The Ethereum Merge could take place as early as August 2022, but second-tier (L2) solutions are already working to scale Ethereum. Arbitrum is one of the leading L2 solutions that relieve the Ethereum mainnet of congestion and high gas tariffs.
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What Is Arbitrum?
Arbitrum is a second-tier blockchain for Ethereum that uses optimistic rollups as a scaling technology. It processes transactions on its proprietary sidechain and transmits the new state of the chain to the Ethereum mainnet. This allows Arbitrum to achieve a throughput of up to 40,000 transactions per second at a significantly lower gas cost than the Ethereum mainnet.
Simply put, optimistic rollups mean that a transaction is executed on Arbitrum and only its output is recorded on the L1 chain. The optimistic rollup name can be decoded as follows:
- Rollup: Transactions on Arbitrum are grouped into a single transaction recorded on the PF mainnet. This saves gas costs and avoids congestion on the main network.
- Optimistic: Rollups are optimistic because they are assumed to be correct and valid (i.e. without double spending). Nodes have an incentive to send only valid transactions. The validity of a transaction can be contested for up to seven days.
Since transactions are not calculated on the Ethereum mainnet, a minimum amount of data is required for storage and state calculation. As a result, Ethereum is less clogged and gas taxes decrease. Arbitrum allows you to execute EVM-compatible smart contracts and is protected by the Ethereum mainnet.
Arbitrum vs Optimism vs ZK-Rollups
Arbitrum isn’t the only L2 solution that uses optimistic rollups. Optimism (OP) is another second-tier chain that launched its OP token in June 2022 with an airdrop. Arbitrum and Optimism share many similarities:
- Validators rely on ETH and are incentivized to act honestly.
- Rollups are optimistic because they are assumed to be valid at the time of the transaction.
- Both have full nodes, accumulate top-level transactions, and validation nodes that monitor the state of the chain.
- Both forward only calldata with hashes of confirmed rollup blocks to the mainnet.
- DApps on both chains can select their own validators. Because transactions are validated locally rather than by all nodes, nodes must communicate less with each other, increasing transaction throughput.
Their main differences are:
- Optimism uses all-round fraud evidence, Arbitrum uses multi-round fraud evidence. Put simply, Optimism performs transaction testing in one round on the layer-one chain, Arbitrum does this in several off-chain rounds.
- Optimism is compatible with EVM. So is Arbitrum, but Arbitrum also has its own Arbitrum Virtual Machine (AVM).
- Optimism has a Solidity compiler, Arbitrum supports all EVM programming languages.
As you can see, the differences are mostly technical and of little interest to the everyday user. Arbitrum, however, boasts a significantly larger ecosystem with more total value locked (TVL) ($1.5 billion versus $300 million) and more active DApps.
There are also a couple of differences between Arbitrum and ZK-rollup solutions:
- Arbitrum argues that it will get lower gas tariffs in the long run because ZK-rollups must submit cryptographic evidence to L1 to validate their transaction. This is more complex and therefore more expensive.
- Optimistic rollups are always compatible with EVM; ZK-rollups are not (according to Arbitrum).
- Optimistic rollups have confidenceless visibility, but not all ZK-rollups do, so some transactions may not be trackable from start to finish.
- Arbitrum admits that bridging is a better experience on ZK L2s because there is no seven-day waiting period to withdraw funds to have one.
Arbitrum Team, Investors and Roadmap
Arbitrum is started by Offchain Labs, a New York development company founded by Ed Felten and Steven Goldfeder is behind the development of Arbitrum. Offchain Labs received a total of $123.7 million in three investment rounds from 2019 to 2021.
A first seed round in 2019 raised $3.7 million and was led by Pantera Capital. The Series A round in April 2021 raised $20 million, with Series B in August 2021 raising an additional $100 million from Lightspeed Venture Partners and other investors such as Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research and Mark Cuban.
