0
0
Guides

The Bankless Guide to Arbitrum

Updated September 2023
0
0
Mar 24, 20238 min read

Arbitrum is a suite of layer-two (L2) scaling solutions that are designed to address the scalability limitations of Ethereum.

As the popularity of apps powered by smart contracts has grown, the “monolithic” Ethereum mainnet has struggled to keep up with the increasing demand, leading to high gas fees and slow transaction times on the network. Arbitrum’s technologies address this problem by providing external, modular layers that can handle higher volumes of Ethereum transactions at drastically lower costs.

Notably, Arbitrum’s first L2, “Arbitrum One,” has become the most popular and most widely-used Ethereum scaling solution since its mainnet opened to the public in August 2021. This rise has been driven multiple reasons, including:

  • Arbitrum’s early-mover advantage in the L2 scene, which has allowed Arbitrum One to gain a strong foothold and start enjoying a network effect
  • The compatibility of Arbitrum’s tech with the Ethereum Virtual Machine (EVM), which has allowed projects to easily take their code L2 while enjoying familiar Ethereum-like UX
  • Arbitrum’s successful courting of influential communities, such that many of the top DeFi and NFT projects are now using Arbitrum as their preferred L2

What is Arbitrum

Arbitrum isn’t a single L2, but rather a suite of L2 technologies. What these technologies all share as a foundation is that they’re based on the optimistic rollups approach to scaling.

Simply put, optimistic rollups are external execution environments for Ethereum transactions. They batch many transactions offchain and then efficiently post these batches to Ethereum, “optimistically” assuming the L2 transactions are valid unless challenged by what’s known as a fraud proof. The efficiency of this approach facilitates very low-cost transactions accordingly.

This precise combination of offchain execution, onchain data, and security via fraud proofs are the main ingredients that make up any optimistic rollup, and this general structure serves as the foundation for all Arbitrum L2s.

All that said, Arbitrum has multiple optimistic rollups to keep in mind. The first is the aforementioned Arbitrum One, which many people simply refer to as “Arbitrum” for its popularity. It’s poised to become more advanced and decentralized in how it sequences transactions over time, but even already it’s considerably more efficient and considerably more affordable than Ethereum.

For example, according to L2Fees.info it’s currently ~2,500% cheaper to swap tokens on Arbitrum One compared to Ethereum:

Additionally, other Arbitrum ecosystem solutions to consider today include Arbitrum Nova, an L2 tailored for web3 social and gaming use cases, and its foundational AnyTrust technology, which can be used to create super efficient L2s that use data availability committees to maintain data and deliver it as needed.

However, Arbitrum’s thinking much bigger than just L2s. In March 2023, Arbitrum announced the Arbitrum Orbit system, a development framework for creating layer-three (L3) solutions that settle to Arbitrum L2s, which themselves settle to Ethereum. This new approach will position Arbitrum to be an ecosystem of many different scaling solutions in the years ahead.

Additionally, the Arbitrum team also recently introduced a series of new technical advancements. Stylus, a new programming environment, allows for smart contracts to be written in languages like Rust, C, and C++. On the security front, BOLD (Bounded Liquidity Delay) aims to make validation permissionless and resistant to delay attacks, enhancing decentralization. Most recently, a partnership with Espresso Systems is set to bring Timeboost, a transaction-ordering design, to improve safety, security, and user experience to rollups.


The pulse of Arbitrum

At the time of this section's latest update (September 2023), Arbitrum One was the largest L2 in the cryptoeconomy per its ~$5.66B in current total value locked (TVL).

Indeed, Arbitrum has held a firm grip on this 1st-place L2 position ever since it launched back in August 2021. With this dominance has come lots of activity, to date Arbitrum One has seen thousands of users rack up over $2B USD worth of collective ETH gas savings!

via L2BEAT

Zooming in, outside of Ethereum it’s also the case that Arbitrum has among the most teeming DeFi and NFT ecosystems in the cryptoeconomy right now. Arbitrum One’s DeFi scene is at ~$1.7B TVL presently, making it the fourth-largest DeFi chain at the moment. So far this leading L2 has already seen +17M NFTs and +24k NFT contracts created and nearly 30k ETH of NFT trading volume.

Arbitrum’s current TVL, +$532M of which currently comes via GMX

The Arbitrum $ARB token

The long-awaited $ARB token is finally here, with the Arbitrum ecosystem having launched one of the most anticipated tokens in crypto history via airdrop claims on March 23, 2023.

The $ARB token will be used to govern the Arbitrum DAO, including the Arbitrum One and Arbitrum Nova L2s. Tokenholders will control the rights to Arbitrum IP, with the DAO having the ability to approve the creation of other L2s built using Arbitrum's tech.

Per this guide’s latest update, $ARB was trading around the $0.83 USD mark with a $1.06B market capitalization, making it the 41st-largest crypto in the cryptoeconomy at the time of writing. The circulating supply was 1,275,000,000 out of a 10B total supply.


