The central theses
- Arbitrum, an optimistic roll-up scaling solution for Ethereum, has successfully launched for developers.
- The scaling of layer 2 aims to reduce the overload of the basic chain while benefiting from its security.
- Less congestion on Ethereum will reduce gas charges for every user, not just those using Layer 2.
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Scalability has been the biggest challenge for Ethereum as it grew in popularity. Arbitrum, one of the key Layer 2 solutions to solving the problem, has now been launched for developers.
The way to scale Ethereum
During the most recent market crash on May 19, when BTC and ETH both slumped by over 30% on one day, gas prices hit up to 1,500 Gwei. Some DeFi users reported Uniswap transactions of $ 1,000 or more. Miners made a record $ 110 million in gas fees during the day.
The explanation for these high prices is simple. In order for a transaction to be handed over to Ethereum, the user must encourage the miners to include the transaction in their block by adding a tip. Miners select the highest tips available and prioritize them in their blocks to ensure the greatest possible profitability from their transactions.
Ethereum has low throughput and focuses on security and decentralization over efficiency. While this wasn’t a particularly pressing issue in the early years, the rise in ETH prices and increased demand for transactions have resulted in high dollar values for every transaction on the blockchain.
As the graph above shows, transaction fees have recently become the main source of income for miners before the block rewards are received after each block mined. The chain’s low throughput and high demand have resulted in high gas charges that have led DeFi users to other Layer 1 platforms such as Binance Smart Chain and Polygon.
The solution to these problems is to increase the throughput of the chain. There are two ways to do this. One of them is to scale the base layer of the blockchain. Ethereum 2.0 is working on this through sharding, which divides the workload in the chain horizontally across 64 shard chains and at the same time benefits from the security of the entire network.
The second option is to move some of the off-chain operations to a second tier, built on tier 1, using its security. While Ethereum processes around 15 transactions per second (tx / s), Layer 2 could increase throughput to 2,000 to 4,000 tx / s. The higher the throughput, the lower the gas prices should be. This is the vision that Ethereum founder Vitalik Buterin presented in his October 2020 article “A Rollup-Centered Ethereum Roadmap”, which described the future of the Ethereum chain and the role that rollups could play. He wrote:
“The Ethereum ecosystem will likely be all-in rollups (plus some plasma and channels) as a scaling strategy for the short- and medium-term future.”
How rollups help Ethereum scale
Layer 2 is a generic term that refers to a variety of solutions that help improve the capabilities of a blockchain by performing out-of-chain transactions while maintaining Layer 1 security. Examples of scaling solutions are Bitcoin’s Lightning Network. Users lock their money and execute any number of trades among themselves, so only one final transaction needs to be passed to the main chain.
Another type of solution is plasma, where transactions are outsourced to lower-level chains. Polygon uses plasma. The problem with this, however, is getting the funds back on the main chain. A transaction can take hours. Sidechains like xDai are independent, compatible chains to which decentralized apps can port their intelligent contracts in order to relieve the main chain.
The scaling solution of choice for Ethereum is rollups. Rollups can combine thousands of sidechain transactions into a single transaction that can be verified by the main chain. If this single transaction is correct, it proves the validity of all bundled transactions together.
This transaction is a type of no-knowledge evidence known as SNARK, which stands for “concise non-interactive argument of knowledge”. A SNARK is a form of evidence in which an actor can prove possession of certain information without revealing that information.
Arbitrum, optimism and zero knowledge
Zero knowledge proofs are the most efficient way to scale Ethereum and Buterin’s as the best option for the short to medium term future. Rollups are divided into two sub-categories: zk rollups and optimism. Zk rollups are faster, but not easily compatible with Ethereum Smart contracts. Optimistic rollups like Arbitrum allow decentralized apps to port their smart contracts with only minimal changes.
In the long run, zk rollups might be a more attractive option for decentralized apps as technology evolves, but in the near future, optimistic rollups are much more realistic. Two projects are working on optimistic rollups with two products that will fight for market share in the near future: Optimism and Arbitrum.
Optimism has seen some delays in the past few months, postponing the public mainnet release date to July, while Arbitrum launches today.
The highly anticipated v3 update from Uniswap was released a few weeks ago with a scheduled release on Optimism, but delays have led the community to propose a release on Arbitrum as well. There was widespread support for the vote, and Uniswap founder Hayden Adams has confirmed that the most popular decentralized exchange would use their smart contracts on Arbitrum.
Assuming that the snapshot passes are available, we would like to support the community by providing the v3 smart contracts for Arbitrum!
We have already started supporting the user interface and planning the deployment.
– @ Hayden Adams @ (@haydenzadams) May 26, 2021
A successful start from Uniswap on Arbitrum would bring a lot of liquidity to your solution compared to Optimism. Adams confirmed that Uniswap V3 would also launch on Optimism as planned. Synthetix, Ethereum’s leading synthetic asset protocol, is also currently testing a beta version of Optimism. Arbitrum uses ChainLink to ensure the connection between intelligent on-chain contracts and off-chain resources and to pay for these services with LINK tokens.
How will Arbitrum benefit Ethereum users?
DeFi users can trade for pennies with faster transaction speeds using the Arbitrum version of popular decentralized apps like Uniswap. The impact of launching Arbitrum doesn’t stop there. Off-chain offloading a significant amount of the transaction volume has an impact on the Ethereum network. Uniswap is currently one of the largest gas consumers on the market. If that volume leaves the main chain, the rest of the transaction will also pay significantly less gas fees.
The (modern) history of Ethereum through gas consumption: pic.twitter.com/PnZbuke7mp
– Alex Svanevik @ (@ASvanevik) May 26, 2021
The presence of layer 2 scaling solutions relieves the main chain. This benefits gas prices for traders on both sides and lowers transaction fees for everyone. It’s important to note that rollups are a complex and experimental technology, which means that launching Arbitrum certainly won’t be without its problems. Only traffic, time and attacks will help create the perfect Layer 2 scale for Ethereum.
Disclaimer: The author owned ETH and several other cryptocurrencies at the time of writing.
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