🎙️Offchain Labs' A.J. Warner on Making Arbitrum the Leading Layer 2 Scaling Solution for Ethereum

This week on The Defiant Podcast we speak with A.J. Warner, the Chief Strategy Officer at Offchain Labs, the builders of Arbitrum, one of the leading scaling solutions for Ethereum using Optimistic Rollups. We also welcome Tegan Kline, the co-founder of Edge Node, the initial team behind The Graph.

The Defiant’s Camila Russo and Tegan are co-hosting the podcast for the first time. Going forward, they will record shows together, and Tegan will also have her own Defiant podcast episodes.

Scaling is now a hot topic on Ethereum and throughout the blockchain ecosystem, as all of our listeners are likely aware. According to L2Beat, Arbitrum has nearly $2.7B in total value locked. AJ goes on to explain the dApps and protocols building on Arbitrum and how they’ve managed to make Arbitrum the leading destination among Layer 2s.

Arbitrum is one of the few scaling solutions that doesn’t nod to the underlying technology it uses in its name. As AJ mentioned, their goal is to scale Ethereum without being a proponent of any scaling technology. Does this mean Arbitrum will have a zero-knowledge (ZK) component in the future?

Finally, we discuss the growing rivalries in a Layer 2 space that’s getting more crowded and whether there’s any noticeable hostility between competitors.

🎙Listen to the interview in this week’s podcast episode here:

📺 Watch the video here:

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What follows is a summary of the podcast episode. Please let us know if you like this new format.

An Intro To Optimistic rollups, Offchain Labs, and the difference between Offchain Labs and Arbitrum.

• Offchain Labs is the development arm, the company that’s building the technology.
• Arbitrum is the underlying technology stack. We call Arbitrum the Optimistic roll-up solution that we’ve designed. So it’s really the distinction between the company that is building and developing this protocol and stewarding the growth of the protocol.
• By design, Ethereum’s base layer, which we call Ethereum Layer 1, does not scale. And the reason for this is that the more throughput you have, the harder it would be to keep things secure and decentralized because it would be harder for people to run nodes at home.

Vitalik’s roll-up-centric plan for Ethereum is to have Layer 2 technologies, and rollup technologies that live on top of Ethereum and tell Ethereum, “We’re going to depend on you for decentralization and security, but we’re going to build other environments that live on top of you for execution.”

Arbitrum looks like a layer one blockchain that can stand on its own. But underneath the hood, it’s really just a set of smart contracts that run on top of Ethereum and use Ethereum for certain components of its security.

When you do a transaction on Arbitrum, all of these transactions are grouped together. They are bundled together and sent to Ethereum Layer 1, and the call data is compressed. This is where the real cost savings come from because when you do a transaction on Ethereum, on Layer 1, you tell the validator set that you want them to store your data and use their computing resources to execute your transaction.

The cost of executing the transaction is much higher than the cost of storing it. So, when you move to a Layer 2 like Arbitrum, you do the execution in a different environment, which lowers the cost. Then, when we compress the transactions, we bring the cost down more and that gets posted to Ethereum. That’s the main idea behind Layer 2 technology.

When Layer 1 knows this, they can make a decision about what to do. This is where ZK rollup and Optimistic rollup differ. Where ZK rollup used some very complicated math to prove something, Optimistic rollup said, “whoever validated and posted this transaction, for every batch that is posted, a seven-day window opens.” This is called a “challenge period,” and during it, any other validator can say, “This isn’t true, and I’m going to challenge what you’ve posted.”

Then, a process called “adjudication” is used to decide who the winner is. Everything is set in stone. But we use this window to post things in an optimistic way, with the hope that no one will question them. The systems are set up so that no one would do it on purpose because they have to put up a stake and if they lose, they lose their money and everything. So, that’s a high-level look at how Optimistic rollup technology works and what we’re building in the blockchain.

