Arbitrum (ARB)

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Arbitrum is a generalized optimistic-rollup that settles to Ethereum. The Layer 2 scaling solution provides users with lightning-fast semi-confirmations and cheaper transaction fees, while inheriting the security of Ethereum L1.

Basics

History

  • In March 2023 Arbitrum launched its governance token and DAO, which immediately afterwards ran into controversy when the Aribtrum team took $1B+ worth of ARB tokens and held a non-binding vote for the show. They backtracked afterwards, however, many accused them of shady dealings and 'decentralized governance theatre'.
  • From Deribit Insights (8-7-2021):

"On a frigid Princeton morning six and a half years ago, a group of undergraduates working with Professor Ed Felten delivered a presentation on the project they had signed up to build: a blockchain-based arbitration system. The objective was to circumvent some of the anticipated scaling challenges of smart contract platforms, and the plan was to design a blockchain that relied on a system of challenges and dispute resolution to lighten the computational workload for traditional miners. “Arbitrum,” as the system was called, would have suffered the same fate as most other promising academic computer science projects, if not for two ambitious PhD students, Steven Goldfeder and Harry Kalodner, who approached Felten a few years later with the idea of building out a robust layer 2 solution based upon the initial concept. Soon thereafter, Felten, Goldfeder, and Kalodner co-founded Offchain Labs and have since shepherded Arbitrum from abstract idea to concrete reality."

"Rollup Plan. Arbitrum plans to support a community chain that uses just ETH for transaction fees (no new token)."

Audits & Exploits

"Funds can be stolen if…

  1. none of the whitelisted verifiers checks the published state. Fraud proofs assume at least one honest and able validator (CRITICAL),
  2. a contract receives a malicious code upgrade. There is no delay on code upgrades (CRITICAL).

Funds can be lost if…

  1. there are mistakes in the highly complex AVM implementation.

Funds can be frozen if…

  1. the centralized validator goes down. Users cannot produce blocks themselves and exiting the system requires new block production (CRITICAL).

MEV can be extracted if…

  1. the operator exploits their centralized position and frontruns user transactions."

However, the Frozen Funds part is being disputed by a different source (9-1-2022):

"Validating the Arbitrum chain is fully permissionless; all you need to do is download the Arbitrum Validator node software and point your node at the chain. To issue or dispute an assertion, you simply need to place a stake that you'll get back after the claim is resolved (assuming you acted honestly)."

On Arbitrum Nova it is similar as above, except 2 extra points:

"Funds can be lost if…

  1. the external data becomes unavailable (CRITICAL),

Users can be censored if…

  1. the committee restricts their access to the external data."

Bugs/Exploits

  • Arbitrum One sequencer & feed stalled during surge in traffic. 90% of transactions were inscriptions (16-12-2023).
  • Arbitrum batch-poster bug caused a temporary pause in posting transactions onchain [around an hour], no loss of service from a user perspective (10-6-2023).
  • From Decrypt (22-9-2022):

"A white hat hacker has discovered a bug within the latest upgrade for Arbitrum, an Ethereum scaling network, that could have led to the theft of over $530 million. 0xriptide discovered that the bridge between the Ethereum mainnet and Arbitrum Nitro contained a flaw that would allow any industrious hacker to replace Arbitrum’s destination address with their own. Essentially, any funds meant to flow from Ethereum into Aribitrum could instead be redirected straight into a hacker’s wallet."

"Yield missing function override post mortem, $206k was at risk on Arbitrum"

  • From Week in Ethereum (15-1-2022):

"Arbitrum Sequencer downtime due to hardware failure, backup had software upgrade in progress, Arbitrum still in beta, plans to decentralize Sequencer."

  • From their blog (15-9-2021):

"Beginning at 10:14 AM Eastern today (September 14, 2021) and continuing for approximately 45 minutes, the Arbitrum Sequencer was offline. Funds were never at risk, but the submission of new transactions stopped during the downtime."

