Arbitrum is one of the hottest projects for 2023. It got attention because of long-awaited airdrop, which marked the end of the crypto winter that the crypto community had grown tired of. Let's unpack what Arbitrum is, why it is so highly demanded, and whether it is worth investing in.
What is Arbitrum
Arbitrum is a second-layer scaling solution for the Ethereum network. Let's dive into terms.
A second-layer solution (layer 2 or L2) is a built-on over the main blockchain. The primary L2 goal is to reduce pressure over L1. The second layer simply takes over part of the first one task. For example, L2 can make computations, conduct all the transactions, and then just write down all the results on the main blockchain. It increases first-layer blockchain speed and makes transactions cheaper.
Ethereum is a first-layer blockchain, which means it is a basic blockchain used to build other projects. The popularity growth made the system overloaded, but it couldn’t scale. Users were queuing up, while the cost of fees was growing. That is why L2-solutions got into demand.
Arbitrum is a tool that helps Ethereum run faster and charge fewer transaction fees.
Links: Arbitrum official website, DAO website, Twitter, Discord, GitHub, blog.
How it all started
Arbitrum is developed by the American company Offchain Labs. It was founded in 2018 by three developers: former Princeton professor Ed Felten, former Google software developer Steven Goldfeder, and former Apple software developer Harry Kalodner.
Arbitrum One was launched on September 1, 2021. At the same time, Offchain Labs announced that it had raised $120 million for project development from Lightspeed Venture Partners, Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research, and other major investors.
Now the Arbitrum is governed by the Decentralized Autonomous Organization (DAO) Arbitrum Foundation. All token holders are DAO members, which means they can vote and choose the platform's next stages of development. To make voting as fair and transparent as possible, the DAO uses tokens. One coin is one vote. The system registers tokens along with the address of the crypto wallet.
Imagine that you are an Arbitrum token owner. You see an upgrade proposal on the Snapshot voting platform. After a small dive into it, you decide that's a bad idea. You have project tokens, which means you are a member of the DAO, so you can vote against it by sending a coin in favor of your vote.
Here is how voting process in the Arbitrum crypto community looks like:
It is possible for one person to create several crypto wallets. That means the possibility of taking part in the voting more than once. The Arbitrum rules contain no information about restrictions related to multiple voting.
How Arbitrum works
Arbitrum is an Ethereum additional layer. It takes over the transaction processing, reducing pressure on ETH. The Arbitrum Virtual Machine (AVM) is responsible for data transfer between L1 and L2. It is compatible with the Ethereum Virtual Machine and supports Vyper, Solidity, Flint, YUL+, LLLL, and other popular programming languages.
If you want to bypass large Ethereum fees and avoid its low speed using Arbitrum, you need to transfer the Ethereum tokens directly to the L2 network through a special bridge. It is always possible to execute a reverse transaction by transferring tokens back to the ETH network.
Arbitrum is based on the Optimistic Rollups solution made by the project's competitor Optimism. The idea is that by default the system marks all transactions as valid until proven otherwise. This approach helps to avoid long, complex, and expensive analysis of each operation.
The Arbitrum team used Optimism as a basis and released its own version which included additional anti-fraud tools that increased security and helped reduce transaction fees.
On August 9, 2022, the developers launched a new version of their tool, Arbitrum Nova. It confirms transactions using AnyTrust concept instead of Optimistic Rollups. It makes Arbitrum Nova more suitable for games and social networks.
Validators are responsible for executing transactions and transferring Arbitrum data for the further addition to the main Ethereum network. Validators are the system participants who have installed special software to process some network tasks on their computers. They are rewarded for their work with the network's fees. Here is what you need to become a validator:
💾 Launch a node that will process the cryptocurrency network transactions. Here you can find all the information about settings.
⚙️ Select the type of validator and follow the instructions to set up the equipment.
There is no information about the maximum number of validators, so feel free to start.
Arbitrum in numbers
Arbitrum One ranks first L2 for Ethereum in terms of total volume of funds locked in its network (TVL). The project occupies over 66% of the second-layer solutions market.
The volume of the locked funds is the amount of assets that users transferred to the L2 network in order to conduct operations on it instead of L1.
Arbitrum One is not the most profitable tool on the market. Loopring and zkSync Lite are a bit cheaper. Here is L2 and Ethereum transaction cost comparison (the first column is the transfer cost, and the second one is the exchange cost):
👥 Arbitrum has almost 4 million users.
💰 These users have already saved $704 million on commissions.
On March 16, 2023, Arbitrum developers announced an airdrop (free distribution) of the project's native tokens ARB. The supply is limited by 10 billion ARB, and only 12.75% of them were allocated for airdrop.
Arbitrum like Ethereum runs on Proof-of-Stake (PoS) algorithm. This means that you can stake the cryptocurrency (it means earning by holding tokens in an account in order to maintain the project network). ARB can be staked on two DeFi protocols: Tenderize and 0xAcid.
Initially the airdrop was expected in 2022, but amid the crypto winter pressure and the number of industry collapses (Terra, FTX, etc.), developers decided to postpone it. Due to the fact that in 2022 Arbitrum has already become one of the largest second-layer Ethereum solutions, many members of the crypto community followed news about the airdrop as this was a great opportunity to get promising project tokens for free. In addition, the decision of such a large platform to run an airdrop was considered a sign of the crypto winter's end as developers often refuse such events in bad market conditions.
The long-awaited event took place on March 23, 2023. Increased investor attention to the airdrop caused Arbitrum's network to go down. Developers noted that all airdrop participants have six months to get their coins. Participants don’t need to prove their rights to own tokens as the developers took network snapshots during the event.
Arbitrum's daily transaction volume surpassed Ethereum's (1.31 million vs. 1.07 million) prior to the airdrop.
Here's how the token distribution looks like:
Right after the airdrop, developers handed all management tools to the DAO which is a community of token owners.
During the airdrop ARB tokens were listed on a number of cryptocurrency exchanges. The token's ATH ($11.80) was reached when the trades began. As of the time of writing, the coin is trading 89.31% cheaper ($1.3).
Arbitrum has already proven its efficiency by quickly entering the top Ethereum second-layer solutions. So its token can be considered as a good investment with high potential.
Also read another popular second-layer solution Polygon review.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.