Arbitrum’s Origin Story

Ed Felton, our chief scientist and one of the company’s co-founders, used to be a professor at Princeton. At the time, people were just getting interested in the idea of “smart contracts,” but Ed saw this coming and said, “There’s no way that if we use blockchain technology, this can scale with just one layer.”

In the fall of 2014, he taught a class seminar at Princeton called “How do we scale blockchain technology using Layer 2s?” It was a rollup of ideas about a hypothetical technology. Ethereum wasn’t real; it didn’t exist. So at that time, all of that was just an idea.

Then Ed went to the White House. He was Obama’s deputy CTO, and when he got back to the office, Steven and Harry, the other two co-founders, came in. It was around the time of the Cryptokitties congestion. That was the first time there was real congestion on the Ethereum chain. It was obviously a sign of things to come. And they said, “We really need to talk about this Arbitrum idea you were working on four years ago and this class seminar you did three years ago.”

That led to more research, a paper that was published, and the start of the company in 2018 when most people didn’t know much about scaling. At that time, people were trying to figure out what use cases look like, but we were already focused on scaling.

Even at that point in 2018, we didn’t have our testnet and real demand until 2020. DeFi summer was probably the first time that there was a steady need for block space on Ethereum layer one. That brought the topic of Layer 2s technologies to the forefront of the conversation. If we want a lot of people to use this technology, this is going to be a very important problem to solve.

After the Cryptokitties boom in 2017, there was a period of crypto winter that lasted about two years. So, what was it like to build this highly technical project when almost no one was using crypto?

• Vision and goals for this space, as well as your beliefs.
• The desire to be on the cutting edge, constantly innovating and problem-solving.
• Make the technology we’re building the best it can be.

It all comes back to your vision and goals for this space, as well as your beliefs, the idea of decentralization, and what you want to do to help it grow. In 2014, there were no platforms for smart contracts, and Ed was already researching this as if it were a top priority.

In 2018, almost no one was using it and the prices were going down, investors were less interested. I think these are incredible problems to solve. I think that one of the things that keeps our team going is constantly innovating and problem-solving.

From a research point of view, I think it’s the desire to be on the cutting edge. I think that our team would still be excited, especially about the engineering side. And it makes our team excited today.

We will always be in the lead when it comes to trying to improve scale, innovation, and efficiency for people who use these technologies. So I think that’s always been what drove us and still drives us to try to make the technology we’re building the best it can be.

Sharding was all the rage back in the day. Did your strategy for Arbitrum change over time, or did you always know that Rollups would be the best way to scale?

I think it probably had like small modifications to our strategy. I think we knew what execution sharding was like, but it would have been a long time before we could have done it. Sharding is still important, though.

There is still congestion on Layer 1 and having data availability sharding is going to be critical if we want to really have transactions that are inclusive to the entire world on Ethereum and solving scale without compromising on that.

There is the view that sharding and roll-ups will be complementary down the line with sharding, kind of taking care of the storage part of things, and roll-ups taking care of the execution part of things.

According to L2Beat, you are the top Layer 2 chain at the moment. So, would love a sense of just how people are using Arbitrum, like what are the biggest protocols and apps that explain this leading?

• Sophisticated DeFi products.
• A community of people that are very focused on prioritization of security.

I think the area of Arbitrum that has found the most product market fit is sophisticated DeFi products which are basically products that could never have existed on Ethereum layer one.

I think, particularly in the DeFi space, the reason for the success of Arbitrum is you have a community of people that are very focused on prioritization of security, right? So, throughout all of these different scaling solutions, whether they’re side chains or L1s or L2s, there are tradeoffs between certain trade-offs between scale, price, and security.

A typical derivatives transaction is probably about $7 cents right now, just like an Arbitrum transaction. On Layer 1, it would be maybe $10. So they’ve seen a lot of that, from a trade-off point of view.

Why do you think DeFi has found more of a fit with Arbitrum than social applications?