Governance

Admin Keys

"While proposing blocks is open to anyone the system employs a privileged sequencer that has priority for submitting transaction batches and ordering transactions. Because the state of the system is based on transactions submitted on-chain and anyone can submit their transactions there it allows the users to circumvent censorship by interacting with the smart contract directly.

The system uses the following set of permissioned addresses:

  1. Arbitrum MultiSig 0xC234…0941 (MultiSig) 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.
  2. MultiSig participants0x0C88…CE1e (EOA), 0x68aF…6e12 (EOA), 0x8042…951B (EOA), 0xf7FA…59c6 (EOA), 0xc19A…e972 (EOA), 0xc73b…5075 (EOA) These addresses are the participants of the 4/6 Arbitrum MultiSig.
  3. Sequencer 0xa4b1…253f (EOA) Central actor allowed to set the order in which L2 transactions are executed.
  4. Validators0xa8c3…fc4f (EOA), 0x9919…f089 (EOA), 0xF76d…0858 (EOA), 0xDdfF…69cD (EOA) They can submit new state roots and challenge state roots. Some of the validators perform their duties through special purpose smart contracts."

"Arbitrum will be using Chainlink’s FSS technology for minimizing MEV on Arbitrum One and decentralizing the sequencer."

"We’re currently targeting the end of the summer to phase out these controls."

Security Council

  • Security Council members are each paid $5,000 per month in $ARB tokens. An updated list of Security Council members was given in the first AIP:

i. September Cohort

  1. Ed Felten is Co-Founder and Chief Scientist at Offchain Labs
  2. Harry Kalodner is Co-Founder and CTO at Offchain Labs
  3. Mo Dong is the Co-Founder of Celer Network
  4. Diane Dai is the Co-Founder of DODO
  5. Caleb Lau has been a software engineer at Etherscan since 2019
  6. Bryan Pellegrino is Co-Founder and CEO at LayerZero Labs

ii. March Cohort

  1. Rachel Bousfield 10 has been a software engineer at Offchain Labs since 2021. She is currently leading the development of Stylus.
  2. Patrick McNab is a Co-founder of Mycelium
  3. Justin Drake has been a researcher at the Ethereum Foundation since 2017
  4. Bartek Kiepuszewski has been a blockchain architect at MakerDAO since 2017. He also co-founded l2beat.com and TokenFlow Insights.
  5. Patricio Worthalter has been working full time in the Ethereum space since 2015.
  6. Yoav Weiss is a security researcher at the Ethereum Foundation and has been building in the Ethereum space since 2017.

"Code changes will be subject to a time delay (to leave time for audits and other safety considerations), but a 12-person security council governed by the Arbitrum DAO will have the ability to make quicker bug fixes."

"Members of the initial council, which will change every six to 12 months, include Celer Network co-founder Mo Dong, LayerZero Labs CEO Bryan Pellegrino, Ethereum researcher Justin Drake and three members of the Offchain Labs team."

  • From their docs (19-3-2023

"Every elected Security Council member’s term lasts one year, excluding the first cohort’s member terms, which are truncated by the amount of time between the date of the first election specified in the Constitution and the date of the DAO's launch.

To become a candidate for the Security Council, you must be a member of the Arbitrum DAO. You must also have support from at least 0.2% of all votable tokens. Once the candidates have been chosen, all members of the Arbitrum DAO can vote for the candidates. The 6 candidates who receive the most votes will be elected to the Security Council. Additionally, the Arbitrum Foundation may set forth further guidelines and procedures for ensuring a fair, transparent and effective elections process.

No more than 3 candidates from the same organization should be elected into the Security Council. Also, candidates shouldn't have any conflicts of interest that would prevent them from acting in the best interests of the Arbitrum DAO.

The rules for the Security Council elections can be changed by the members of the Arbitrum DAO, but these changes can't be made during an ongoing election. Security Council members can also be removed from their position prior to their term ending if at least 10% of all votable tokens participate in a removal vote, and at least 5/6 of the votes are in favor of removal. A member can also be removed if at least 9 members of the Security Council vote in favor of removal."

