO Steven Goldfeder for comments on a draft of this article.
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