When I talk to a DeFi project, the gas fees aren’t something that they can’t handle but if we’re talking about like expanding communities or very high throughput NFTs or social opportunities they have a trade-off and more sensitivity to gas. That’s actually the reason why we launched the Nova chain.

Arbitrum Nova is intended to solve that. Where we’re building a chain for social and gaming purposes. What we were seeing in the social and gaming spheres was that the tradeoffs were pushing a lot of projects to leave Ethereum because they just couldn’t justify the transaction fees for their use cases.

Arbitrum One, is the rollup and Arbitrum Nova, is the antitrust technology chain, they both rely on the same Nitro code base. Nitro is like technology software. The only difference between these two chains and why Nova is significantly cheaper is where are you posting call data. On Arbitrum One, you’re posting calldata to Ethereum, like a true rollup. On Arbitrum Nova you’re posting calldata to a data availability committee, and the security properties are slightly different, and that is the reason why it’s so much cheaper because the cost of posting to a committee is much cheaper than the cost of posting to Ethereum.

Some people within the ETH community were a little bit disappointed by the committee piece. Can you maybe speak to some individuals that are listening that might have that position?

What I’m telling projects is, we’ve heard you loud and clear and you’ve told us that the tradeoffs for you are either we leave the Ethereum ecosystem for less decentralized, less secure technologies that can offer the affordable transaction fees that we want or we can’t launch on Ethereum. And we’re trying to offer a product that we think is, from a security perspective and a decentralization perspective, significantly superior to a typical side chain and has the same cost structure and pricing versus a rollup.

So if we’re talking about a world in which Ethereum’s data availability sharding is already implemented, the need for this kind of technology becomes more limited and maybe we get to a world where Arbitrum Nova technology migrates to posting its calldata on Ethereum.

But we’re trying to satisfy and be inclusive to all use cases, all types, and frankly even people from all over the world. So for some places in the world, a 10-cent transaction is very expensive as a transaction fee. And for some places, like the United States, it’s probably palatable depending on what you’re doing.

If we want to be inclusive to develop underdeveloped countries, if we want to be inclusive to other use cases right now we’re in an environment where we need to have a suite of offerings.

Potential risks

Two critical risks are the fact that validators are apparently not fully permissionless at the moment and that they need to be whitelisted. So that does create some level of centralization and there is no delay in code upgrades which means potentially somebody could upgrade the code in a malicious way to steal funds or do something to hurt other users and it doesn’t give the rest of the users much recourse in that case. So, would love for you to either clarify or address these concerns.

This is not something we’re hiding. If you look at the Arbitrum Bridge Page or ARPA Scan, which is our explorer at the top, we have a banner on every page that’s user-facing stating Arbitrum is still in beta.

This is an extremely sophisticated and complex technology and everything that we decide is a trade-off between bug risk and malicious actor risk. And you have to make, I wouldn’t say compromises, but I think it’s an iterative process of getting to full decentralization and decentralized control of these things where you have confidence that certain risks are outweighed by other risks.

And the technology is fully feature-complete. The whole protocol has been implemented, all the proofs have been implemented. There is nothing that we are like hiding from the perspective of what is deployed. But it’s a sophisticated technology that, hasn’t been around for an extremely long time, and we are always grappling with that trade-off.

So we will not remove the main beta monitor until we feel confident in the decentralization of what we’re doing, where we don’t have the ability to focus on these things ourselves and have these administrative controls live in our hands. But we’re constantly grappling with the tradeoffs between, software risk from a bug perspective and malicious actor risk.

That’s where we’re at now, but we’re extremely transparent about it. And we continue to iterate and improve on areas of decentralization where we can.

What makes Arbitrum different from Optimism?

• Arbitrum is feature complete. We’ve fully built out the protocol. We’ve championed a lot of research in this space and it’s great to see different teams, continuing to push the envelope.