Arbitrum Beta Mainnet launched in May 2021, followed by the launch of the mainnet in August 2021 and sidechain support in Q1 of 2022. There are currently more than 80 DApps running on Arbitrum. According to Arbiscan, Arbitrum boasts over 720,000 unique addresses as of June 2022 and is growing rapidly. Between 50,000 and 100,000 transactions per day are processed, and Arbitrum has nearly $1.5 billion in total value locked.
Arbitrum Token and Airdrop Potential
Arbitrum doesn’t have a token yet. However, considering that its competitor Optimism launched its OP token with an airdrop, Arbitrum will likely introduce a native Arbitrum token in the future. If you want to be eligible for an Arbitrum airdrop token, you should connect to the Arbitrum ecosystem and use some of the Arbitrum DApps listed below. Here’s also our guide to airdrops called What Are Crypto Airdrops.
How to use Arbitrum
You can use Arbitrum with a few simple steps:
- Connect to the official Arbitrum bridge.
- Transfer eTH to Arbitrum.
- Add the Arbitrum network to your wallet.
- Access the DApp on Arbitrum through the Arbitrum One portal.
Best DEX on Arbitrum
The best decentralized exchanges (DEX) on Arbitrum are:
- SushiSwap: a Uniswap fork.
- GMX: a decentralized spot and a perpetual exchange.
- Curve: A huge stablecoin exchange.
- Uniswap: the pioneer of the AMM mechanism.
- Balancer: Competitor of SushiSwap and Uniswap.
SushiSwap (SUSHI) is a decentralized exchange (DEX) launched as a fork of Uniswap. It is one of the largest decentralized exchanges on the market and has a total locked value of over $300 million on Arbitrum. Users can exchange different tokens, borrow and lend and provide liquidity without giving up custody of their funds.
GMX is a decentralized spot and perpetual exchange that prides itself on its low swap fees and the deep liquidity that guarantees trading with zero slippage. GMX differs from traditional order book models in that it does not support trading pairs. Instead, it provides liquidity through its multi-asset GLP (GMX Liquidity Provider) to execute trades. Users trade against the automated market maker (AMM), who gets prices through an oracle.
The price of GLP tokens is derived from the total value of the assets in the pool divided by the total supply. When the liquidity provider adds assets to the liquidity pool, mints GLP tokens, and when liquidity is removed, these GLP tokens are burned. Therefore, fees are reduced when the supply of an asset in a pool is low, providing an incentive to add the activity to the pool.
In addition, GLP holders receive esGMX, which can be converted into GMX tokens after one year. They also receive 70% of the platform’s revenue. GMX tokens can be wagered to receive esGMX, a 30% share of the platform’s revenue, and multiplier points for GMX. This intricate design of tokens and betting incentives allowed GMX to become the second largest protocol on Arbitrum with over $300 million in total value locked.
Curve (CRV) is a DEX stablecoin and one of the most important exchanges for stablecoin exchange. It was one of the first exchanges that popularized the AMM model. Curve is available on almost every relevant blockchain and boasts a TVL of over $150 million on Arbitrum, making it one of the largest protocols in the ecosystem.
Uniswap (UNI) is a decentralized exchange and one of TVL’s largest DEX in DeFi. Although it has significantly less TVL on Arbitrum than its rival Sushiswap, Uniswap invented the AMM principle that allows users to trade without a counterparty and only against a liquidity pool controlled by a smart contract. On Arbitrum, Uniswap has a TVL of over $50 million as of June 2022.
Balancer (BAL) is another DEX, which uses shared pools and smart pools for token exchange. Balancer works similarly to Uniswap and Curve and allows anyone to create token pools with automatically adjusted pool weights. Its TVL on Arbitrum is smaller than that of its competitors, but Balancer still boasts over $15 million in total locked value.
