Ethereum has become one of the most popular blockchains in the crypto ecosystem, with over 2,800 applications currently running on the blockchain according to data. The staggering increase in the number of DApps currently being built on Ethereum has caused Gas fees (representing the cost of transactions within the network) to rise dramatically along with the price of the ETH token.
Thus, the widespread adoption of Ethereum has resulted in developers struggling to find a solution to the scalability problem, which led to the emergence of Arbitrum.
| What is Arbitrum?
The Arbitrum protocol is a Layer 2 feature developed by New York-based OffchainLabs to address the congestion the ethereum network has been experiencing by improving how smart contracts are verified. The protocol leverages the security provided by the Ethereum mainnet, but allows smart contracts to run on a separate layer to reduce congestion within the network. This technique is called"Rollup", consisting of batches of transactions and records that are validated in the lower layer and then moved to the layer 1 mainnet.
On May 29, 2021, Arbitrum launched a beta version and quickly attracted the interest of DeFi application developers, constantly seeking to reduce the fees incurred by users using the Ethereum network during peak hours. This does not mean that Arbitrum will now operate independently of the Ethereum blockchain.
Fees collected by Arbitrum will be paid in ETH, and the development team expects to pay approximately 50 times less fees per transaction. This means that running Arbitrum smart contracts should be cheaper than running them directly in the ETH mainnet.
| What makes Arbitrum unique?
Many scaling networks have launched and promise to solve Ethereum's problems. Some of these networks include DOT, ADA, and EOS, which are independent blockchains backed by proof-of-stake (PoS) protocols that promise to solve the scalability issues of the Ethereum network. Unlike these solutions, Arbitrum operates as a separate layer of the network, facilitating the verification of smart contracts and thereby mitigating excessive transactions on the ETH mainnet.
While other protocols aim to achieve similar improvements, the Arbitrum network currently stands out for its EVM compatibility, meaning developers don’t have to learn a new coding language to build their DApps on the Arbitrum mainnet. At the same time, Arbitrum also seeks to reduce fees by allowing smart contracts to be validated in batches while providing compensation to validators.
| The confrontation between L1 and L2 begins
With high interest rates creating an attractive risk-reward, a flood of stablecoin funds has pushed the value locked in DeFi to new heights. At the same time, some Layer 1 ecosystems are vying for dividends during the transition period, and the liquidity incentives introduced in the form of arbitrage were first implemented by AVAX and now dominated by Fantom and Celo. The question is whether these rewards will generate any retention of liquid and sticky users in the long run.
With the arrival of the L2 season, the replacement of L1 and the addition of incentives will give new functions to the entire crypto space. Arbitrum and Optimism will primarily rely on their tight integration with Ethereum to attract liquidity. Composability may make Arbitrum finally attractive to interdependent applications, and DeFi will accelerate composability progress. In the DeFi field, composability is extremely important, and early integration will bring huge benefits.
The future of DeFi is multi-chain. Since the project's inception, Arbitrum has been integrating with leading EVM-compatible blockchains. The data shows that Arbitrum locked funds have increased significantly, and the total value of encrypted assets locked on the network has increased by 10 times in the last week. The total value locked reached $2.234 billion. Currently, Arbitrum addresses hold 65.7% of all funds locked on the network.