DAO

  • The centralization issues around the DAO did not get solved yet, on 12-3-2024 a proposal to fund Tornado Cash lawyer fees was heavily voted in favor and then got removed from Snapshot.
  • In March 2023 Arbitrum launched its governance token and DAO, which immediately afterwards ran into controversy (3-4-2023) when the Aribtrum team took $1B+ worth of ARB tokens and held a non-binding vote for the show. The vote became a big failure. They backtracked afterwards, however, many accused them of shady dealings and 'decentralized governance theatre'.

"The backtracking comes after a day of rage in the Arbitrum community over how the Foundation – a centralized company charged with promoting Arbitrum's claimed decentralized ecosystem – held a "ratification" vote over decisions it had already implemented, including sending nearly $1 billion in tokens to itself. The current vote treats the Foundation's power over that sum as a foregone conclusion; it started spending and sending tokens even before passage. The Arbitrum Foundation's "special grants" program – at the heart of the controversy – will be rebranded the "Ecosystem Development Fund." Arbitrum pledged to "provide context on how the funds will be used," as well as a "transparency report" on the Foundation's budget.

The Arbitrum Foundation further pledged it "has no near-term plans to sell more tokens," a nod to the blowback over millions of dollars in ARB it sold for "operational purposes" without community consent."

"Arbitrum then clarified on Twitter that the total amount of ARB converted into stablecoins was around $10 million."

There is no talk about buying back these tokens, so the damage is already done.

  • The ARB token will have governance on Arbitrum One. From Coindesk (16-3-2023):

“Arbitrum DAO will have the power to control key decisions at the core protocol level, from how the chain's technology is upgraded to how the revenue from the chain can be used to support the ecosystem,” the Arbitrum Foundation said in a statement. Arbitrum DAO’s governance process will be self-executing, meaning votes can be used to directly alter Arbitrum’s core code."

Treasury

Token

Launch

  • The Arbitrum Foundation said on that ARB, Arbritrum’s new token, will be airdropped to community members on Thursday, March 23, 2023. The token will be launched on Arbitrum One.

Token allocation

  • The Arbitrum Foundation plans (19-3-2023) to grant a relatively high number of tokens to investors and core contributors (44%). There will be 10B tokens with inflation of max 2%.
Percentage of initial supply Number of tokens Allocated to
42.78% 4.278 billion Arbitrum DAO treasury
26.94% 2.694 billion Offchain Labs Team and Future Team + Advisors
17.53% 1.753 billion Offchain Labs investors
11.62% 1.162 Billion Users of the Arbitrum platform (via airdrop to user wallet addresses)
1.13% 113 million DAOs building apps on Arbitrum (via airdrop to DAO treasury addresses)

Utility

  • Governance.

Token Details

Stablecoin

Coin Distribution

Technology

Transaction Details

How it works

  • From the first (failed, but implemented) AIP (15-3-2023):

"Transactions occurring on the Arbitrum Nova chain are settled on Ethereum mainnet, but, unlike transactions occurring on the Arbitrum One chain, the underlying transaction data batches are posted and stored by the members of the Data Availability Committee on a Data Availability Server 18 (and not on Ethereum mainnet).

The initial members of the Data Availability Committee are authorized representatives of the following parties:

  1. Reddit, Inc.
  2. ConsenSys Software Inc.
  3. QuikNode, Inc.
  4. P2P Business Technologies
  5. Google Cloud ( Google LLC.)
  6. Offchain Labs, Inc.
  7. Opensea Innovation Labs Private Limited

Data Availability Committee members can be appointed and removed at any time pursuant to a Constitutional AIP approved by the ArbitrumDAO"

"After some period of time, the published state root is assumed to be correct. For a certain time period, usually one week one of the whitelisted actors can submit a fraud proof that shows that the state was incorrect.

All executed transactions are submitted to an on chain smart contract. The execution of the rollup is based entirely on the submitted transactions, so anyone monitoring the contract can know the correct state of the rollup chain."