The best Arbitrum bridge
Synapse (SYN) is a cross-chain bridge that connects several L1 and L2 blockchains. Cross-chain multi-party compute validators protect the Synapse bridge, and the ecosystem is powered by the Synapse – SYN token. The SYNapse DAO uses SYN as an incentive for liquidity providers to enable the cross-chain functionality of the protocol and as a subsidy to pay for gas spent by network validators. Synapse is one of the most important bridges to Arbitrum besides the official Arbitrum Bridge and has a TVL of nearly $30 million.
The best loan protocols on Arbitrum
The best 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 loan protocol.
dForce (DF) is committed to providing DeFi infrastructure in the web3 through lending, trading and staking services. dForce is a community-driven DAO with dForce USD (USX) as a stablecoin at the heart of its protocol matrix. This algorithmic stablecoin implements a pool and vault-based model with a hybrid interest rate policy. It is powered by protocol-to-protocol integrations and a cross-chain bridge to facilitate its adoption. dForce also provides lending, staking, trading, and bridge services as part of its all-in-one DeFi infrastructure solution.
Stargate Finance (STG) is a fully composable liquidity protocol. It allows users to transfer assets through blockchain and access the protocol’s unified liquidity pools with an immediate purpose guaranteed. Stargate’s key products are cross-chain transfers, providing liquidity to its omnichain protocol, yield farming for STG rewards, and staking to receive veSTG, the protocol’s governance token. Stargate Finance has over $100 million in TVL on Arbitrum.
Aave (AAVE) is a DeFi money market protocol and lending platform that allows users to borrow and lend different crypto assets. Users can deposit their crypto assets in different liquidity pools and earn interest on them or borrow against their existing crypto holdings as collateral. Aave is one of the largest lending protocols in decentralized finance and boasts over $30 million in total value locked on Arbitrum.
Vesta Finance (VSTA) is a lending protocol that allows users to get maximum liquidity against their crypto collateral without paying interest. Users can deposit different cryptocurrencies as collateral and mixed VST, a stablecoin pegged to the USD.
The best NFT market on Arbitrum
Treasure DAO (MAGIC) is an NFT marketplace that wants to bridge the gap between NFT and DeFi. Its Bridgeworld metaverse is the protocol’s flagship product, offering DeFi features such as MAGIC token staking and mining, liquidity provision, and NFT trading in the market. Treasure DAO is also working on a growing number of partnerships with other DeFi protocols and NFT projects.
Best DApps on Arbitrum
Some of the best DApps on Arbitrum include:
- Dopex: a decentralized options protocol.
- Beefy Finance: an aggregator of returns.
- Sperax USD: An algorithmic and crypto-collateralized hybrid stablecoin.
- Jones DAO: an options liquidity protocol.
Dopex (DPX) is a decentralized options protocol. It aims to maximize the provision of liquidity while keeping losses for option writers to a minimum. Dopex has implemented a system of discounts for losses based on options exercised for each era. Option writers receive discounts based on their percentage losses and are paid in the rDPX protocol discount token. This allows options writers to engage in sophisticated trading strategies that go beyond normal hedging. Dopex also boasts constant innovation in the form of its Atlantic options and has partnerships with several DeFi protocols such as OlympusDAO and Jones DAO.
Beefy Finance (BIFI) is a multi-chain return optimization platform, where users can earn compound interest on their crypto assets. Beefy Finance distributes funds of users stuck in vaults throughout the DeFi ecosystem and applies different investment strategies to ensure the highest possible return. The BIFI token is the “dividend-eligible” share of revenue in Beefy Finance with which token holders earn profits.
Sperax USD (USDs) is an algorithmic stablecoin and a crypto-collateralized stablecoin hybrid. It boasts an APY auto-compounding of 11%. Its SPA governance token can be staked to receive protocol fees and a share of self-return incentives and USD staking.
Jones DAO (JONES) is a yield maximizer and liquidity protocol for options. It’s built on Top of Dopex and allows one-click access to options strategies for users who don’t want to manage their options investments on their own. Jones DAO offers vaults for multiple assets and risk profiles.