Arbitrum: The future of blockchain expansion?

From a historical perspective, Ethereum’s Gas fees have soared to astronomical heights three times: during the bull market in 2017, the summer of DeFi in 2020, and the summer of NFT in 2021. As shown below:

Arbitrum: The future of blockchain expansion?

Above: The gas fee increase of the Ethereum network from 2015 to November 2021.

Every time the gas fee soars again, the discussion around the scalability of the Ethereum blockchain will reignite, while more people are scrambling to find the next competing blockchain network. In fact, the high gas cost is just the tip of the iceberg that we have to deal with. The reason why the current gas fee is so high is because Ethereum cannot scale , that is, the demand for transactions is still more than the Ethereum blockchain can actually handle each time.

Understanding the scalability debate

Blockchain was created as a model that processes transactions in a decentralized manner and records them in blocks, thereby avoiding the double-spending problem and relying on trusted institutions. Early blockchain networks, such as Bitcoin and Ethereum, processed and recorded these transactions based on their PoW (Proof of Work) consensus model.

In the PoW mode, once a transaction is initiated, the transaction will be placed in a transaction pool waiting to be processed and broadcast to all nodes in the network. Although it will be broadcast to all nodes, only one node will successfully solve the computational problem and add this transaction together with other transactions to a block, and receive transaction fees as a reward.

First of all, since the transaction must be broadcast to the network before and after the transaction is verified, it will take a long time to process the transaction . Second, the computing power required to solve mathematical problems consumes a lot of power . Finally, each block for which the number of transactions can be included with the limited space of the block , which resulted in competition between the user and pushed Gas cost, even to sometimes exceed the value of the transaction. As more and more dApps (decentralized applications) use blockchain technology to process and store transactions <span ql-global=”true” droid=”” font-size:=”” margin-top: 0pt; font-size: 11pt;color: rgb(73, 73, 73);line-height: 2em;”> 

Therefore, in order to solve these problems, Ethereum must expand to increase the number of transactions (measured in TPS (transactions per second) ) and transaction speed that the network can handle . To this end, many scalability solutions have been developed, mainly including Ethereum 2.0 other competitive L1 blockchain networks side chains, and L2 solutions . L1 networks like Ethereum 2.0, Polkadot, and Solana have structurally changed the underlying consensus and block generation rules of the current Ethereum network, while the L2 solution is built on the Ethereum main network and its protocols.

The few blockchain/L2 networks that stand out in this competition will power the entire DeFi field and NFTs, maintain DAOs and virtual worlds, and also support the entire creator economy and meta-universe. Below we will elaborate on why we believe that L2 solutions like  Arbitrum invested by Marc Cuban, Polychain Capital, and Pantera Capital) will lead the scalability of Ethereum for at least the next 5 years .

02. Overview of Ethereum’s scalability plan

As mentioned above, scaling refers to increasing transaction throughput and transaction speed. The following are currently existing programs aimed at achieving this goal:

Arbitrum: The future of blockchain expansion?

Above: Scalability solution landscape in 2021, drawing: @yasminekarimi_

There are two ways to expand the blockchain ecosystem:

L1 solution

The L1 (first layer) solution increases the transaction throughput of the blockchain by processing the underlying protocol of the blockchain , that is, the code of the main network blockchain itself. They can be further divided into:

1) Protocol improvements

Protocol improvement refers to changes to the underlying protocol to expand transaction throughput. This is mainly done by increasing the number of transactions that can be contained in a single block (only sustainable in the short term), reducing the time difference between block creation, or from The PoW consensus model is realized by the structural transformation of PoS. Unlike the PoW model, PoS selects verifiers based on the number of blockchain native tokens pledged by the verifier. Since the verifier is selected on this basis, and therefore does not require extensive computing power it does not exist leading to G AS charges up to astronomical competition among the miners The time required to verify transactions is much less , because a single node does not need to invest so much processing power, as demonstrated by PoS-based blockchains such as Solana ( 50,000 TPS ) and Polkadot (1000 TPS). In contrast, the current Ethereum can only handle 16 PTS.