  • From L2beat (13-10-2022), Regarding Arbitrum Nova:

"Users transactions are not published on-chain, but rather sent to several well known and trusted parties, also known as committee members (DAC). New transaction batch needs a BLS signature with the required DAC quorum, for example 9/10. This signature is not verified by L1, however external Validators will skip the batch if BLS signature is not valid resulting. This will result in a fraud proof challenge if this batch is included in a consecutive state update. It is assumed that at least one honest DAC member that signed the batch will reveal tx data to the Validators if Sequencer decides to act maliciously and withhold the data."

"The majority of the fees collected on Arbitrum are used to pay for posting calldata on Ethereum (so they end up going to the Ethereum miners), and there are also costs to operate the chain and the supporting infrastructure. ETH is the native asset on Arbitrum, and fees will be paid in ETH on L2. For more info on fees, see here. In order to use the chain, users will first have to use the Arbitrum bridge to transfer ETH from Ethereum to their L2 wallet."

Fees

Upgrades

  • Offchain Labs BOLD (Bounded Liquidity Delay): proposed dispute protocol for permissionless validation of Arbitrum chains, eliminates delay attack vector (5-8-2023).
Arbitrum Nitro
  • Arbitrum One upgrades to Nitro August 31, its whitepaper got released on 27-8-2022. Arbitrum Nitro features several changes to the current AVM architecture and ArbOS. The popular WebAssembly (WASM) architecture would replace the older, custom-designed AVM architecture.
  • Partnered up with Chainlink (10-12-2021). From EthHub:

"Arbitrum will be using Chainlink’s FSS technology for minimizing MEV on Arbitrum One and decentralizing the sequencer."

"Arbitrum Nitro is next iteration of Arbitrum, which the team has been working on for months. It’s built on standard technologies like WASM and Geth, so it’s more EVM-compatible, an order-of-magnitude faster than the current tech, and adds another 0. When it’s ready it’ll be deployed as a seamless upgrade to Arbitrum One."

Staking

Validator Stats

The broadened group of organizations securing the Arbitrum One chain now include:

@ConsenSys

@ethereum

@l2beat

@mycelium_xyz

@OffchainLabs (us)

@P2Pvalidator

@QuickNode

@iffunic

@unit_410

Scaling

Different Implementations

  • Arbitrum One is the mainnet Ethereum L2 chain built using the Arbitrum technology.
  • Has Arbitrum One and Arbitrum Nova live (13-10-2022):

"Arbitrum Nova is an AnyTrust chain that aims for ultra low transaction fees. Nova differs from Arbitrum One by not posting transaction data on chain, but to Data Availability Committee."

Interoperability

"Polygon and Wanchain are launching a decentralized L2 to L2 cross-chain bridge that connects Arbitrum and Polygon’s PoS chain."

Other Details

Pipelining

"Pipelining allows network validators to continue processing transactions for final approval even if a previously-processed transaction is under dispute. What this creates is a “pipeline” of recently-processed but yet-to-be-finalized transactions, instead of a bottleneck that prevents the sequencer from processing transactions and network parties from submitting challenges.

Pipelining is possible because anyone monitoring the network can know immediately whether a dispute is valid or invalid even before the dispute resolution process is finished. In essence, validators can operate as if the disputed transaction is already finalized and continue building the chain (i.e. processing transactions) on whichever outcome, or “branch,” is correct. This process, blunts the force of any would-be spamming attack.

Oracle Method

Compliance

Their Other Projects

AnyTrust

"Ultra low cost transactions, hash of data posted on mainnet, operated by committee, assumes minimal members honest as can fallback to rollup.  Similar trust assumptions to Validium." AnyTrust chains will operate alongside Arbitrum One.

Arbitrum Orbit

  • Arbitrum Orbit supports using an ERC20 token for gas (6-1-2024).
  • Developers can now deploy an Orbit chain on Arbitrum Sepolia with Celestia as modular DA, complete with Nitro fraud proofs and Ethereum fallback (20-12-2023).
  • Will allow third-party apps and protocols to build new “layer 3” blockchains based atop Arbitrum (16-3-2023).

Roadmap

  • Can be found [Insert link here].
  • On February 24, 2023 Arbitrum proposed combating sequencer overloading by arbitrage bots with a hybrid PoW approach.

