What Is Arbitrum? How Does It Work? A Comprehensive Guide

What Is Arbitrum (ARB)?

Arbitrum is a Layer 2 scaling solution designed to improve efficiency and reduce the costs of smart contract transactions on the Ethereum blockchain. By delegating complex computational tasks, such as transaction processing and data storage, to the second chain, Arbitrum can scale the base Layer 1 blockchain and reduce congestion and costs.

This Layer 2 scaling solution executes the smart contract, and the Layer 1 blockchain stores the data in a process known as ‘Optimistic roll-ups.’ DeFi projects like Sushiswap and Aave use Arbitrum to offer more efficient swaps with lower gas fees. Arbitrum handles blockchain transaction processing and batching, making it a vital tool for developers looking to create decentralized applications (DApps) on the Ethereum network.

Key Takeaways

  • Layer 2 solutions like Arbitrum offer faster and cheaper transactions to solve Ethereum’s scaling problem.
  • Arbitrum uses optimistic roll-up technology to batch transactions and execute them off the main Ethereum chain.
  • Arbitrum offers an established ecosystem of dApps and complex smart contracts due partly to its Virtual Machine compatibility.

What Is The History of Arbitrum (ARB)?

Arbitrum’s journey began in 2019 when Edward Felten, Dan Boneh, and Nick Zooko, the co-founders of Offchain Labs, embarked on a mission to revolutionize the blockchain landscape by introducing a technology that could seamlessly handle the exponential growth of Ethereum’s ecosystem.

In 2020, their vision materialized with the launch of Arbitrum One, a testnet that provided developers with the opportunity to familiarize themselves with the intricacies of Arbitrum’s technology.

In 2021, the Arbitrum One Mainnet went live, and by the end of the year, over 200 decentralized applications (dApps) had been deployed on Arbitrum, and the network had processed over $1 billion in transactions.

The network introduced a suite of new tools and features, catering to the diverse needs of developers and users. In 2022, the ARB token, Arbitrum’s native cryptocurrency, made its debut, enabling users to participate in governance and earn rewards for securing the network.

Arbitrum was launched during the bear market, but even so, it attracted a huge amount of interest from developers and users. Data from DeFiLama1 shows that there’s over $2 billion locked in Arbitrum, making it the fourth biggest chain by total value locked.

Arbitrum has seen its TVL rise at an impressive rate within a year of its launch.
Arbitrum has seen its TVL rise at an impressive rate within a year of its launch. Source: DeFiLama

How Does Arbitrum’s Ethereum Scaling Solution Work?

Arbitrum uses blockchain rollups to achieve efficient transaction processing. Rollups use a 2-layer architecture to process transactions off-chain before settling them on-chain. The benefit is that the blockchain no longer needs to validate separate transactions – it can directly confirm a “rolled up” batch of transactions. Unlike other Layer 2 solutions, such as sidechains, rollups derive their security from the main blockchain2.

Arbitrum’s scaling solution uses a particular type of roll-up called optimistic rollups. Optimistic rollups process transactions off-chain like other roll-ups but add compression techniques while bundling the transactions. This compression helps reduce gas fees and optimizes block space by storing only necessary data on the Ethereum blockchain. Thus, optimistic rollups allow the main chain to process more transactions while requiring less space.

What Makes Arbitrum’s Solution ‘Optimistic’?

An optimistic rollup is a type of rollup that relies on an optimistic assumption that most transactions are valid3. They only execute a costly verification process when there is a dispute. Network participants can raise disputes for faulty blocks in a week. The validator that approved them loses their collateral if any faulty blocks are present. By bundling transactions, optimistic rollups allow the main chain to process more transactions while requiring less space, which results in more scalability.

What Are The Core Elements of the Arbitrum Ecosystem?

Arbitrum’s ecosystem consists of various products, including Arbitrum, Nitro, and Nova, which have unique features that distinguish them from each other.

What is Arbitrum One?

Arbitrum One is the official mainnet of the Arbitrum ecosystem and was launched on August 31st, 20214. It processes transactions on the Arbitrum Virtual Machine (AVM), which is an extension compatible with the Ethereum Virtual Machine (EVM). The team behind Arbitrum, Offchain Labs, secured $120 million in a Series B funding round in September 2021 to further its growth. Notable investors include Alameda Research, Pantera Capital, and Lightspeed Venture Partners.

What Is Arbitrum Nitro?

