Arbitrum: The Layer 2 Network with the Largest TVL on Ethereum

As of today’s latest statistics, Arbitrum, the Ethereum expansion network, is the second-layer network with the largest TVL on Ethereum , with a locked value of $274 million. In September last year, Arbitrum announced that it had deployed the Ethereum mainnet test Arbitrum One, and more than 250 teams applied to access the developer testnet.

From 2020 to the present, public chains such as BSC, Solana, Polkadot, and Avalanche have begun to seize Ethereum's users and markets. Their advantages such as low gas fees and fast transaction speeds have made Ethereum urgently need to launch an effective Layer2 solution to achieve capacity expansion .

In a sense, the emergence of Arbitrum can be said to be a redemption of ETH2.0. By reducing costs and improving efficiency, it builds a sustainable infrastructure and efficiently and securely powers DApps with higher throughput.

01
The blockchain industry is in urgent need of performance upgrades

Source: L2beat

The reason why Arbitrum's launch has caused great enthusiasm in the industry is not that it has more than 250 developers connected to the network at the beginning of its launch, but the blockchain industry's urgent performance demand for blockchain public chains, forcing developers committed to the implementation of blockchain concepts to "surrender" to public chains with higher performance.

As we all know, there is an "impossible triangle" in the blockchain field. Since the birth of blockchain technology, there has been a trade-off between performance, security, and decentralization .

In the era of digital asset value (from the birth of blockchain in 2009 to 2017), people's value recognition was supported by communities and consensus, and the value of digital assets was determined through simple economic models. At this time, the performance requirements of blockchain technology were not urgent .

As this trend continues, a large number of public chains (including the Ethereum network represented by Blockchain 2.0) will pursue higher security and decentralization, while ultimately ignoring performance improvements .

In 2020, mainstream digital assets and POW consensus mechanisms were restricted by strong regulatory policies. The value trust system originally established by the community and consensus is no longer favored by participants. DeFi based on the derivatives market of mainstream digital assets and GameFi represented by visual finance have a much greater momentum than mainstream digital assets.

The recent popularity of the metaverse concept and the continued popularity of the NFT asset market have put forward higher performance requirements for many public chains. Under the high-level performance requirements , blockchain 1.0 represented by the Bitcoin network is obviously weak and cannot meet the trading needs of many developers for the above assets.

Ethereum, which has relied on performance and smart contracts as its main competitive advantages since its inception, is unable to cope with the demands of new segments. In 2019, when Ethereum first faced DeFi, it was able to cope with it through a relatively complete ecosystem. But after entering 2020, even the most basic on-chain settlement could not be completed.

Users often need to wait longer to get transaction confirmation. The design of Ethereum's second-layer network is designed to meet people's more complex and diverse business needs .

Arbitrum is an off-chain protocol managed by Ethereum on-chain contracts, which can realize high-throughput, low-cost smart contracts while maintaining trustless security . The principle of this design is to shard the public chain data and adopt a method that combines the computing advantages of the Internet with the rights confirmation advantages of the blockchain to meet the needs of today's blockchain asset market.

For example, when a transaction of an NFT painting asset occurs, it is necessary to transmit images and the value attached to the images. However, the transmission of NFT paintings by blockchain is extremely difficult and cannot meet the business needs of users. Therefore , this part of the data is allocated to the idle off-chain (side chain) for processing .

The chain only settles digital data and values. In this way, blockchain computing is synchronized with off-chain computing. This ensures the decentralized, secure, and tamper-proof nature of on-chain assets, while also meeting users' business needs for more complex blockchain assets.

For Arbitrum, in order to enable their applications to run on Arbitrum Rollup, DApp developers need to write a set of contracts in Solidity, and then compile these contracts into executable code that can run on the Arbitrum virtual machine , which will run faster.

02
Arbitrum has a relatively complete ecosystem

Arbitrum's co-founder and CTO is Ed Felten, who was a professor at Princeton University for 28 years. In 2014, he founded the Arbitrum blockchain project at Princeton University, and Steven, one of the founders of Arbitrum, participated in it.

Around 2019, Arbitrum was spun off from Princeton University's research laboratory project to form an independent company, and Ed Felten officially joined Arbitrum.

It took Arbitrum 7 years to go from academic research in the laboratory to actual implementation and practical application . In a timeline that is significantly longer than that of ordinary public chains, Arbitrum has a more rigorous scientific spirit than other public chains.

At present, Arbitrum's ecosystem is relatively complete, and many top projects are preparing to cooperate with Arbitrum. It is worth noting that a large number of blockchain companies from China have also cooperated with Arbitrum.

According to Arbitrum CTO Ed Felten in an AMA conversation, Arbitrum’s next upgrade will feature a new architecture, Arbitrum Nitro , which will be further upgraded in terms of performance and better compatible with Ethereum.

During the testing of Arbitrum, the performance of Arbitrum was further confirmed:

• Arbitrum's transaction costs have further dropped, far lower than other public chains.