What are the tradeoffs between ZK Rollups and your Optimistic approach?

• We are the only major scale rollup team that doesn’t have a nod to the underlying technology in their name.
• We are looking to scale Ethereum. We are not looking to scale Ethereum with a specific technology in mind.

We know we’re trying to scale. We’re not trying to scale with a specific tool or specific resource. And that’s really our approach. We will just continue to be at the forefront of trying to, always innovate for our community and improve the technology where we can.

Looking at where the technology is today how do you think it’ll evolve? Do you think it’s likely that Arbitrum will have some sort of ZK component in the future?

We don’t have any immediate plans to change to ZK. But we also have top-tier researchers who have an understanding of ZK technology, and an understanding of how to scale these systems. I wouldn’t say that we have a plan to incorporate ZK. There could be a new thing that nobody has heard of in 2022, whereas in 2024 that will be like the new ZK, and maybe that is the thing we will incorporate.

The commitment that we will make is we will always try to be at the forefront of scale and use the resources that are necessary to scale without a bias to necessarily a specific resource.

Many don’t know that Arbitrum has this separate gaming and social focus chain with Nova. Can you chat a little bit about the future that you see there? Some people say the future is one app per chain. Do you see it as more of a use case per chain?

I think the tradeoffs between application-specific chains and the use of public chains will continue to evolve as protocols and projects get product market fit. My personal opinion on this is we’re still at a stage where there’s so much discovery. It’s very hard for a project that launches on its own chain to attract users.

I think a migration strategy is just much more logical. You start on a public chain, you build up a user base where you now have consumption that justifies and you can attract infrastructure partners that you need and you can build an ecosystem around what you’re doing, a framework that can succeed. I think this will probably be the playbook of what we see as we continue to scale. But today there are very few use cases that justify their own chain when you consider the tradeoffs of the lack of composability and collaboration and infrastructure and tooling that you can have on a public chain.

Like Arbitrum, which is our core rollup chain. Almost every major centralized exchange supports direct onboarding of the key infrastructure. The Graph, Chainlink, Etherscan, Alchemy, and Infura all support it. It’s complex to have that level of user onboarding experience or developer onboarding experience or have compatibility if you’re in an application-specific environment.

So I think these things will continue to evolve, but that’s just my personal take on it, not company opinion.

Recently you all acquired Prysmatic Labs. They’re core developers of one of the ETH2 clients. And there was a little bit of controversy about this in the community. What drove the decision and what do you all hope comes out of this acquisition?

• We have a commitment for Prism to always remain open source and community agnostic. That is never going to change.
• There’s nobody who has a better knowledge of the layer one technology stack than the Prysmatic cloud team.
• I think it’s a vertical integration of knowledge. Our team has obviously been extremely focused on scaling, and that’s what we’ve been doing for years and years. Their team’s been extremely focused on the Layer 1, consensus client.
• Bringing all of that under one roof is just going to have a lot of efficiencies.

Now a lot of both Layer 1 and Layer 2 work is focusing on scaling and whether that is data availability, scaling or execution, scaling and roll-ups like that is the critical thing that we are all focusing on now, and having a leading Layer 2 team and a leading Layer 1 team be able to work together to collaborate, to effectively, push the ball forward for the ecosystem is really what we’re hoping to get out of.

We’re extremely excited about this. I think it’s extremely beneficial for the growth and scaling of Ethereum. In terms of answering the questions around centralization risk, I don’t think it’s something that the community should be concerned about. But even if they were, that’s, first of all why we have a diversity of clients, which is great. But the software will continue to remain open source.

Can you talk a little bit about what Reddit is doing with Arbitrum with the points system, and do you foresee the NFT piece moving to Arbitrum Nova?

• Reddit’s done an incredible job for a Web2-focused team to think about the onboarding experience for people who are not crypto native into Web3.
• Instead of you getting karma points on Reddit, you can get an ERC20 representation of your contributions to these communities.

