What Is Arbitrum (ARB)? How It Works? Complete Guides 2024

ARB is the Arbitrum blockchain’s native governance token. Learn about its features and tokenomics in this article.

Key Takeaways:

• ARB is the native ERC-20 governance token for the Arbitrum blockchain, which is designed to enhance scaling solutions for Ethereum.
• Holders of ARB tokens can transfer value, vote on governance decisions, and participate in the Arbitrum ecosystem.
• The initial supply of ARB tokens is 10 billion, with a maximum yearly inflation rate of 2%.
• The ARB token is used for governance decisions, including the allocation of funds and technical changes.
• ARB token holders can also vote on electing members for the Security Council, a team responsible for Arbitrum’s treasury wallet.

What Is the Arbitrum Protocol?

ARB is the brainchild of Offchain Labs, a company founded by Ed Felten, Steven Goldfeder, and Harry Kalodner. It offers a Layer-2 (L2) scaling solution for Ethereum, designed to enhance the network’s capabilities by increasing transaction speed, helping to improve scalability, and adding privacy features.

Arbitrum’s primary goal is to address the limitations of Ethereum’s smart contracts, including inefficient performance and high execution costs, which have been factors negatively impacting the Ethereum user experience.

The ARB protocol is a suite of technologies designed to improve the scalability of the Ethereum blockchain. It tackles the challenges of Ethereum’s mainnet, which can be slow and expensive for transactions. Here’s a closer look at ARB core features:

Optimistic Rollups:

• ARB is an Optimistic Rollup solution. This means it processes transactions off-chain on a separate chain called the ARB Rollup chain. This secondary chain can handle transactions much faster and cheaper compared to Ethereum’s main chain.

Transaction Flow:

• Users submit transactions to the ARB network.
• The Arbitrum Rollup chain executes these transactions efficiently.
• Validators constantly monitor the Arbitrum Rollup chain for any invalid transactions.
• If an invalid transaction is detected, a validator can submit a fraud proof along with the necessary data to challenge it.
• The Ethereum main chain serves as the final settlement layer. Disputed transactions undergo a resolution process on the main chain if a fraud proof is submitted.
• If no disputes arise during a designated challenge period, the transaction on the ARB Rollup chain is considered valid and finalized.

Benefits:

• Faster Transactions: By taking the burden of transaction processing off Ethereum’s mainnet, Arbitrum significantly reduces processing times, leading to a smoother user experience.
• Lower Fees: Users benefit from considerably lower transaction fees on Arbitrum compared to the Ethereum mainnet due to the off-chain processing.
• Security Inherits from Ethereum: The ultimate settlement happening on the Ethereum blockchain ensures Arbitrum inherits Ethereum’s robust security measures.

Things to Consider:

• Fraud Proofs and Dispute Resolution: While rare, the possibility of fraud proofs and dispute resolution on the main chain can add complexity and potential delays for transactions.
• Centralization Risks (Initially): In its early stages, Arbitrum relied on a permissioned set of validators, raising concerns about centralization. The network is transitioning towards a more decentralized validator system.

How Arbitrum Works

Arbitrum offers a suite of L2 scaling technologies, including optimistic rollups, which allows Ethereum smart contracts to scale by exchanging messages with other smart contracts on the Ethereum mainchain and those on the Arbitrum second layer.

This technology is ‘optimistic’ because any validator can post a rollup block and confirm the validity of other blocks. Meanwhile, ‘rollup’ describes how public information can be used to reconstruct a complete history of the chain from an optimised log of events.

Arbitrum Rollup refers to the optimistic rollup protocol, and Arbitrum One is the first rollup chain in Arbitrum.

Arbitrum is a type of scaling solution for the Ethereum blockchain, aiming to address Ethereum’s limitations in transaction speed and cost. Here’s a breakdown of how Arbitrum works:

Core Concept:

• Arbitrum falls under the category of Optimistic Rollups, a specific scaling technique for blockchains. It essentially processes transactions off the main Ethereum blockchain (Layer 1) and batches them together before submitting them for final settlement on Layer 1.

