A Quick Guide to Understand Arbitrum & How it Works

Before we dive into what Arbitrum is, it is best to understand the precise problem that it aims to solve. For that, we need to understand how Ethereum works.

Ethereum, while sharing some similarities with Bitcoin, is quite expansive in terms of the conditions and transactions it can execute. This is where the Ethereum Virtual Machine comes into play. Smart contracts and transactions are all executed on the EVM. As Ethereum is a decentralized network, miners help verify and process transactions. To do so, computational power is needed, known as “gas.” The system of “gas” was originally proposed in the Ethereum yellow paper to incentivize miners. Each time a transaction or a smart contract is executed, users need to set a gas limit for it depending on the gas price in GWEI (1 GWEI equals 0.000000001 or 10^-9 ETH).

When innumerable transactions and smart contracts are waiting to be executed, miners prioritise the ones with a higher gas limit (which translates to a higher incentive to the miner). This led to an inflated gas price, resulting in the transaction fee crisis on Ethereum. That’s where Arbitrum comes into play: it aims to reduce the congestion on the network and bring down the transaction fees by moving computation data storage off Ethereum’s main layer — Layer 1 — and taking it to Layer 2. It is known as a “Layer 2” scaling solution.

Arbitrum: A Layer 2 Scaling Solution Building Optimistic Rollups

We’ve previously established that Arbitrum is a Layer 2 scaling solution; to put it in more elaborate terms, Arbitrum builds something called “optimistic roll-ups” — and is one of the two major blockchain teams in the blockchain space to do so. This has helped Arbitrum onboard several major Defi projects as it offers a faster and cheaper experience.

What are Optimistic Rollups Exactly?

Optimistic rollups are constructions that exist in Layer 2 and decrease latency (or the amount of time it takes to confirm a transaction). The time to confirm a transaction is determined by Ethereum’s block time, which is 13 seconds. This transaction time comes further down through optimistic rollups, enabling smart contracts to run at scale more efficiently while retaining the security of Ethereum. As a ripple effect of what optimistic rollups do, the gas fees also come down.

So how do transactions occur in the presence of Arbitrum or a Layer 2 Scaling solution? We’re getting there.

How Transactions Happen on Ethereum in the Presence of Arbitrum

Imagine a user proposes a transaction. When that happens, bits of those transactions are posted on Ethereum’s chain. But if you break down a transaction, you would find two parts, logically speaking — the bits and the data of the transaction alongside the actual instruction that the transaction carries. Now with Arbitrum, the results of any transaction do not get posted on Layer 1, but get posted on Layer 2. So, in essence, a transaction doesn’t get executed on Layer 2 — but we have Layer 1 of Ethereum vouching for the correctness of the transaction that happened on Layer 2.

How are these transactions validated, you ask? They are validated through Layer 2 validators who execute transactions posted on Layer 1 and submit the results, such as an image or hash of the resulting state. Now, who are these Layer 2 validators? Just about anyone can be a validator as it is a permission-less role.

Circling back to the fact that Arbitrum builds “optimistic roll-ups”, — the name itself implies that the transactions, once validated, get posted without any proof “optimistically.” That said, anyone can dispute the transaction and offer proof of fraud. When such an instance occurs, Arbitrum steps in and carries out an interactive process through which the dispute is mediated and resolved. This way, fraud can be removed from the system.

Arbitrum & DApps Composability: What You Need to Know

Arbitrum, despite being a part of Ethereum, is still a separate chain. This means there wouldn’t be a synchronous or composable call between any rollups or a rollup and an Ethereum layer.

Competition Check: How Arbitrum is Different from Optimism

Before we talk about the differences between Arbitrum and Optimism, here’s more context about what Optimism is: Much like Arbitrum, Optimism is also a Layer 2 scaling solution for Ethereum that takes off the heavy lifting of running computation and data on Ethereum’s Layer 1. It more or less tries to accomplish what Arbitrum is trying to do.

Now that Optimism and Arbitrum are different, let us look at the technicalities that separate the both: Dispute mediation and resolution.

As we mentioned, when a transaction occurs, and someone disputes it, a fraud-proof must be posted. Here’s where all the difference lies. In Optimism, fraud-proof tends to happen on a per-transaction basis — and the disputed transaction must be executed. But when it comes to Arbriturm, the entire transaction isn’t run on the chain. Instead, an interactive process kicks and a much larger unit is examined.

If a dispute occurs at step 50 of 100, Arbitrum traces back to step zero and starts checking each step till the point of disagreement, step 50.’ In broader terms, the dispute mediation process is like a “binary search.”

Future of Arbitrum, Ethereum 2.0, & What’s Coming Next

Arbiturm is currently onboarding several interesting Defi projects and is steadily expanding. As Ethereum 2.0 will be rollup-centric, Arbiturm will invariably experience greater traction and adoption. As of now, Arbitrum is going to launch one public chain called “Arbitrum 1.” Soon, there will be multiple rollup chains that will be specialized for various use cases, and projects can then choose the rollup chain that best suits their needs. At the moment, though, there’s only going to be one rollup consisting of several Defi projects on the same chain.

That’s a quick guide to get you up to speed with Arbitrum. We regularly post several educational articles giving you insights into new developments and everything exciting about blockchain, technology, and engineering. Follow us on our socials and sign up for our newsletter to never miss out on any updates. Cheers.

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