In recent years, blockchain technology has been increasingly popular, and different applications and solutions have been created for a variety of industries. The worldwide blockchain industry is anticipated to reach USD 39.7 billion by 2025, expanding at a compound annual growth rate of 67.3% from 2020 to 2025, according to a report by Grand View Research.

While the existing blockchain platforms have proven to be reliable, they are still limited in terms of scalability, privacy, and interoperability. These limitations have paved the way for the development of new and innovative blockchain solutions, and one such solution is Arbitrum.

Arbitrum is a next-generation blockchain platform that aims to address the limitations of existing blockchain solutions by providing faster and more efficient solutions for businesses. The platform was developed by Offchain Labs, a company that specializes in developing blockchain solutions for businesses. In this blog, we will take a closer look at the features and benefits of Arbitrum, and how it is changing the game in the blockchain industry.

The Backstory—How Arbitrum was Founded?

Arbitrum is a layer 2 scaling solution for Ethereum that was founded by Offchain Labs, a blockchain research and development company.

Offchain Labs was founded in 2018 by three individuals: Edward Felten, Steven Goldfeder, and Harry Kalodner. Ed Felten is a computer science professor at Princeton University and served as the Deputy U.S. Chief Technology Officer under President Obama. Steven Goldfeder is a leading expert in blockchain security and privacy. Harry Kalodner is a computer science researcher and entrepreneur with a background in computer security and privacy.

Offchain Labs launched Arbitrum, a groundbreaking blockchain platform, after years of research and development, that was designed to address the limitations of existing blockchain solutions. The platform was built on a combination of layer 2 solutions and optimistic rollup, which allows for faster and more efficient transactions.

Arbitrum has been well received by businesses and the blockchain community, and the platform is now being used by a growing number of companies. As of 2022, there were a total of 621,841 unique addresses on Arbitrum. The success of Arbitrum is a testament to the vision and hard work of EdwardFelten, Steven Goldfeder and Harry Kalodner, and their determination to make a positive impact in the world of blockchain.

What is Arbitrum?

The layer-2 functionality known as the Arbitrum network, created by the New York-based business Offchain Labs, aims to alleviate Ethereum's network congestion by enhancing the validation of smart contracts.

Optimistic rollup technique allows to get the security offered by the Ethereum blockchain system while allowing smart contracts to operate on a separate module to lessen network congestion.

This method is known as "transaction rollups". It requires transferring collections of confirmed transactions and records from layer-1, in this case, the Ethereum mainnet, to layer-2.

Arbitrum compensates aggregators or nodes who proactively evaluate the smart contracts enabled by the Arbitrum chain, with ETH. Aggregators are also in charge of adding new blocks to the Ethereum mainnet, which is the first layer.

How Arbitrum works?

Arbitrum is a Layer 2 scaling solution for Ethereum that aims to provide faster, cheaper, and more efficient transactions. The Arbitrum network achieves this by creating an off-chain, trust-minimized execution environment that runs on top of Ethereum, but with its own set of validators.

Here's a high-level overview of how Arbitrum works, according to the official developer documentation:

1. Arbitrum's design involves a set of smart contracts that handle the interactions between Ethereum and the Arbitrum network. These smart contracts are deployed on Ethereum and can be accessed by anyone.

   
   

2. When a user wants to transact on the Arbitrum network, they first deposit their funds into a special smart contract called the Arbitrum gateway. The gateway is responsible for managing deposits and withdrawals, and ensures that the funds are locked up on Ethereum until the user wants to withdraw them.

   
   

3. Once the user has deposited their funds, they can interact with the Arbitrum network as they would with Ethereum. Transactions are submitted to a set of validators, who process them off-chain and produce a proof that can be verified on Ethereum. The proof includes a Merkle tree of the state of the Arbitrum network, which is periodically updated and submitted to Ethereum as a checkpoint.

   
   

4. The validity of transactions and the state of the Arbitrum network are enforced by a set of validators that run a consensus protocol based on a modified version of Optimistic Rollup. Validators are selected by a decentralized algorithm that ensures they have staked enough tokens as collateral and are incentivized to behave honestly.

   
   

5. When a user wants to withdraw their funds from the Arbitrum network, they can submit a request to the Arbitrum gateway. The gateway then verifies that the user has enough funds available and creates a transaction on Ethereum to transfer the funds back to the user.

Layer 2 scaling solutions on Ethereum

Arbitrum is a Layer 2 scaling solution for Ethereum, which means it is a platform built on top of Ethereum that aims to increase the efficiency and scalability of Ethereum-based applications.To date, Arbitrum controls over 50% of all TVL on Ethereum L2s.

