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ARB Token

In March 2023, the much-anticipated Arbitrum token, ARB, was officially announced by the Arbitrum Foundation, with an airdrop date set for March 23. The introduction of the ARB token signifies Arbitrum's transition into a DAO, with token holders governing both Arbitrum One and Arbitrum Nova. Furthermore, the foundation unveiled an L3 developer toolkit called Orbit, which is expected to resemble Optimism's OP stack and its vision for a flourishing ecosystem of 'Superchains.'

ARB's total supply will amount to 10 billion tokens, with 1.15 billion allocated for the airdrop targeting users who bridged to Arbitrum. An extra 110 million tokens will be airdropped to DAOs that contributed to Arbitrum's ecosystem growth prior to the token launch, akin to Optimism's approach. Overall, ~55% of the supply is designated for the community, while the remaining portion is reserved for investors and team members.

Arbitrum One

Arbitrum is the top Ethereum optimistic rollup scaling solution, with an increasing number of TVL, users, developers, and decentralized applications (dApps). Arbitrum supports up to ~60K transactions per second at an average cost of less than $0.50, making it substantially faster and more affordable than Ethereum.

Arbitrum One is currently the L2 network that has the highest TVL. For an overview of Arbitrum’s ecosystem of applications, see the Arbitrum Portal. Binance, Huobi, and Crypto.com have open withdrawals to Arbitrum, becoming some of the first exchanges to open an on-ramp to Ethereum’s layer 2. Additionally, Arbitrum has partnered with Chainlink nodes and oracles to provide its validation services. This is positive as Chainlink is already used in hundreds of Ethereum L1 projects and will bring the same security and composability to L2. In fact, Arbitrum is top-5 among all protocols in the number of Chainlink price feeds out of all blockchains.

Source

In the beginning, Arbitrum used AVM (Arbitrum Virtual Machine) to allow developers to easily deploy their projects from Ethereum to Arbitrum. Now, after the Nitro update (diuscussed below), instead of using a custom-built EVM emulator, Arbitrum uses Geth, the most popular and well-supported Ethereum client. Core execution and state maintenance function is handled by code from open source Geth.

Previous Issues and Early-Days Centralization

It’s important to note that as promising as rollup technology is, it’s still a new technology not without risk. Arbitrum One experienced downtime for ~45 minutes in September 2021 when a bug caused a large burst of transactions to overload the system. Optimism (OΞ) also experienced a temporary outage (~one hour) in November 2021 in which its L2 transactions were halted. 

Beyond downtime, Arbitrum (and most rollups) remained very centralized around the core team/company. Control over the core code (and thus, users’ funds) in Arbitrum is maintained with a 4/6 multisig design. This means only four people are needed to collude/be compromised in order to have complete control over the rollup. The multi-sig address is seen here.  

“The admin of all contracts in the system, capable of issuing upgrades without notice and delay. This allows it to censor transactions, upgrade bridge implementation potentially gaining access to all funds stored in a bridge and change the sequencer or any other system component (unlimited upgrade power). It is also the admin of the special purpose smart contracts used by validators.” -Source

Additionally, rollups currently use sequencers to collect and order users' transactions in a mempool before they get executed and posted to the DA layer. This poses a potential issue regarding the Maximum Extractable Value (MEV) as the sequencer is generally centralized (one company) in current rollup implementations. Arbitrum is built by Offchain Labs, which currently operates Arbitrum's sequencer and illustrates the long road ahead many rollups have towards achieving true decentralization. The current solution would be to decentralize the sequencers, which many rollups plan to do, although this presents its own challenges. 

In the event the L2 node is offline, users must be able to withdraw funds from the bridge. Up until recently, becoming a validator for Arbitrum has not been completely permissionless. Arbitrum implemented a whitelist. As previously discussed, validators send new L2 state roots to Ethereum mainnet.  Due to the existence of a whitelist, if all validators were to fail, nobody could publish L2 state roots, and users' funds would subsequently be frozen. But as of Q3 2022, the whitelist has been effectively removed with a new process in place should a validator go offline. 

