An Intro to the Arbitrum Ecosystem

David Akilo
By David Akilo
Joel Taylor
Edited by Joel Taylor

Published April 30, 2022.

A 3D illustration of the Ethereum logo levitating above a platform

A blockchain ecosystem refers to a blockchain's network of participants who come together to share business goals, ideas, and processes. Blockchains are often associated with cryptocurrencies; however, the technology has evolved to encompass decentralized protocols that apply its power to create unique ecosystems with different applications and perks for its members.

Due to its smart contract compatibility, Ethereum has grown to become the developers' favorite blockchain for building ecosystems, DeFi solutions, and decentralized applications (DApps). However, the Ethereum "rush" also created problems for the network ranging from ridiculously high transaction fees to network congestion.

This is where Arbitrum comes into play. Arbritrum is a layer two scalability solution for Ethereum's smart contracts, which focuses on improving speed and scalability with the added integration of privacy features. The platform creates a second layer Ethereum solution that runs on unmodified Ethereum Virtual Machines (EVM).

What Are Arbitrum Ecosystems?

Arbitrum ecosystems are blockchain networks that leverage the Arbitrum chain to improve the speed and efficiency of system processes while reducing transaction costs.

Arbitrum seeks to address the demerits of Ethereum smart contracts like lack of efficiency and high transactional costs while simultaneously taking advantage of Ethereum's layer one security features. Arbitrum utilizes a technique known as optimistic rollups to reduce most of the computational and storage hurdles that slow down the Ethereum blockchain.

Optimistic rollups work by recording clusters of transactions on Ethereum's main chain and transferring them for execution on a cheaper and scalable Arbitrum sidechain while simultaneously utilizing the Ethereum blockchain to ensure the correct completion of transactions.

What Gas Does Arbitrum Use?

Arbitrum uses ArbGas to track the cost of executing transactions on the Arbitrum chain. There is no hard limit on ArbGas, unlike Ethereum; this makes it cheaper than ETH gas. The ArbGas helps compensate Arbitrum's chain validators for their expenditures, incentivizing validation on the Arbitrum chain.

Top Arbitrum Coins

The Arbitrum ecosystem currently has a market cap that sits around $170 billion. Several arbitrum ecosystems utilize Arbitrum layer two solution for processing transactions on their networks.

These coins include:

  • USDC/USDT/TUSD Popular stablecoins; USDT, TUSD, and USDC, which are cryptos tied to the value of stable assets like the US Dollar, depend on Arbitrum layer two solution for enhancing network transactions.
  • UNI The governance token for Uniswap, a decentralized exchange, also uses Arbitrum.
  • LINK The native token of Chainlink, a framework for building hybrid smart contracts and decentralized oracles.
  • YFI The native token of Yearn Finance, a group of DeFi protocols that expose users to various earning options via lending and borrowing.
  • BAL The governance token for the balancer platform, an Automated Market Maker that allows any investor to create and add liquidity for trading pools to earn customizable rewards.

Advantages of the Arbitrum Ecosystem

The Arbitrum comes with several beneficial features for blockchains on the Ethereum network.

These advantages include:

  • Cheaper transactions Being a layer 2 scaling solution for Ethereum, Arbitrum boosts transaction time and reduces the cost of transactions. The deployment of its rollup technology and ArbGas, allows Arbitrum to significantly cut transaction fees while providing incentives for its validators.
  • Access to developer tools The Arbitrum team has produced extensive developer documentation for the platform, which will reduce the barrier to entry, giving developers access to exiting Ethereum tools. All tools required to build on Arbitrum, like plugins, Truffle, and compilers, are available to developers without requiring downloads.
  • Robust Ecosystem Many crypto ecosystems, decentralized applications, and DeFi projects already utilize the Arbitrum solution; this indicates the efficacy of Arbitrum as an Ethereum layer 2 solution. Some ecosystems that patronize Abitrum include Uniswap, Sushiswap, and DODO.
  • Great EVM Compatibility Arbitrum has one of the highest EVM compatibility for any Ethereum layer 2 solutions. Its compatibility goes down to the bytecode level, making it easy to build on top of it since developers don't need to learn a new coding language to work with Arbitrum.

Disadvantages of the Arbitrum Ecosystem

Despite its impressive merits, using Arbitrum still comes with some drawbacks.

Some of these include:

  • No Security Guarantees Arbitrum solely focuses on scaling, not security. As a layer 2 solution itself, Arbitrum doesn't offer any security guarantees. Instead, it depends on the Ethereum infrastructure for this.
  • Competition There is a growing list of Ethereum layer 2 solutions; some of them may even offer better scaling options than Arbitrum. Aside from layer 2 competitors, layer 1 solutions seeking to replace Ethereum as a whole are already gaining ground. Solana and Cardano are good examples of these competitors.
  • Possible Hardware Issues Arbitrum isn't immune to hardware failure, which could lead to network outages or a freeze on transactions. This problem occurred recently, causing users to panic over the state of their funds stuck in suspended transaction. However, the Arbitrum team managed to identify the issue and solve the problem.