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Coinbase Ventures invests in Ethereum Arbitrum scaling solution


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By delivering benefits beyond scalability alone, layer 2 solutions can remain consistently useful as Ethereum evolves.

Scalability is a constant issue on public blockchains, which can be solved at a few different levels. You have the giant, complex long-term solutions on the protocol level itself, as encapsulated by Ethereum's long-term roadmap, and then you have "layer 2" scaling solutions like Arbitrum, which can be thought of as blockchain attachments of sorts.

It's a rich field for development. There's now a whole world of Ethereum applications demanding more performance than Ethereum can currently muster, and layer 2 scaling solutions present a flexible range of solutions, delivering potential benefits well beyond scalability alone.

This may prove to be key to their longevity even if and when Ethereum achieves its needed scalability at the base layer. This reassurance that layer 2 scaling solutions can be more than just a temporary stop-gap may also be part of the reason Coinbase Ventures has plonked down an investment in Arbitrum.

In Arbitrum's case, the additional benefits beyond scalability include:

  • Low, fixed gas fees for smart contracts regardless of how complex they are.
  • Privacy for smart contracts, so only the contract participants can see the inner workings and status of the contracts.

These kinds of solutions are getting a lot of attention from all echelons. Arbitrum is led by former White House deputy chief of technology Ed Felten, and the startup behind it, by the name of Offchain Labs, raised $3.7 million in a seed round in April 2019.

"We believe that blockchains have a distance to go in terms of being enterprise-ready, with the primary issue being scalability," Felten said. "We've built a solution that enables dApp developers to improve the performance of their applications without any significant cost or development time. Coinbase Ventures has invested in some of the most well-known and innovative companies in the space and we’re thrilled to see that they share in our vision to make blockchains ready for prime time."

How does Arbitrum work?

In simple terms, Arbitrum works by bundling smart contracts – which typically consist of a lot of different actions – into one convenient package, which can then be efficiently executed inside the Arbitrum box, which sits off the main Ethereum chain.

To ensure it all works as intended, and maintains its blockchain tamper-proofing, contract creators select validators who are responsible for collectively checking the correctness of the contracts as they are executed. Validators are required to put up some ETH as collateral and it's expected that all validators will unanimously agree on the correctness of a contract, so it can be quickly finalised.

In this way, Arbitrum is a bit like a highly specialised miniature blockchain, where every smart contract creator can choose their own validating nodes.

In the event of any disagreements between validators, the system will automatically hone in on the exact part of the contract that's being disputed and let validators argue it out. In the end, the incorrect validator gives up some of their collateral to the correct validators, which provides a financial incentive for validators to stay honest.

If things get really messy Arbitrum can look to the main Ethereum blockchain to act as an overarching referee.

In the end, a contract is guaranteed to execute correctly as long as there is a single honest validator online.

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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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