Introduction
To truly understand the leaps this technology has made, we need to look back nearly 2 years to a forum post from Vitalik signalling a shift in Ethereum’s short-term goals toward a rollup-centric roadmap. The team at Offchain Labs were well ahead of the curve by this point, having published their Arbitrum research paper in 2018 at Princeton University, they were already in testnet at this stage. For context, in the 6 months leading up to this post (Apr ‘20 - Oct ‘20) - $ETH had climbed 268%, transactions per second were up 2x, and gas had surged an astonishing 5380% from its depths to its Sep ‘20 high. Ethereum was being seriously tested, and the real bull market hadn’t even started yet…
Arbitrum One, the flagship product of Offchain Labs, launched the year after this, as the first major available Layer 2 (L2) scaling solution for Ethereum. This launch was eagerly awaited by many DeFi enthusiasts, especially those counting the days before the rebirth of GMX, from the ashes of the Gambit and XVIX migration. A long summer spent expecting Arbitrum in just another ‘2 weeks’. But finally, it came, and boy did it deliver.
Arbitrum One (Classic)
Arbitrum One is an optimistic rollup of Ethereum. An optimistic rollup achieves much higher processing speeds by processing transactions off-chain before delivering large batches of transactions back to Ethereum L1. In this architecture, Ethereum is used as the consensus layer and data availability layer, whilst Arbitrum One acts as the execution layer. Unlike sidechains, optimistic rollups derive their security from the consensus layer (Ethereum) and verify the accuracy of these transactions through fraud proofs.
Historical TVL of Arbitrum One (L2BEAT)
Arbitrum Nitro
This section will describe the new version of the Arbitrum Rollup, released on 31 August 2022 for the Arbitrum One chain.
This major upgrade is essentially a top-to-bottom re-write of the entire software stack and has improved on Arbitrum “classic” in numerous ways, from compressing calldata further to reduce the data burden on L1 to enhancing several forms of L1 compatibility and interoperability, and many things in between.
Nitro’s design can be split into 4 main concepts:
Sequencing, Followed by Deterministic Execution - orders transactions into a single sequence, where a state transition function processes the transactions in that sequence
Geth at the Core - supporting Ethereum data structures, formats, and virtual machine by compiling in “geth” (go-ethereum) - high degree of compatibility with Ethereum - this is the first major change in the system
Separate Execution from Proving - compiling the source code a second time, separately, to WASM (WebAssembly) for use in proving - portability- and security-optimised - this is the second major change in the system
Optimistic Rollup with Interactive Fraud Proofs - the rollup technology acts as the execution layer and settles transactions to L1, utilising Arbitrum’s interactive fraud proofs
I could go into much more detail, but I’ll leave that to the Offchain Labs docs.
Nitro Benefits
The main reasons for the above upgrades were to make the chain faster and cheaper, but how far did they really get?
The chain has only just been upgraded so we may need to wait for official figures from the team, but in the meantime, I have scraped some technical alfa for you:
Transaction throughput capacity increase of 7x (7 Ethereums of capacity now possible with Nitro)
Arbitrum One vs Arbitrum Nova
As both these chains are now fully equipped with Nitro, I thought it best to quickly outline their differences. If you haven’t already read about Arbitrum Nova, it is Offchain Labs second L2 chain, designed with social and gaming applications in mind. This chain design accepts a mild trust assumption from the base Arbitrum Rollup in order to lower costs, creating AnyTrust, the core technology behind Arbitrum Nova.
Firstly, let’s look below at a range of possible modular stacks with Arbitrum One and Arbitrum Nova style stacks highlighted. Some of the nomenclature will be incorrect for this example but it should help you visualise the stack all the same (e.g. a Validium is a ZK Rollup with an off-chain data availability layer).
From Delphi Digital report
Arbitrum One
Consensus Layer = Ethereum L1
Data Availability Layer = Ethereum L1
Settlement Layer = Ethereum L1
Execution Layer = Arbitrum Nitro Stack
Arbitrum Nova
Consensus Layer = Ethereum L1
Data Availability Layer = Data Availability Committee (off-chain)
Settlement Layer = Ethereum L1
Execution Layer = Arbitrum Nitro Stack
Whereas an Arbitrum Rollup (Arbitrum One) posts data on L1 Ethereum as calldata, AnyTrust (Arbitrum Nova) instead relies on an external Data Availability Committee to store data and provide it on demand. This removes the need for L1 Ethereum in the data availability layer of the stack. The Data Availability Committee is made up of large and respectable Web2 and Web3 corporations and therefore somewhat brings us back to our Web2 way of trust, with the benefit of lower fees.