2) Fragmentation

Sharding refers to dividing the computing tasks and data space of a blockchain into multiple chains. For example, there will be many sharding chains in Eth2.0. Sharding the blockchain protocol intuitively means dividing the nodes of the initial network into smaller groups, where each group is responsible for verifying a different subset of pending transactions in the network and storing a subset of the global state. The method of assigning nodes to the shard chain is an encrypted lottery mechanism implemented by VRF (Verifiable Random Function) to avoid the situation where a single shard contains most malicious nodes and takes over the shard. Since in sharding, transactions are assigned to specific nodes for verification instead of the entire blockchain network, there is no competition that leads to high transaction fees, and the transaction speed is faster, which increases the number of times per second. The number of transactions that can be processed. Vitalik Buterin stated that on Ethereum 2.0, the sharding and PoS consensus model should be able to achieve 100,000 TPS.

L2 solution

The above-mentioned L1 solution is mainly to change the blockchain protocol, while the L2 (second layer) solution is to implement the expansion of L1 by a smart contract built on the chain. By outsourcing transaction execution to the L2 network , the L2 network then reports the transaction processing results to the L1 network, thereby creating additional space for pending transactions. There are currently multiple ways to achieve this:

1) Side chain

You can transfer assets to transaction costs and speed better side chains Sidechains on, for example using a delegate proof of interest xDai consensus mechanism to achieve fast transaction time (5 seconds) and low transaction costs ($ 0.000021). Cross-chain asset transfer is achieved through a two-way anchoring protocol (2WP) , which first locks assets in the first blockchain network (such as Ethereum) , and then on the second blockchain network (such as Polygon) create a transaction, the input of this transaction contains the correct encryption proof of the asset lock operation. A good example of a side chain is Polygon.

2) Plasma

Plasma is to build a blockchain in the blockchain. The assets are sent to the smart contract that manages the Plasma chain. Plasma chain executes transactions, only the hash of the block header will be submitted to the root chain (such as Ethereum), unless there is a fraud proof indicating that there is a fraud problem, in which case the Plasma block will be rolled back and the block is created Those who will be punished. This mechanism brings great scalability, because the minimization of root chain status updates can make transactions faster.

3) Channel

Channels are open source protocols and smart contracts that allow participants to perform X off-chain transactions but only need to submit 2 on-chain transactions to Ethereum. When users open the channel for the first time, they must create and pay for an Ethereum transaction; when they are ready to close the channel, they must pay again to process a transaction on the Ethereum chain. This reduces the number of transactions that must be processed and stored, and reduces the Gas fee to only open and close one channel. The main projects that utilize state channels on Ethereum are State Channels, Celer, Perun, and Raiden.

4) Rollups

Rollups uses compression tools to verify transactions off-chain in batches, and then stores the data on L1 , thereby bringing expansion to the L1 main network (such as Ethereum). Compression and batch processing can bring higher throughput, speed up transactions and minimize the cost of each transaction.

There are two different types of Rollups that rely on this verification method: Optimistic Rollups and ZK-Rollups. Verifying a transaction refers to checking whether the state root (including the account balance in Rollup, contract code, etc.) of the transaction after it is executed in the Rollups batch is correct. ZK-Rollups will be generated for each batch transaction has called zk-SNARK the effectiveness of proof ; and Arbitrum et Optimistic Rollups will be “optimistic” assumption that the validity of the transaction only when a node of a suspected fraudulent transactions The calculation proof (that is, the fraud proof is submitted will be executed only when it is time , which can further improve the transaction speed and throughput .

As a user, how do I interact with Arbitrum?

As a user, you are likely to interact with Arbitrum to use any of the above dApps (such as Uniswap or Aave). These dApps are usually available on Ethereum but require higher fees. Specifically, first add the Arbitrum One network to your Metamask wallet, connect the network and bridge the assets to the network.

Why will Arbitrum lead the scalability of Ethereum in the near future?