Transaction Processing:

1. Transaction Submission: Users submit their transactions to the Arbitrum network.
2. Off-Chain Execution: A separate chain, called the Arbitrum Rollup chain, executes these transactions in a much faster and cheaper way compared to Ethereum’s main chain.
3. Fraud Proofs: A key aspect of Optimistic Rollups is the concept of fraud proofs. In Arbitrum, there are validators constantly monitoring the Arbitrum Rollup chain. If a validator detects an invalid transaction, they can submit a fraud proof along with the necessary data to challenge it.
4. Dispute Resolution: If a fraud proof is submitted, the transaction is halted, and users can initiate a dispute resolution process on the Ethereum main chain. This process involves submitting the conflicting information (transaction and fraud proof) and requires a stake of tokens (acting as a deterrent for frivolous disputes).
5. Challenge Period: There’s a designated challenge period on the Ethereum main chain where anyone can participate in the dispute resolution if they disagree with the submitted fraud proof.
6. Finality: If no disputes arise during the challenge period, the transaction on the Arbitrum Rollup chain is considered valid and finalized.

Benefits of Arbitrum:

• Faster Transactions: By processing transactions off the main Ethereum chain, Arbitrum significantly reduces transaction processing times.
• Lower Fees: Since transactions aren’t directly added to the Ethereum main chain, users experience considerably lower fees on Arbitrum compared to Ethereum’s mainnet.
• Security Inherits from Ethereum: The ultimate settlement of transactions happening on the Ethereum main chain ensures Arbitrum inherits Ethereum’s security.

Things to Consider:

• Fraud Proofs: While rare, the possibility of fraud proofs and dispute resolution can add a layer of complexity and potential delays for transactions.
• Centralization Risks: In its initial stages, Arbitrum relies on a permissioned set of validators, which raises some concerns about centralization. The network is working towards a more decentralized validator system in the future.

What Is the ARB Token?

ARB is an integral part of the Arbitrum ecosystem, serving as the governance token for the Arbitrum blockchain. It is an ERC-20 token designed to enable token holders to participate in the decision-making processes of the network and have a say in the development and direction of the ecosystem.

Features and Utility of the ARB Token

1. Transfer of Value

One of the primary functions of the ARB token is to facilitate the transfer of value within the Arbitrum ecosystem. Holders can send and receive ARB tokens securely and efficiently, making it a convenient means of exchange within the network.

2. Governance Voting

ARB token holders have the power to vote on important governance decisions that shape the future of the Arbitrum ecosystem. These decisions may include the allocation of funds, investments in the ecosystem, and technical changes to the network infrastructure.

To participate in the governance process, token holders submit their votes through an open forum like Snapshot.org, where they connect their wallets and cast their votes on an open proposal. The voting process is transparent and democratic, allowing token holders to express their opinions and contribute to the ecosystem’s development.

3. Security Council Election Decisions

In addition to governance decisions, ARB token holders may also vote on electing members for the Security Council, a 12-member team responsible for managing the treasury wallet of the Arbitrum ecosystem. By participating in these elections, token holders help to shape the composition of the council and ensure the security and integrity of the network.

Tokenomics of the ARB Token

Understanding the tokenomics of the ARB token is crucial for evaluating its potential value and utility within the Arbitrum ecosystem. Here are some key details about the tokenomics of the ARB token:

• Initial Supply: The initial supply of the ARB token is set at 10 billion tokens.
• Inflation Rate: The token has a maximum yearly inflation rate of 2%, ensuring a gradual increase in the token supply over time.
• Distribution: The distribution of the ARB token is as follows:

1. Investors receive 17.53%
2. DAOs in the Arbitrum ecosystem: 1.13%
3. Individual wallets: 11.62%
4. DAO Treasury: 42.78%
5. Team and future team plus advisors: 26.94%

It’s important to note that the allocation numbers mentioned above are subject to change based on the decisions of the Arbitrum DAO, the decentralised governance body responsible for the network.

How to Trade ARB

Arbitrum (ARB) is now listed in the Crypto.com App, joining the growing list of 250-plus supported cryptocurrencies and stablecoins, including Bitcoin (BTC), Ether (ETH), Polkadot (DOT), Chainlink (LINK), VeChain (VET), USD Coin (USDC), and Cronos (CRO).

Crypto.com App users can now purchase ARB at true cost with USD, EUR, GBP, and 20-plus fiat currencies and utilise it at over 80 million merchants globally using the Crypto.com Visa Card.

Conclusion

The ARB token plays a vital role in the Arbitrum ecosystem, offering features like the transfer of value and governance voting rights. With its unique tokenomics and comparison to other tokens in the market, the ARB token showcases its potential to shape the future of Layer-2 scaling solutions for the Ethereum blockchain. 

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