By easing some of the pressure on the primary Ethereum network, Arbitrum aims to enable quicker and less expensive transactions on the Ethereum network. This is accomplished by transferring data storage and smart contract execution from the Ethereum blockchain to Arbitrum's native Layer 2 network. Since the beginning of February, Arbitrum One is consistently doing between 40-50% of the number of transactions as mainnet, with an average cost reduction of nearly 97% compared to L1.

Arbitrum provides an environment for executing Ethereum smart contracts in a way that is more scalable, efficient, and secure than executing them on the main Ethereum network. By using Arbitrum, developers can build and run decentralized applications that are faster, more affordable, and more secure than would be possible with Ethereum alone.

In simpler words, Ethereum is the underlying blockchain platform and Arbitrum is a scaling solution built on top of Ethereum that aims to increase the efficiency and scalability of Ethereum-based applications.

What can be built on Arbitrum?

With Arbitrum, developers can build and deploy decentralized applications (dApps) and smart contracts, just like they would on Ethereum. Some of the things that can be built on Arbitrum include:

1. Decentralized exchanges (DEXs)

2. Supply chain management systems

3. Gaming platforms

4. Identity management systems

5. Decentralized finance (DeFi) applications

6. Social media platforms

7. Voting systems

8. Real estate marketplaces

9. Prediction markets

Arbitrum has another blockchain called Nova, which is high-performance, decentralized blockchain platform that is designed to support the development of decentralized applications (dApps) and smart contracts. Here are some examples of what can be built on Nova:

1. Decentralized finance (DeFi) applications 

2. Gaming and NFT marketplaces

3. Supply chain management 

4. Identity and authentication

5. Social networks and messaging platforms 

 Pros and Cons of Arbitrum 

Pros of Arbitrum

1. Scalability: One of the biggest advantages of using Arbitrum is its scalability. The platform has been designed to handle large volumes of transactions, making it ideal for businesses with high demand. This scalability also makes it easier for businesses to grow and expand as their needs change.

2. Privacy: Another advantage of using Arbitrum is its privacy features. The platform allows businesses to keep their transactions confidential, which is essential for businesses that handle sensitive information. The privacy features also make it easier for businesses to comply with data protection regulations.

3. Security: Security is a key concern for businesses and developers, and Arbitrum has been designed with security in mind. The platform uses advanced security features to protect against hacking and other forms of cybercrime. This makes it easier for businesses to keep their data and assets safe.

Cons of using Arbitrum

1.Centralization risk: One potential disadvantage of using Arbitrum is that it relies on a set of validators who are responsible for processing transactions and securing the network. This introduces a degree of centralization, as these validators hold significant power over the network. According to the Arbitrum website, there are currently 100 validators on the network, which could be considered a relatively small number compared to the number of nodes on the Ethereum mainnet.

2. Limited User Base: Although Arbitrum has received a lot of attention from the blockchain community, the platform still has a relatively small user base. This may make it difficult for businesses to find other businesses to work with and may also limit the number of available tools and resources for developers.

3. Limited interoperability: Another potential disadvantage of using Arbitrum is that it is currently limited in terms of interoperability with other blockchain networks. While the platform is designed to support the Ethereum Virtual Machine (EVM), it is not yet compatible with other smart contract platforms, such as Polkadot or Solana. This could limit the potential use cases and adoption of the platform in the future.

It's worth noting that these potential cons of using Arbitrum are based on current data and observations, and that the platform is evolving rapidly. As such, it's possible that these issues will be addressed or mitigated in the future as the platform continues to develop and grow.

Conclusion

In conclusion, Arbitrum is a promising layer 2 scaling solution for Ethereum that offers fast and inexpensive transactions, making it an attractive option for developers and users alike. However, the strength of Arbitrum is not just its technology, but also its community.

Arbitrum has a strong and growing community of developers, investors, and users who are actively contributing to the platform's growth and success. This community is committed to making Arbitrum a leading player in the Ethereum ecosystem, and they are actively working to develop new applications and use cases for the platform.

One exciting project that highlights the potential of Arbitrum is Treasure DAO. This project is leveraging Arbitrum's fast and low-cost transactions to create a decentralized autonomous organization that focuses on collecting and curating valuable digital content. With its focus on community-driven curation, Treasure DAO is a prime example of the innovative projects that can be built on top of the Arbitrum platform.

Overall, the combination of strong technology and a vibrant community makes Arbitrum a platform to watch in the coming months and years. As the Ethereum ecosystem continues to evolve, Arbitrum is poised to play an increasingly important role in enabling new and exciting applications to emerge.

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