1) Arbitrum solves the trilemma of the blockchain: scalability, decentralization and security.

Just having scalability is not enough. While increasing transaction throughput, the blockchain network must maintain the two basic properties of blockchain technology: decentralization and security. This is called the “trilemma ” of the blockchain. As of now, the only Ethereum scalability solution that satisfies all three attributes is a Rollups network like Arbitrum . As of September 12, 2021, the total number of transactions processed on Arbitrum reached 3.56 million, with a maximum of 268,000 transactions per day.

Arbitrum: The future of blockchain expansion?

Above: The trend of total daily transaction volume (blue line) and total daily gas cost (green line) on the Arbitrum network.

In terms of processing power, the Arbitrum network should be able to achieve 40,000 TPS, and the average cost is 5 times lower than using the Ethereum base layer (according to the data of l2fees.info, the cost of Arbitrum at the time of writing is about US$2, while the Ethereum network is about For $10). In addition, Arbitrum is actually working to further reduce costs by 90%-95%, which means that users will be able to mint an NFT or transfer ETH at a cost of tens of cents. The total daily gas cost on the Arbitrum network has also been lower than that of Ethereum. The only noteworthy peak in the total daily cost of Gas was the launch of an L2 income farm called ArbiNYAN on Arbitrum on September 12 , as shown in the following figure:

Arbitrum: The future of blockchain expansion?

Above: The total daily gas cost of the Arbitrum network ( blue line ) compared to the total daily gas cost of the Ethereum network ( green line ).

While achieving higher throughput, Arbitrum has gained security from the Ethereum L1 consensus . In contrast, early L1 blockchain networks (such as the current Ethereum and Bitcoin networks) prioritized decentralization and security, but sacrificed scalability, as evidenced by the high gas fees of the current Ethereum network at this point. Similarly, other competing L1 blockchains (such as Solana and EOS) sacrifice decentralization because only 150 and 21 nodes in these two networks can control their networks. In turn, this centralization will also affect the security of the network, because it increases the possibility of 51% attacks.

Similarly, side chains may also bring attack vectors in the network, because side chains rely on their own consensus and block verification mode. Another example of limited security is protocol improvements , because blockchains with larger block sizes are inherently more difficult to verify, and are likely to become more centralized and therefore less secure. But it should be noted that not all Rollups networks are decentralized in their early stages, although most (if not all) Rollups are committed to gradually achieving decentralization .

2) From EVM compatibility to EVM equivalence

As of now, Arbitrum is one of the most compatible EVM Ethereum Virtual Machine)  L2 solutions . EVM compatibility makes it easy for developers to migrate existing Ethereum applications to the Rollups network because they do not need to rewrite most of the code. Arbitrum is currently the largest Ethereum L2 network , and the total value (TVL) locked in its DeFi protocol at the time of writing exceeds $2.5 billion.

Currently, the Arbitrum network already supports existing Ethereum dApps, such as Uniswap, 1inch, Aave, Balancer, Curve, MakerDAO, Gnosis Safe, etc. In contrast, the current ZK-Rollups and payment channels only support simple payments, transactions, and other application-specific use cases . In addition, Arbitrum currently has a total of 2,361 verified (application) smart contracts, and an average of 12 contracts have been added per day since September, as shown in the following figure:

Arbitrum: The future of blockchain expansion?

Above: The number of contracts verified daily in the Arbitrum network. Image source: Arabiscan.io

As more and more dApps are integrated into the Arbitrum network, Arbitrum is not only attractive to developers but also to users. This can be confirmed by the increase in the number of unique addresses using Arbitrum , as shown in the figure below:

Arbitrum: The future of blockchain expansion?

Above: The growth of the number of unique addresses in the Arbitrum network. Image source: Arabiscan.io

Among these addresses, the Smart Money address appears to have been transferred to Arbitrum. As shown in the figure below, 50% of ETH millionaires who use the Ethereum network also use Arbitrum. (Note: An ETH millionaire address refers to an address with an ETH balance of at least $1,000,000.)