Arbitrum One migrated to Nitro in 20225; it marked a significant technical upgrade to the underlying technology of the Arbitrum One ecosystem. Nitro is faster, more EVM-compatible, and cheaper than its predecessor. It introduces interactive proofs that run over the WebAssembly (WASM) code used by Arbitrum to achieve this. Developers can use standardized EVM-compatible languages and run unmodified EVM contracts, which has increased the development scope and attracted more developers. Arbitrum One migrated to Nitro in 2022.

What Is Arbitrum Nova?

Arbitrum Nova is a new chain that focuses on reducing individual transaction costs by reducing data storage on the Ethereum blockchain. Instead of storing full transaction data on Ethereum, transaction data is available with third parties on the “data availability committee,” which includes storage providers such as Infura and Google Cloud6. This makes Nova more centralized than Arbitrum One, which stores full transaction data on Ethereum.

Nova sacrifices some of the security of the Ethereum blockchain to reduce transaction fees and increase scalability. It is especially useful for games and social dApps with a higher volume of transactions but low individual transaction value.

What Are The Tokenomics of Arbitrum (ARB)?

The Arbitrum token, $ARB, is the native ERC-20-compatible governance token for the Arbitrum blockchain. The maximum supply is $ARB 10 billion, and as of December 2023, 1.275 billion tokens are circulating7. According to TokenTrack8, the last ARB token will enter circulation in early 2027.

CategoryAllocation Percentage
DAOs in the Arbitrum Ecosystem1.13%
Individual Wallets11.62%
DAO Treasury42.78%
Team and Future Team + Advisors26.94%
The allocation of all ARB tokens will be completed in early 2027. Source: TokenTrack

How Has ARB Traded In 2023, And What Are The ARB Price Predictions?

The ARB token has lost around 20 years to date, according to data from TradingView9. The disappointing returns have occurred despite a huge ETH rally and considerable growth in ARB’s total value locked. Some analysts believe that ARB has lagged behind due to a series of massive token unlocks that meant that those who airdropped ARB have been dumping their tokens and taking profits10.

Coincodex11 has produced a forecast that suggests the ARB token is gearing up for a big rally in 2025. Their minimum price target for 2024 is $2.25, while their maximum target is over $9. However, they expect the token to trade flat or lower in 2024.

Techopedia12 expects ARB to rally to at least $2 in 2024 and possibly even hit $3.5. In 2025, they’ve set a maximum target of $6 and an even more bullish target of $11 for 2030.

Remember that crypto prices are extremely volatile, and you should always do your own research before risking your capital.

Arbitrum (ARB) has traded lower this year despite its TVL surging.
Arbitrum (ARB) has traded lower this year despite its TVL surging. Source: TradingView

Final Thoughts on Arbitrum (ARB)

Arbitrum set out to compete with the biggest layer-2 scaling solutions and appears to have succeeded in displacing all of them in terms of total value locked. Even though the mainnet only went live last year, over $2 billion has been locked on the chain, and some of the biggest dApps have migrated to Arbitrum. Interestingly, the project’s success has not been accompanied by a rally in its native token’s rally, possibly due to successful token unlocks that have flooded the market with selling pressure.

Frequently Asked Questions

What Is Arbitrum?

Arbitrum is a Layer 2 scaling solution for Ethereum that enhances transaction speed and reduces fees without compromising security.

How does Arbitrum One improve upon Ethereum’s scalability?

Arbitrum One is a layer-2 scaling solution built on the Ethereum blockchain. It uses Optimistic Rollups to achieve high throughput and low latency for transactions on the Ethereum network. By moving transactions off the Ethereum mainnet and onto the Arbitrum One sidechain, the network can handle many more transactions per second than Ethereum alone. This allows for faster and cheaper transactions and greater scalability for dApps.

Which decentralized exchanges (DEXs) are available on Arbitrum?

Arbitrum supports a number of popular decentralized exchanges (DEXs), including Uniswap, SushiSwap, and Curve. These DEXs allow users to trade cryptocurrencies without the need for a centralized intermediary, providing greater privacy and security for their transactions.

Who are the main developers behind the Arbitrum protocol?

Arbitrum was developed by Offchain Labs, a blockchain research and development company based in New York City. The company was founded by a team of experienced blockchain developers and researchers.

Peter Barker


Peter Barker

Peter is an experienced crypto content writer and a DeFi enthusiast with more than 3+ years of experience in the space. Previously a journalist and news editor at a leading European news sourcing agency.

Recent posts

View more