Usage

  • GMX currently constitutes 25% of the total value locked on Arbitrum (23-3-2023).
  • Arbitrum processed 1.1M daily transactions on 24-2-2023, about 20,000 more than Ethereum.
  • From Bankless (9-12-2022):

"GMX comprises over half of Arbitrum’s TVL. Arbitrum’s TVL, exclusive of GMX, has increased 7.6% from its pre-FTX high set on November 5." Most other L2s have lost TVL since then.

"In terms of TVL, Arbitrum One has recently surpassed Solana and Avalanche with $941.47 million. Month over month TVL has only dropped -2.67%, which is the smallest drop-off of any of the major smart contract platforms with DeFi. In addition to DeFi, Arbitrum One has also seen successful projects in the DAO and NFT space. TreasureDAO surpassed $250m in marketplace sales on its own collections in the first half of 2022.

Arbitrum Nova is the second EVM chain from the team, launched August of 2022 with a focus on gaming and social dApps. Reddit, Google, ConsenSys, P2P, and Quicknode make up the data availability committee. Reddit selected Nova for its decentralized community points strategy with the first sub-reddits (r/cryptocurrency & r/fortniteBR) live, bringing strong growth in new Nova wallets. An exciting gaming ecosystem is currently building on Nova, with more coming soon. As of this month, Nova has already seen more than 200K addresses complete transactions on its network."

  • Transactions have shot up more than 550% since the launch of its Nitro network upgrade in August, now representing 62% as many weekly transactions as the Ethereum blockchain, research firm Delphi Digital reported earlier this week. Before the surge, Arbitrum handled just 9% of Ethereum activity.
  • From The Defiant (8-9-2022):

"Activity on Arbitrum quadrupled after its Nitro upgrade, with daily transactions hitting all-time highs during consecutive days this week. According to data from Arbiscan, there were 319,000 transactions executed on the blockchain network on Sep 1, the day after Arbitrum’s Nitro upgrade went live."

"On Friday, ~$170M worth of ETH had been bridged onto Arbitrum. That changed over the weekend though, as yield farms for speculative tokens like ArbiNyan and Carbon.fi (which is already down 99%) managed to spur FOMO and cause bridge volume to spike. Arbinyan’s ETH pool currently has over $1.45B of ETH. Meanwhile, Arbitrum’s ETH bridge custodies over ~$2b worth of ETH. It’s worth noting that a single whale wallet was responsible for ~168K ETH bridged. Arbitrum grew >$2b in bridge TVL with only ~500 unique depositors."

Projects that use or built on it

"Arbitrum’s technology is leveraged by defi projects like Aave, Balancer, Band Protocol, Coinbase Wallet, Chainlink, Curve, DAI stablecoins, Etherscan, Dodo, Metamask, Shapeshift, Sushiswap, Uniswap, and many more."

"Plans to launch Swapr, Omen and a DXdao base on Arbitrum, a Layer 2 scaling solution that uses an optimistic rollup."

"MCDEX Launched on Arbitrum Rollup Testnet: The MCDEX perpetual swap platform platform is now able to be used on Arbitrum’s layer 2 rollup technology (testnet only for now)."

  • Reddit; using it for its community points (7-2021). Will also provide the infra for all other community points (10-8-2022). Community points got wined down (18-10-2023).
  • Uniswap had a vote and launched on Arbitrum.

Competition

"The simplest way to describe the difference is that Optimism’s dispute resolution relies more heavily on the Ethereum Virtual Machine (EVM) than Arbitrum’s. When someone submits a challenge on Optimism, the entire transaction in question is run through the EVM. By contrast, Arbitrum uses an offchain dispute resolution process to whittle down the dispute to a single step within a transaction. The protocol then sends this single step assertion, as opposed to the entire transaction, to the EVM for final verification. Conceptually, Optimism’s dispute resolution process is thus considerably simpler than Arbitrum’s. Optimism’s approach to dispute resolution—i.e. running entire transactions through the EVM—is not just conceptually simpler: it’s quicker too. There aren’t “multiple rounds” of back and forth, as there are in Arbitrum’s process. In fact, for this reason, Optimism’s rollups are often called “single round” whereas Arbitrum’s are “multi round.” Practically speaking, this means that in the case of a disputed transaction, final confirmation on Ethereum is delayed in Arbitrum’s case longer than it is in Optimism’s case.