In the new system, if validators do not submit new state roots within a week, anyone can become a validator and submit the transactions. This is a big step in the right direction for decentralizing the rollup chain.

However, other attack vectors still exist. ORs and their challenge period are susceptible to 51% attacks. In this scenario, the attacker would try to introduce “bad” transaction data into the rollup and attempt to censor any attempts to challenge it during the challenge period. The attacker is ultimately trying to corrupt the state of the rollup (with fraudulent data for their own self-interest) and stop anyone from challenging the submission.

This is why an adequately lengthy withdrawal/challenge period (one to two weeks) is needed. An attacker may be able to censor or sneak a transaction through if the window was short enough, but the longer the window, the harder it is to fool the rest of the chain. 

To withdraw from Arbitrum, you first submit the withdrawal transaction on the rollup. Once the transaction is finalized on L1 (up to ~seven days), your funds are free to claim with another L1 transaction (requiring a Merkle proof).

The Arbitrum Nitro Upgrade

Arbitrum Nitro is an upgrade to Arbitrum Classic (the first tech stack released on Arbitrum One). Nitro significantly increased network capacity and reduced transaction costs. After implementing the Nitro upgrade, the network’s throughput increased by 7-10x.

Nitro’s design has four different features, making Arbitrum One more efficient and Ethereum-compatible.  

• Geth at the core: The custom-built EVM emulator of Arbitrum Classic was replaced by open-source go-ethereum (Geth), the most popular and supported execute layer node software. Geth handles the core execution and state maintenance functions in Nitro. Using Geth, the execution and state of a rollup become highly compatible with Ethereum. Most of the benefits of Nitro were possible due to the design choice of using Geth.
• Separation of execution from proving: Code of state transition function is compiled for two purposes. First, it’s compiled for native execution in ordinary operations. Secondly, code is compiled into portable web assembly (Wasm) code for use in fraud proofs in case any dispute arises. This approach ensures fast executions of transactions.
• Optimization in fraud proofs: Nitro uses optimized dissection-based interactive (multi-round) fraud proofs.
• Sequencing: is followed by deterministic execution of transactions
   

Handling of submitted transactions takes place in two stages:

1. Transactions are put into the sequence for processing and the sequencer commits to that sequence. 
2. Deterministic state transition function is applied to each transaction in sequence. The state transition function only gives results of the valid transactions submitted to it.

Two major benefits of Nitro

1. Lower fees for end users, which is possible due to two reasons. First is the separation of execution from proving, which makes execution fast and increases node performance. Second, advanced calldata compression is done using brotli, a well-known general-purpose compression method to compress each batch of transactions. Using this method, transaction fees on Arbitrum are reduced further as fewer data now need to be posted to layer 1.
2. More EVM compatibility due to the use of Geth and Ethereum layer 1 gas compatibility, which ensures improvement in pricing and accounting for EVM operations perfectly in line with Ethereum.

Gas Costs on Arbitrum

Arbitrum employs a unique tracking mechanism called ArbGas to monitor the cost of executing smart contract code on its chain. Each instruction in the Arbitrum Virtual Machine (AVM) has a corresponding ArbGas fee, and the total cost of a calculation is the sum of all instructions' fees, which are measured against Ethereum's gas limit.

Compared to Ethereum, Arbitrum's gas fees are significantly lower and there is no fixed limit on the amount of ArbGas that can be used. The validators of the Arbitrum chain generally charge a fee to cover their costs, although the initial fee is set at zero.

In addition to covering validator costs, ArbGas is also used to ensure that each instruction is properly verified by the AVM. Accurately estimating the amount of L1 gas required by the EthBridge is essential to avoid exceeding the allowed limit. Furthermore, by estimating the emulation time, the chain's speed limit can be safely determined, which is important for optimizing rollup chain throughput.

Unlike Ethereum's gas fees, which are used for a similar purpose on the Ethereum network, ArbGas aims to estimate the cost of emulating smart contract code on the AVM. For example, accessing storage is much more expensive on Ethereum because storing data requires a commitment from all Ethereum miners that can last for an extended period.