Arbitrum (ARB): The 2025 Guide to Ethereum's Leading Layer-2 Solution

Arbitrum​‍​‌‍​‍‌ is arguably the most talked-about Layer-2 of Ethereum at the moment. What it basically does is to take the transactions out of Ethereum's main chain and still use Ethereum's security for finality. So, it's like having the advantages of both worlds.

How Does Arbitrum Work?

Scalability​‍​‌‍​‍‌ was one of the major issues that blockchain faces, and Arbitrum is a solution to that problem. When more people started using Ethereum more and more, transaction fees went up drastically, making smaller transactions almost pointless, as users could not bear the fee that sometimes even went over $100 during periods of congestion.

Ethereum on-chain vs Arbitrum’s off-chain speed

Simply put, Arbitrum's key difference with Ethereum is that it processes the transactions elsewhere. Ethereum requires all validators to handle the transactions on-chain, but Arbitrum only does a few on-chain and most of the work is off-chain. However, this does not mean that it is a different blockchain - it's more like a new feature that still borrows security from Ethereum.

Arbitrum uses "optimistic rollups" that accept transactions without verification and only check them if a dispute arises. This solution is quite better than sidechains (which are less secure) or zero-knowledge rollups (which are more complex and have limitations). To normal users, all these technicalities come down to one thing: they can execute transactions on Ethereum with the same apps but with considerably lower fees.

The Optimistic Rollup Mechanism ​‍​‌‍​‍‌Explained

Basically,​‍​‌‍​‍‌ Optimistic Rollups perform transactions in a network that is different from Ethereum, and only the very essential information is saved on the main chain. The term "optimistic" here means that it considers the transactions as correct if no one shows otherwise.

Arbitrum's system works through steps that might sound tricky but create a simple result - cheaper transactions:

• You send transactions to Arbitrum instead of Ethereum

• Off-chain validators do the work and bundle them together

• Only transaction data is posted to Ethereum as compressed info

• The system always assumes that operations are valid except for those that have been contested

• The challenge period during which one can dispute bad transactions lasts for about a ​‍​‌‍​‍‌​‍​‌‍​week

• After​​​‍​‌‍​‍‌ this period, all layers are merged back on Ethereum

Ethereum mainnet, the main network, is only capable of 15-30 transactions per second, while Arbitrum can handle thousands. What is more, a token swap that costs $15-25 on the Ethereum mainnet will only cost about $0.25-0.75 on Arbitrum, hence DeFi is becoming more and more wallet-friendly. 

Meanwhile, you still have your money in the safe and secure system of Ethereum. Most of the time, the confirmations are almost instantaneous, however, the final decision in its entirety still has to come from the challenge period (which is a place where most users are not allowed for normal trades).

ARB Token Economics and Price Outlook

Since August, ARB has been fluctuating sideways within a range that has been tested several times. This range represents a buying zone from the past where the demand was strong enough to absorb the selling ​‍​‌‍​‍‌pressure.

ARB demand rises as DeFi protocols expand

A few factors can influence the ARB price. Primarily, the growth of the ecosystem is the main driver that changes the price of ARB. Therefore, good DeFi protocols such as GMX, Radiant, and Camelot, are attracting more transaction volume. Fees on Arbitrum were increased every quarter of the day, thus mounting the evidence for a real demand for the network.

The ARB token is the DAO governance token of the Arbitrum DAO, which means the holders are granted the power to determine the protocol's future directly. Instead of just a pure speculative token, ARB has clear use cases:

• Voting rights on protocol upgrades

• Involvement in treasury fund decisions

• Potential fee sharing through staking (although this is still under discussion)

• Ensuring the validator network

The launch of the Arbitrum network was followed by the release of a fixed maximum of 10 billion ARB tokens, of which approximately 5.62 billion ARB are in circulation now.

Investors​‍​‌‍​‍‌ need to understand that the unlocking schedule is one of the most essential factors to know when it comes to the Arbitrum (ARB) token. Following the big initial unlock on March 16, 2024, the rest of the tokens are going to be released monthly for the next four ​‍​‌‍​‍‌years.

Real-World Applications: How People Use Arbitrum

If we consider the real-world applications of Arbitrum, what would they be? These are the very simple and understandable uses that can explain the 1.45 million active wallets on the network.