Arbitrum: The future of blockchain expansion?

3) Arbitrum is built on the king of smart contracts (i.e. Ethereum)

We believe that another reason why Rollups like Arbitrum will dominate the scalability of Ethereum in the next few years is that they are built on Ethereum, which is the king of smart contracts. This gives them a first-mover advantage. First of all, Ethereum is still the most used blockchain protocol in the world, with more than 3000 dApps, powering the entire DeFi ecosystem, NFT projects, DAOs and virtual worlds. In this regard, Bitcoin is the only blockchain comparable to it, but Bitcoin lacks the ability to host the Rollups network.

Then, unlike most people think that Ethereum 2.0 will eliminate Rollups, considering that Ethereum 2.0 will be fully deployed in a few years, Rollups such as Arbitrum are actually the primary scalability solutions. The data sharding to be implemented in Ethereum 2.0 will focus on accelerating Rollups. By dividing the transaction history by sharding, while Rollups registers itself in a specific sharding chain, the scalability throughput of Rollups will usher in exponential growth and may reach 14 million TPS by 2030.

For these reasons, it is clear that Rollups like Arbitrum will lead the wave of Ethereum scalability solutions in the near future.

Some current challenges of Rollups

The first criticism of Rollups is that the withdrawal time of Optimistic Rollups is very long (it may take 7 days). The withdrawal operation needs to be delayed, so that the observer has time to issue a fraud proof and cancel the withdrawal operation in the case of suspected fraud.

At the same time, the condition to ensure the security of the Optimistic Rollups network is that at least one node is honest and recognizes fraudulent transactions .

In addition, Rollups still at an early stage, are not interoperable , although we can expect across Rollups transfer of assets and data will become increasingly easy. Having said that, we already have interoperability solutions like Hop Protocol, Connext, cBridge and Biconomy .

Finally, many people believe that Ethereum’s liquidity is fragmented among different Rollups . But since users are motivated to get the best possible price, over time, we can see that liquidity will accumulate in Rollups networks such as Arbitrum.

The future scalability paradigm

In fact, in the long run, the potential of Rollups is not limited to Ethereum. In fact, the future scalability solution will be a more complex system consisting of multiple interdependent scalability projects on the L1 blockchain. Nevertheless, in this complex future, we can expect three main trends .

As mentioned above, in the short term, Rollups on Ethereum (such as Arbitrum) will dominate the pattern of scalability solutions, and will be further enhanced by the deployment of Ethereum 2.0 and its sharding solution . L2 solutions (including but not limited to Rollups) will continue to develop and improve performance to compete with other L1 networks in terms of transaction execution.

The second trend is that when other L1 networks reach full capacity, they will begin to build Rollups on the mainnet . In fact, what most people still don’t understand is that every L1 network needs Rollups , and Ethereum is just the first L1 network that has been prepared for this for a long time (beginning in 2015). For example, Tezos is adopting a road map centered on Rollup. The same is true for NEAR, Celestia and Polygon, Polygon recently announced its advanced zk-STARKs solution Polygon Maiden.

In fact, considering that the demand for Ethereum and blockchain technology is constantly increasing, we can also expect that all scalability solutions are effective and necessary to meet the increasing demands of current and future market participants Demand .

Summarize

In short, the high gas cost is really just the tip of the iceberg. Ethereum has been facing scalability problems since its inception, and today there are many scalability solutions that are dedicated to solving this problem. Among them, Arbitrum is currently the largest Ethereum L2 network, and it is also the Rollup network that is most likely to dominate scalability solutions in the next few years.

Arbitrum has proven to be able to scale Ethereum without sacrificing decentralization and security. As users want the best possible price, more and more developers will build on Arbitrum, because it is one of the most EVM-compatible L2 solutions. In addition to Ethereum, Rollups will be adopted in other competitive L1 networks and integrated into the increasingly complex scalability solution landscape.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/arbitrum-the-future-of-blockchain-expansion/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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