On the flip side, the advantage of Arbitrum’s dispute resolution is that it is cheaper in terms of onchain (i.e. on Ethereum) transaction costs. The bite-sized chunk of code that the EVM eventually processes after the completion of the back-and-forth dispute resolution process requires much less gas (in most cases) than it does to re-process the entire transaction onchain. Arbitrum should be more gas efficient than Optimism—and therefore cheaper for users—not only in the rare case of a dispute, but also in the predominant “happy” case."

"The biggest distinction is what happens when two parties disagree on the state after executing a tx ie. implementation of the fraud proof (FP) mechanism. Optimism uses single round fraud proofs. This means that L1 executes the whole L2 transaction on-chain to verify the state root. This makes FPs instant which is nice. But there are some problems too:

• you need to supervise tx execution hence need for OVM (aka rewriting EVM to avoid sideeffects) • L2 tx gas is bound by L1 block gas limit • you need on-chain state roots after each TX - costs more :( • source of potential security issues

Arbitrum features multi-round fraud proofs. You can dumb it down to doing a binary search between two parties to find the first opcode of a whole block that they disagree on. Once found only this particular opcode is executed on-chain. It has some nice properties: • it requires posting on-chain just one state proof for a whole bunch of txs, • L1 block gas limit doesn't matter since L2 txs will never entirely execute on L1 Drawbacks: • It requires EVM -> AVM translation (thankfully it's automatic) • it's slow - in the worst case it takes up to 2 weeks to finish FP. Realistically it's 1 week. • requires original claimer to be online and cooperative

Optimism's approach has one *HUGE* drawback. Imagine that there is a hardfork and Ethereum consensus rules change. One of the opcodes is removed/repriced or modified in some other way. Suddenly re-executing past tx on L1 will result in a different final state. Arbitrum fully controls AVM specs and doesn't have this problem.

Optimism requires a special solidity compiler to generate OVM bytecode. So, unfortunately, it works only with Solidity and only with particular versions of solidity. On the other hand, their L2 node is just modified geth which is great for compatibility.

Arbitrum on the surface is fully compatible with EVM/JSON RPC spec but their node is a custom implementation. It does automatic EVM→ AVM transpilation to support fraud proofs. Thanks to this low-level translation, it supports any EVM language (vyper, YUL+ etc).

Optimism uses weth but Arbtirum has native eth support. Optimism launches with wallet abstraction built in too. Arbitrum launches with a unified permissionless bridge to bridge any tokens to L2 (it deploys generic ERC20 as a L2 counterpart). Optimism prefers dedicated bridges but of course, deploying "unibridge" on optimism is possible as well."

Pros and Cons

Pros

Cons

“There is a chicken and the egg [issue] that needs to be solved when decentralizing a network, and the point of AIP-1 was to inform the community of all of the decisions that were made in advance.” Since the measures outlined in AIP-1 have already been implemented, the community’s opposition and votes against the proposal appeared to be moot.

But afterwards they had to come up with new tactics.

  • Is giving 44% of its token to insiders. Optimism for comparison gave 33%.
  • Had investment from bankrupt Alameda Research/FTX. This could mean fall-out risk.

Team, Funding, Partners

Team

Funding

Partners

"Arbitrum will be using Chainlink’s FSS technology for minimizing MEV on Arbitrum One and decentralizing the sequencer."

Arbitrum Foundation

Directors

  • According to the first AIP, the following were suggested as directors (15-3-2023). The vote did not pass however, so it is as of yet unclear. However, it seems like the Arbitrum Foundation was already created ahead of the vote:
  1. Campbell Law
  2. Edward Noyons
  3. Ani Banerjee
  • Lemma LTD is one of a “few different service providers” the Arbitrum Foundation is working with to “bootstrap itself and be in a position to properly serve the DAO.”

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