What you need to use Arbitrum

  1. 👛 A wallet — since Arbitrum is EVM-compatible, you can use any Ethereum wallet (MetaMask, Coinbase Wallet, WalletConnect, etc.) to create an Arbitrum address
  2. 🌐 Network support — use the Chainlist tool to add the Arbitrum One network to your wallet, the network ID is 42161
  3. 🪙 Starter ETH — like you need ETH for gas on Ethereum, you need ETH to pay for transactions on Arbitrum; if you have ETH on Ethereum you can then bridge the tokens over to use on Arbitrum

How to bridge to Arbitrum

If you’re interested in moving Ethereum-based assets like ETH and ERC20 tokens to or from Arbitrum One or Arbitrum Nova, you can consider the native Arbitrum Bridge system. You input how much you’d like to send, select your chain, confirm the transaction with your wallet, and that’s it.

Keep in mind that for withdrawals to Ethereum, though, this native bridge system can take as long ~7 days to send you your funds due to the nature of fraud proof security.

If you’re after a speedy bridging experience, you could also consider third-party, pool-based “fast withdrawal” bridges like Hop or a similar bridge aggregator like Bungee. Note that every bridge will support its own unique ranges of chains and assets.


What to do on Arbitrum

1. Go long or short via GMX

The GMX trading UI

GMX is a decentralized perpetual futures exchange that offers traders the ability to open up to 50x leveraged long or short positions on cryptocurrencies like ETH, WBTC, LINK, and UNI.

GMX traders can also borrow from a basket of assets known as GLP, which acts as the counterparty on GMX. GLP gains value when traders lose and drops in value when traders win. In addition, GLP accrues 70% of all GMX’s trading fees paid in ETH, while stakers of the governance token, the eponymous GMX, earn the other 30%.

Currently, the GMX protocol’s Arbitrum One deployment has a TVL of $530M, which accounts for ~27% of the DeFi TVL on all of Arbitrum at the moment. The protocol has also facilitated over $107B USD worth of trading volume to date, and in its early climb it’s become a cash cow in having generated more than $37.5M in revenue over the past year per Token Terminal.

If you’re interested in trying GMX for yourself, start slow and be cautious because leverage and decentralized derivatives are best suited for more experienced traders. However, feel free to explore this native Arbitrum app’s trading UI as you please at app.gmx.io/#/trade.

2. Swap and provide liquidity on Uniswap

Uniswap is DeFi’s oldest and most proven decentralized exchange in action today, and it’s been live on Arbitrum One since the network launched to the public in August 2021 and has become a major hub for trading activity on the L2 between then and now. Currently, Uniswap’s $160M TVL on Arbitrum makes it the second-largest app on the leading L2 behind only GMX.

As for trading on Uniswap’s Arbitrum deployment, the UX is exactly the same as trading on the Ethereum deployment, but with significantly faster and more cost-effective trades. Remember, after all, that it’s currently ~2,500% cheaper to swap on Arbitrum than on Ethereum right now!

If you’d like to try swapping tokens on Arbitrum with Uniswap, simply visit app.uniswap.org and switch from Ethereum to Arbitrum using the frontend’s provided list of networks. Additionally, you can also provide liquidity to Uniswap trading pools and potentially earn yield from accrued trading fees.

3. Collect NFTs on Treasure

Arbitrum has the largest NFT scene in the L2 space right now, and at the top of this scene is Treasure DAO, the collective behind the Arbitrum-native Treasure NFT marketplace that’s also building out a suite of related tools, like MagicSwap, in an effort to actualize the “decentralized Nintendo” of web3.

To get started in the Treasure ecosystem, head over to treasure.lol where you can browse some of the top marketplace listings and gaming options available on Arbitrum today. If you see anything you’d like to collect, simply connect your wallet, switch to the Arbitrum network, and you’ll be ready to go!


Additional Arbitrum apps

Curious to explore more of what the Arbitrum app scene has to offer? If you’re ready to take the plunge, these apps are some of the most popular projects on Arbitrum One that you can check out today:

  1. 🔆 Radiant — Lending | $159M USD TVL
  2. 👻 Aave V3 — Lending | $145M USD TVL
  3. 💫 Stargate — Bridge | $101M USD TVL

Additional Arbitrum resources

If you're interested in exploring more and deepening your understanding of Arbitrum in general, there are a variety of supplementary resources worth exploring. Here are a handful you can use to dive in:

  1. 📜 Arbitrum Docs
  2. 🕳️ Arbitrum Nova Portal
  3. 🌊 Arbitrum NFT OpenSea stats
  4. 🔍 Arbiscan block explorer
  5. 🦙 DeFiLlama’s Arbitrum DeFi dashboard

Zooming out

The fundamentals of the Arbitrum ecosystem are strong. Its tech stack is performant, flexible, routinely optimized, and in the process of decentralizing. Its DeFi and NFT scenes are beginning to blossom, and the potential for its native token has people from across all walks of the cryptoeconomy tantalized.

The big picture is that as the cryptoeconomy continues to grow, so too does the need for innovative and scalable solutions that can keep up with increasing demand. With its robust technology suite that can roll out optimistic rollups as needed, e.g. Arbitrum Nova, Arbitrum is well-positioned to help meet this demand and help drive more crypto use cases forward.

Accordingly, Arbitrum isn’t just notable for its achievements so far, but also for its potential to shape the future of DeFi and other sorts of blockchain-based apps.

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

Account Light mode Log Out