One of the main areas where Arbitrum is most successful in is decentralized finance. In this case, just to name a few, Arbitrum boasts big protocols such as GMX, Camelot, Radiant, Gains Network, and Uniswap. Apart from these, there are in total hundreds of other protocols. What makes these apps useful is simple: users can exchange tokens by paying less than $1 as a fee (against $15-$50 on the mainnet). It also provides liquidity without gas fees taking up the profits and allows people to get into the lending markets with smaller deposits and carry out complex strategies - which, until now, were only accessible to big money holders.

Besides, gaming apps have joined the Arbitrum ecosystem too, opting for the platform because of the cost-effectiveness. In most cases, transaction fees are lower than $0.10; hence things such as minting NFTs, in-game purchases, and frequent interactions become feasible. 

Low-fee ARB powers scalable Web3 gaming & NFTs

Xai, a gaming Layer-3 built on Arbitrum, through its flagship game "Eternal Dragons" has gained more than 300,000 users. This, to be fair, would not have been possible on the mainnet, where each game action could have cost $5-$20 in gas ​‍​‌‍​‍‌​‍​‌‍​‍‌fees.

Maybe the most meaningful real-world use is Arbitrum's role in enabling cheap cross-border payments. Considering the nearly instant settlement and extremely low fees, users can send stablecoins without being restricted by the time and costs of traditional services. 

As a result, Arbitrum is addressing the problems of those who work abroad and need to send money back home (who save 5-8% compared to Western Union), small businesses that want to export their products, and individuals who want to safeguard their buying power in case of a local currency crisis in countries that either have currency issues or no banking facilities.

Why Arbitrum Leads the L2 Race: Competitive Landscape

In the complicated and multi-layered Layer 2 market, Arbitrum is still leading this game because of its obvious advantages. With $2.3 billion in Total Value Locked (TVL), it commands about 40% of all the capital that has been deployed in Ethereum Layer-2 solutions.

Besides, Arbitrum is also equipped with some technical features that set it apart from the rest of the pack. To take one example, multi-round fraud proofs are safer and more efficient dispute resolutions than those of competing optimistic rollups. The Arbitrum Virtual Machine has a higher level of compatibility with Ethereum than other alternatives, while the Nitro upgrade has brought the performance of the system up through more advanced data compression. With the Stylus initiative, it will be possible for developers to write smart contracts in Rust and C++.

It would be pretty easy to compare Arbitrum with its rivals and find out some significant differences. Arbitrum is a more extensive network with a higher TVL and transaction volume than Optimism. Though, the "OP Stack" of Optimism is getting more popular for the custom chain deployment with Base (Coinbase's L2). Compared to Polygon's solutions, Arbitrum focuses on security guarantees over pure speed. In the case of zkSync and other zero-knowledge rollups, they are a closed-environment project that is currently less mature and compatible. Though in the long run, zk-rollups could become more secure once they’ve matured.

Getting​‍​‌‍​‍‌ Started with Arbitrum: Your Path to Lower Fees

Use reliable wallets to bridge and access Arbitrum

Setting up a wallet compatible with Arbitrum (MetaMask, Trust Wallet, or Coinbase are all fine) is pretty much all you need to get started with the Arbitrum ecosystem. After you have added the Arbitrum network to your wallet (which most wallets now support by default), you can move assets from Ethereum (or any other chain) to Arbitrum via the official Arbitrum Bridge or a third-party route. Then, you can use any app you want with your assets.

Once your wallet is connected to Arbitrum, you can consider the following options:

• GMX: Perpetual decentralized exchange with low trading fees and high ​‍​‌‍​‍‌liquidity

• Camelot:​‍​‌‍​‍‌ Arbitrum local DEX with revolutionary features and one of the highest LP rewards programs

• Radiant Capital: A multi-chain lending protocol with interest rates that are usually below the market average

• Gains Network: Decentralized leverage trading with up to 150x on crypto and forex

• Treasure: An NFT community and marketplace with gaming ​‍​‌‍​‍‌integrations

The official Arbitrum ecosystem portal (https://portal.arbitrum.io/) features the up-to-date list of verified projects. One personal advice from my experience is that you should not try to be involved in too many protocols at the same time, as you might not manage to be efficient in any of them. Instead of chasing every new yield opportunity, pick 2-3 protocols that you understand well and focus on those.

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