As a fallback, Offchain Labs have ensured that if all members of the committee were behaving fraudulently and not one party was honest in the return of dat, the chain would automatically revert to an Arbitrum Rollup, using Ethereum L1 as the data availability layer once again.
Arbitrum One Performance Post-Nitro
Layer 2 Fees Summarised
Arbitrum Daily Transactions
As you can see from the above, on day one post-Nitro, Arbitrum One has broken its all-time-high in transactions with no implications on gas (318,777 transactions on 1 September 2022). In fact, fees were the lowest of all rollups on Nitro day 1.
What’s next for Arbitrum One?
Now that the core technology behind Arbitrum has reached a stable point of maturity, expect the team at Offchain Labs to start thinking seriously about moving towards decentralisation and allowing the community to become a larger part of the future direction.
Do not forget that multisig admin keys will continue to be held by Offchain Labs for some time after the upgrade to ensure everything goes as planned. The question is how soon can we expect these wheels to start moving?
In terms of decentralisation, a few first steps have already been taken, with the Ethereum Foundation running a validator on the Arbitrum One chain. However, for sequencer decentralisation, we may be waiting a while longer…
In terms of the baseline rollup technology, Offchain Labs believe that optimistic rollups will be cheaper than zero-knowledge (ZK) rollups for some time, however they ensure they will evolve with demand wherever necessary. Much of the hype from ZK rollups are generally from a comparison between Arbitrum now and future ZK rollups, and therefore not entirely accurate at the current point in time.
Arbitrum Odyssey
Now down to the real business, getting stuck into the chain and exploring all parts of the application layer. Unfortunately, the Odyssey didn’t go as planned last time out with heavy transaction loads and spiking gas fees (higher than Ethereum L1). But, nothing can stop us degens now we have Nitro and 7 Ethereums of raw power!
Here are some projects to look out for and some of their highlights.
GMX
Decentralised swap and derivatives exchange with up to 30x leverage
Yet another week with fees above $2M (30% to GMX, 70% to GLP )
FTX spot listing coming up
One of the few DeFi protocols to actually deploy a decentralised front-end
Synthetics, X4, and Atlantics (with Dopex) on the horizon
GMX Blueberry Club (GBC)
Productive PFPs that earn treasury yield for holders
Impressively performing treasury for 2022 made up of GMX and GLP
GBC trading on the horizon (and in testnet) - use your treasury yield in GMX leverage trades
Dopex
Making option trading more accessible through SSOVs and other products
Atlantic Straddles recently launched and thriving - profit off short-term volatility in the market (new tokens being listed)
Atlantic Options on the horizon
rDPX tokenomics revamp in the works
Jones
Profit from options strategies without knowing the greek alphabet
Jones Metavaults - farm your favourite assets and use your yield for writing calls and puts
A new GMX vault is in the works, offering ~25% APR?!
Plutus
A blackhole for ve-assets on Arbitrum (plsDPX, plsJONES)
Just launched plvGLP (a new auto-compounding vault offering) which will grow with #RealYield (1 plvGLP > 1 GLP)
Some whispers around plsGMX…
Vesta
Native Arbitrum stablecoin protocol with borrowing and lending
Deposit stables in a Stability Pool to take advantage of tokens you want to DCA into at lower prices (e.g. GMX pool at 8% APY with a chance to buy 15% below market rate if borrowers are liquidated)
Keep your eyes peeled for plvGLP as collateral, due to its auto-compounding nature it could make much more sense than raw GLP
3xcalibur
Still in community discussion phase before the official raise
A Tri-AMM architecture (Swaps, StableSwaps, AMM Credit Market)
One to keep an eye on
Trident
A new Risk-to-Earn project, looking to displace traditional and unsustainable Play-to-Earn models
Migrating to Arbitrum soon…