They worked on different projects for 10 months. Then they finally said that they had chosen Arbitrum, which had designed the product on testnet for a year. When they announced that they had chosen Arbitrum, the principles they used were Ethereum alignment, decentralization, the ability to decentralize the protocol, composability, EVM, and compatibility. All of these are important for developers in general. They also opened the first two communities on the Arbitrum NOVA chain in August, which has been a lot of fun.

Can you talk a little bit about how you landed Reddit as a partner and how those negotiations went?

Technology was very important for them. They were all about technology diligence and not just like technology today, but like how this technology matures into something. What does the end game for a specific technology look like? What does the endgame for an ecosystem look like from a security and decent decentralization perspective? That was very important to them in their decision-making process.

They were very public around the requests for proposals of chains, but very private about the product launch. I think this was one of those deals that were very tech-driven from a decision-making perspective.

What would you say is your secret to a successful strategy and successful BD?

I think one of the things that I like to say is there is an extreme focus in this space on collaboration and alignment. Spending the time to really understand the projects that use our technologies, who they can benefit from working with, how we can be a good partner, and how their success looks to us. How we think about success and growth, not just from our own point of view, but also from theirs. I think that’s one of the things I love most about Web3.

Constantly trying to understand the business of who you’re working with and how they can succeed.

Competition in the Layer 2 space

I think is interesting, despite some competition between these teams, I don’t think anybody questions anybody else passion, vision, and ultimate goal. We all recognize the passion and sincerity of what we’re all trying to do, which is scale Ethereum scale, decentralized technology, and scale blockchain technology.

You have an incredibly brilliant set of people on different teams that are extremely passionate about their approach to doing it and the trade-offs that come with it.

We’re all trying to achieve something that is such a significant thing. If we don’t figure out scale, it is very hard to see how this technology continues to mature and continues to onboard a billion people. It’s not a non-trivial thing that we’re trying to solve.

Nobody believes that the other side is malicious or that the other project is malicious. Everyone’s just trying to do what’s best and try their best.

What’s next?

• No comment on the token.
• Now we are moving towards answering questions of how we continue to make the developer experience better.
• How do we continue to focus on onboarding new people?
• How do we enter new verticals?
• How do we enter new geographies?
• How do we get exposure to new underdeveloped countries or ecosystems or environments?
• Continue to expand, onboard, evangelize and educate people to join both Arbitrum and Ethereum ecosystems.

A.J, what makes you defiant?

Something that I’ve cared a lot about is the line between paternalism and guidance in life and how systems that we’ve grown up in have been almost predatory and like how they’ve shaped our lives. The way that sovereignty has been shaped to fit a specific mold for an individual is something that is that matters a lot to me.

The world has structurally been designed to define people or things in certain ways. That is something that’s always bothered me. I think one of the things that attract me to this space is our ability to objectively say, I don’t care who you are, what you know. What I care about is the objective facts of how I can define, your role, your contributions, and your rights.

The ability to shatter those preconceived notions that structurally exist in societies is one of the things that, I guess, makes me defiant.

Tegan, what makes you defiant?

We are in a time right now where the monetary system is failing us. Inflation is insanely high here in the United States, and then we’ve seen inflation skyrocket across many countries around the world where we have this looming recession, this globalism rug pull.

In addition to that, you have these tech giants and social media companies that make us the product. It’s extremely extractive. Even though we’re going mainstream with NFTs, crypto is still a counterculture movement. And we’re kind of fed up with the current system and the extraction.

What we’re building in Web3 and crypto is kind of the light at the end of this dark tunnel that’s seemingly getting darker and darker. All the problems in the world, I believe boil down to incentives and coordination. With crypto and Web3, we’re fixing the incentives and we’re coordinating at a global level without the need for governments or companies, which is extremely powerful.

Defying the old ways, defying authorities, and we need scale to do all of that.