Arbitrum (ARB): The Next Evolution of Ethereum Scalability

In the latest instalment of an informal series about how a relatively new class of protocols are attempting to solve Ethereum's blockchain trilemma

In the latest instalment of an informal series about how relatively new class of protocols are attempting to solve Ethereum’s blockchain trilemma, this article explores the inner workings of Arbitrum- one of Superchain’s main rivals- and the state of its ecosystem.

Why was Arbitrum created?

The blockchain trilemma posits that developers have to make trade-offs between security, decentralisation and scalability. Ethereum prioritised security and decentralisation, which limits its scalability- the network processes 16 transactions per second (TPS), ranking it the sixteenth fastest blockchain overall. The resulting congestion affects transaction fees, known as gas fees, which rose by nearly 500% in September 2024 following a surge in on-chain activity, driven in part by increased trading volume on decentralised exchanges.

Arbitrum was launched in August 2021 by Offchain Labs to address Ethereum’s scalability challenges. It’s a layer 2 (L2) protocol, so it inherits Ethereum’s security, and it uses a technology called rollups to boost TPS, which process transactions off-chain and send them back in batches to the base layer. Arbitrum employs optimistic rollups, which assume transactions are valid unless disputed, as opposed to zero-knowledge (ZK) rollups which use a cryptographic technique called ZK proofs to validate transactions.

The network consists of multiple chains. Arbitrum One executes rollups, while Arbitrum Nova is an AnyTrust chain, similar to a rollup but it stores data off-chain on external platforms like Google Cloud. This design allows Nova to charge lower transaction fees, but it sacrifices a degree of decentralisation by relying on third parties. Finally, Orbit Chains are customisable blockchains which can take the form of L2s or layer 3s.

ARB: Arbitrum's native token

Arbitrum’s native token is ARB, created using the ERC-20 standard developed by the Ethereum community. While it can serve as a medium of exchange, ARB’s main role in the ecosystem is as a governance token (users pay transaction fees in ether):

Holders can participate in the Arbitrum DAO (decentralised autonomous organisation), submitting and voting on Arbitrum Improvement Proposals (AIPs) such as network upgrades.

They can also elect members to the security council, which manages risks by implementing emergency and non-emergency actions.

Votes are token-weighted, so the larger the holding, the greater the influence on the outcome.

ARB’s total supply was initially set at 10 billion, with 4.6 billion in circulation as of March 2025. The table below shows how these tokens were distributed after the approval of AIPs 1.1 and 1.2. Team members and investors were subject to a four-year lock-up, with the first ‘unlock’ taking place in March 2024 and continuing monthly over the following three years. The Arbitrum Foundation’s vesting period started in April 2023 and also lasts four years.

ARB’s maximum annual inflation rate is 2%. The Arbitrum DAO is responsible for issuing new tokens, but no minting proposals had been submitted as of March 2025.

Ecosystem

The market capitalisation of the Arbitrum ecosystem is just short of $290 billion, putting it well ahead of Optimism ($48 billion).

Arbitrum’s largest projects by market cap are multichain stablecoins pegged to the US dollar: USDT, issued by blockchain platform Tether, and USDC, issued by payment provider Circle. Tether recently announced that it chose Arbitrum to provide the infrastructure for USDTo, its interoperable stablecoin.

The next biggest project by market cap is Chainlink, an oracle network that links blockchains with real-world data required by smart contracts to execute agreements, such as bets on the outcome of an election or sports event. Rounding out the top five projects are two further stablecoins: Sky Protocol’s DAI and USDe, a synthetic stablecoin issued by Ethena Labs, which is backed by cryptocurrencies and futures rather than fiat currency.

The blockchain technology is also used by crypto exchanges GMX and Camelot.

Arbitrum’s activity has also surged in 2025, thanks to its role as the main bridge to Hyperliquid, a crypto exchange offering perpetual derivative contracts.

Looking ahead

Offchain Labs published a roadmap for Arbitrum in August 2024 outlining its short-term priorities for the protocol. Some of the planned upgrades include:

Making Arbitrum more accessible to developers by deploying Arbitrum Stylus, a virtual machine that supports multiple programming languages in addition to Ethereum’s Solidity.

Supporting decentralisation by introducing a new dispute resolution mechanism for Arbitrum’s optimistic rollups, which should help the network achieve L2Beat’s definition of a stage