• Arbitrum is able to accommodate larger transaction volumes, improve user experience, and meet more industry needs.

• Arbitrum’s compatible tools enable better interaction between public chains and technologies.

Therefore, some industry insiders believe that Arbitrum and other scalability solutions will continue to develop. For Arbitrum, the long-term research and development phase has made the technical roadmap of the solution very mature, and Arbitrum's potential has been further verified.

03
What Arbitrum brings

The blockchain industry is developing extremely rapidly. Judging from the pattern established by the blockchain 2.0 public chain with smart contracts as the core in the past 10 years, whether it is a hard fork for overall performance upgrades and structural adjustments or a soft fork for adjusting the public chain rules, it involves the interests of different users .

However, as a distributed structure technology, the decentralized characteristics of blockchain cannot form a unified fork solution, which will cause the above-mentioned public chains to continue to lag behind user demand .

In the case of long-term failure to meet user needs, the Arbitrum development team predicts that most users will abandon business transactions on congested public chains and choose Layer 2 networks more .

The development of Arbitrum's own technology will significantly reduce the cost; the development of ETH2.0 will also significantly reduce the cost on Arbitrum. As the user base grows, the experience of Arbitrum users will be better and cheaper .

Arbitrum's impact on the blockchain industry goes beyond revolutionary performance upgrades and cost reductions.

There are currently three main concepts for public chains: Layer2, cross-chain and public chain .

• Some practitioners believe that Layer2 is the best solution. Through off-chain transactions and on-chain clearing, the off-chain performance is constantly upgraded to meet the needs of users in the short term.

• Another group of practitioners believe that since both the Bitcoin network and the Ethereum network are limited by performance and cannot provide users with a smoother user experience, it is necessary for the industry to launch a public chain with better performance;

• There are also some practitioners who believe that all blockchain problems require substantial progress in cross-chain technology in order to fundamentally solve the problem that the imagination of blockchain is limited by the performance of the public chain.

Judging from the current blockchain structure and industry characteristics, cross-chain is indeed the best solution. Although Layer2 can solve the urgent needs of the industry, in the long run, the Layer2 strategy cannot continue to improve performance as users continue to demand. At least, this motivation for continuous performance improvement is unsustainable.

Even if the performance of the new public chain solution far exceeds that of the Ethereum network and the Bitcoin network, it cannot reach the same level of value consensus as the two in the industry. Cross-chain technology is a means to solve the information island of blockchain .

Most chains are independent of each other. Different blockchain systems are based on different consensus algorithms, data structures, security algorithms, and ledger types, which results in the inability to communicate the values ​​of various public chains, forming islands of value and information.

The cross-chain bridge technology is a fundamental solution to this problem. If the public chains of the blockchain can communicate with each other to form a network structure , then its operating speed and user experience will far exceed that of the traditional Internet.

Arbitrum is just the tip of the iceberg for multi-chain cross-chain bridges. Now many companies have joined, but they have only realized cross-chain bridges between liquidity. In the future, under the influence of Arbitrum's technology, the development of cross-chain bridges will be more in-depth.

For example, liquidity will be shared, or cross-chain bridges will be faster, and the integration will be higher. This is not just about transferring assets from one chain to another through a cross-chain bridge.

Arbitrum's cross-chain bridge mainly realizes cross-chain with Ethereum's first layer. Its special feature is that it can not only realize cross-chain with Ethereum, but also realize cross-chain with all homogeneous tokens. Arbitrum will also add support for NFT soon.

After Arbitrum cross-chain bridge is derived from Ethereum, it can enable the public chain to obtain the security guarantee of Ethereum . In addition, the Chinese development team is working on the cross-chain bridge research between Arbitrum and other Layer2 or other chains.

Arbitrum's impact on the cross-chain bridge industry will lead to more cross-chain bridge facilities in the blockchain industry, thereby promoting the transition of blockchain to "blockchain network" . Currently, blockchain development teams including cross-chain bridge projects such as Celer have been able to achieve fast asset swaps.

04
Arbitrum's support for the development of the NFT field

Source: L2beat

Obviously, Arbitrum did not take into account the popularity of NFT and GameFi fields when it was first established, but it is undeniable that the explosion of NFT and GameFi fields in the blockchain industry is an important factor in Arbitrum's widespread recognition .

As a public chain, the reduction of fees and the improvement of transaction efficiency are in themselves support for new areas of blockchain. The explosion of the above areas will also attract more investors and participants to Arbitrum.

As an infrastructure, Arbitrum has not subjectively cooperated with the layout of NFT and Gamefi, but it must consider the demand for infrastructure in new fields. Not only NFT, DeFi, and blockchain games, but also various new concepts and phenomenal applications will surely appear in the future .

For DeFi, Arbitrum focuses more on traditional projects and protocols. For example, AMM automated market makers or lending protocols can be migrated to Arbitrum as a whole project. In the field of NFT, Arbitrum is cultivating its own creator community .