It is often said that innovative products get built in bear markets. This summer was a far cry from 2017’s “DeFi Summer”, but major developments in the layer 2 front were made. One such advancement came from the popular optimistic rollup Abritrum.
Last week, Arbitrum deployed their second generation optimistic rollup, Arbitrum Nitro. Nitro supplies the network with a higher throughput, faster finality, and more efficient dispute resolution than traditional optimistic rollups. This piece aims to provide an overview of how Arbitrum Nitro works, the problems it solves, and how investors can best position themselves ahead of the anticipated (but yet announced) token.
- The main component of Nitro is a new prover that does customary interactive fraud proofs, but via Arbitrum’s WebAssembly (WASM) code.
- Enables 90-95% cheaper fees on average than Ethereum.
- Decentralization has suffered as a result of Arbitrum’s innovation. A potential solution to this could be to follow in Optimism’s footsteps and airdrop a token.
The Big Picture
Arbitrum is an L2 scaling solution for Ethereum that provides a unique set of benefits:
- Trustless Security: Ethereum-based security in which any one party can assure proper Layer 2 outcomes.
- Compatibility with Ethereum: capable of running unmodified EVM contracts and Ethereum transactions.
- Scalability: achieved by offloading contract processing and storage from the main Ethereum chain, allowing for substantially larger throughput.
- Minimum Cost: developed and constructed to reduce the system’s L1 gas footprint, lowering per-transaction costs.
Nitro is the most recent development of Arbitrum technology. It is a fully integrated layer 2 optimistic rollup system that includes fraud proofs, a sequencer, token bridges, enhanced calldata compression, and more.
Nitro’s primary element is a new prover that can do traditional interactive fraud proofs of Arbitrum via WebAssembly (WASM) code. This means that the custom-designed language and compiler currently in use can be replaced by standard languages and tools for writing and compiling the L2 Arbitrum engine.
Furthermore, Nitro will significantly boost network capacity while lowering transaction costs. Prior to this, Arbitrum’s capacity was regulated by Offchain Labs, but with Nitro, Arbitrum will be able to relax those constraints and dramatically increase throughput. Arbitrum transactions are currently 90-95% cheaper on average than Ethereum, with post-Nitro fees expected to end up even lower.
Let’s Get Technical
Several advancements underpin the Nitro stack. At its heart, is a new prover capable of doing Arbitrum’s classic interactive fraud proofs via WASM. That means the Arbitrum engine may be developed and built using conventional languages and tools instead of the custom-designed language and compiler used in prior Arbitrum versions.
Validators and nodes use the Nitro engine compiled to native code in regular operation, switching to WASM if a fraud proof is required. Offchain Labs devs are able to compile the core of Geth, the EVM engine that specifies the Ethereum standard, directly into Arbitrum. As a result, Geth, the most popular and well-supported Ethereum client, has replaced the prior custom-built EVM emulator.
The last component of the stack is a condensed, Go-written version of the ArbOS component, which offers the remaining functionality required to run an L2 chain, including cross-chain communication and an updated batching and compression scheme to reduce L1 costs. In essence, Nitro runs Geth at layer 2 on top of Ethereum and is able to prove frauds using the Geth engine’s WASM-compiled core.
When and Why Token?
Having a sequencer (a computer under the control of Arbitrum) to validate transactions off-chain before rolling up bundles of transactions for settlement on Ethereum allows the layer-2 to process more transactions in fewer blocks.
Although Nitro brings many improvements, it is by no means the be-all-end-all for Arbitrum. Decentralization has suffered as a result of Arbitrum’s innovation. Currently, only nodes authorized by Arbitrum may validate transactions, and the sequencer also remains internal.
Decentralizing fair sequencing is simple when viewed from a distance. The sequencer would be set up as a committee of servers, rather than a single centralized server. As long as a sizable supermajority of the committee is sincere, the Sequencer will provide a fair ordering over transactions.
In practice, it’s much more difficult to accomplish. The first-ever decentralized fair sequencing algorithm was created through research by a team at Cornell Tech, which included Steven Goldfeder, CEO and co-founder of Offchain Labs. These ideas will serve as the foundation for our longer-term solution, a fair decentralized sequencer, along with certain modifications that are currently being developed.
Offchain Labs claims this is only a temporary situation, with many expecting Arbitrum to follow in the footsteps of its rival Optimism in releasing a token to instigate decentralization.
In conjunction with the upgrade, Arbitrum will relaunch Odyssey, a program that lets customers earn NFTs for utilizing the ecosystem. Late in June, Arbitrum had to suspend the program after an influx of new users led to a rise in transaction costs.
Investors can best set themselves up to receive the token airdrop by participating in the Odyssey NFT campaign, as well as engaging with the Arbitrum system as a whole, similar to Optimism.
This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.