Most recent update: [June 26, 2023]
What is Arbitrum?
Arbitrum is a Layer-2 scaling solution for the Ethereum blockchain that aims to address some of the challenges of the Ethereum network, such as slow transaction speeds and high gas fees. It is developed by Offchain labs, a start-up founded by computer scientists from Princeton University.
Arbitrum uses a technology called Optimistic Rollups, which allows it to bundle multiple transactions into a single batch and execute them off the main Ethereum network. This reduces the number of interactions with the Ethereum network, which in turn increases transaction speeds while also lowering the cost of gas fees for users.
One of the unique features of Arbitrum is its compatibility with the Ethereum Virtual Machine (EVM). Users can interact with smart contracts on the Ethereum network using the same addresses and wallets they use for Ethereum transactions. This means that developers can build and deploy smart contracts on the Arbitrum network using the same programming languages and tools as they would on Ethereum. It makes it easy for developers to migrate their existing Ethereum-based applications to Arbitrum and take advantage of this scalability benefits.
Overall, Arbitrum aims to provide a faster, more efficient, and more affordable alternative to the Ethereum network all while maintaining compatibility with the latter’s ecosystem, making it an attractive option for developers.
Who is behind Arbitrum?
Arbitrum was founded in 2018 by Offchain Labs, a blockchain research and development company co-founded by three computer science professors – Ed Felten, Steven Goldfeder, and Harry Kalodner – who have extensive experience in blockchain research and development.
Ed Felten is a professor of computer science and public affairs at Princeton University and has served at the Deputy U.S. Chief Technology Officer under President Obama. Steven Goldfeder is a computer science professor at Princeton University with expertise in blockchain security and privacy, and Harry Kalodner is a former computer science researcher the University of Maryland with expertise in blockchain and smart contract security.
The team at Offchain Labs also includes experienced blockchain developers, researchers, and engineers with backgrounds in distributed systems, cryptography, and programming languages. The company has received funding from prominent investors, including Pantera Capital, Lightspeed Venture Partners, and Mark Cuban, among others. In addition, Offchain Labs has partnered with industry leaders such as Chainlink, Uniswap and Polygon to bring their solutions to the Arbitrum ecosystem.
How does it work?
Arbitrum uses a technology called Optimistic Rollups to increase transaction throughput and reduce fees while maintaining security and decentralization. This technology bundles multiple transactions into a single batch, which reduces congestion on the Ethereum network, and therefore decreases transaction fees and speeds up transaction processing time.
To begin, users initiate transactions on the Ethereum network by sending transactions to a smart contract deployed on Arbitrum, which are in turned bundled into Optimistic Rollup blocks. These are processed off-chain and not directly on the Ethereum network. Once verified by a set of Arbitrum validators, results are submitted to the Ethereum network, at which point the transaction is recorded on the Ethereum blockchain and the state of the smart contract is updated. Once updated, users can then interact with the smart contract on the Ethereum network just like they would with any other smart contract. If a conflicting transaction is detected, the transaction is “rolled back” and the Arbitrum validator responsible for it is penalized.
The Arbitrum Token and Tokenomics
ARB tokens were airdropped beginning on March 23rd 2023 following a snapshot on February 6th 2023. Multiple exchanges have announced support for it, and are currently supporting an IOU version of it. The initial supply is capped at 10 billion tokens, with a maximum inflation rate of 2% per year. As of March 23rd, the fully diluted market cap of ARB IOU was estimated at around US$13 billion.
The token distribution for ARB is allocated as follows:
- 42.78% allocated to the Arbitrum DAO treasury.
- 26.94% allocated to the Offchain Labs Team and Future Team + Advisors.
- 17.53% allocated to Offchain Labs investors.
- 11.62% allocated to users of the Arbitrum platform (via airdrop to user wallet addresses).
- 1.13% allocated to DAOs building apps on Arbitrum (via airdrop to DAO treasury addresses).
All investor and team tokens are subject to four-year lockups, with the first unlocks happening one year from the airdrop date and then monthly unlocks for the remaining three years.
The ARB token is purported to serve as a utility token for activities such as gas fee payments and governance, but it can also be staked to participate in the network’s consensus mechanism and to earn rewards. The token also helps to secure the network by attaching a fee for transactions on the network, thus preventing spamming attacks.
Arbitrum uses a combination of on-chain and off-chain techniques to ensure that transactions are secure, transparent, and resistant to attack. To address the risk of invalid transactions being included in Optimistic Rollup blocks, Arbitrum uses a mechanism called fraud proofs.
Fraud proofs allow users to submit evidence to the Arbitrum chain if they detect an invalid transaction. Arbitrum validators in turn verify the evidence, and if sufficient, the fraudulent transaction is “rolled back” and the perpetrator penalized. Arbitrum validators are required to stake tokens as collateral to ensure that they have an economic incentive to act honestly, meaning that their funds could be slashed if they act maliciously.
Finally, Arbitrum also sports a bug bounty program to incentivize developers to identify and report any security vulnerabilities on the network.
Drawbacks and risks
By relying on collateral staking as its security mechanism, it indirectly implies that the richer the validator, the greater influence it will have over the network. This may run counter to the idea of utmost decentralization, especially since there are currently only a few sets of validators in charge of the network. Further, by using the Optimistic Rollup technology, these validators could choose to reorganize and prioritize transactions at will.
In terms of token distribution, the public will only receive 11.62% of the initial supply which itself may continue to grow indefinitely, thus making it an inflationary asset as opposed to a deflationary one. This could imply that the economics surrounding the ARB tokens are to a large extent beyond the control of the public at large.
Finally, as with any other new smart contracts, there could be bugs and vulnerabilities that are yet to be discovered, thus implying a certain degree of risk when using the network.
Before listing ARB on the VirgoCX Platform, VirgoCX performed due diligence on ARB and determined that ARB is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis includes reviewing publicly available information on the following:
- The creation, governance, and location of ARB and/or its primary development team;
- The supply, demand, maturity and liquidity of ARB; and
- Legal and regulatory risks associated with ARB.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30th 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario) and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
To learn more about the technology behind Arbitrum, check out these in-depth resources here: