What is Arbitrum?
Summary
Arbitrum is a layer 2 network that handles app activity and anchors results and data to Ethereum. On Arbitrum One, ordinary network fees are paid in ETH; ARB is used for governance.
- Arbitrum processes app activity outside Ethereum’s main chain and posts results and data to it.
- ARB is a governance asset; ordinary Arbitrum One fees use ETH.
- Virtune Arbitrum ETP is physically backed by ARB but does not grant network voting rights.
Why put an app on Arbitrum?
An Ethereum app can become costly to use when demand for mainnet capacity rises. Arbitrum is a layer 2 that handles transactions away from Ethereum's main chain and anchors their results and data to Ethereum1. A swap app, for example, can process many user actions on Arbitrum rather than putting each full action on the mainnet.
Polygon Chain also moves app activity away from Ethereum, but is a separate proof-of-stake chain connected by a bridge. Unlike Polygon Chain, Arbitrum depends on Ethereum for settlement and data. An asset held on Ethereum may need to cross a bridge2 before it can be used in an Arbitrum app. The bridge and the app have their own technical risks. Ethereum's explainer covers the underlying network.
Where does ARB fit?
ARB is Arbitrum's governance asset3. Holders can vote or delegate voting power on decisions about the system. Ordinary Arbitrum One network fees are paid in ETH4, so ARB is not the coin a user normally spends to complete a swap.
That distinction matters for an investor: increased app activity may create demand for the network's services, but it is not a direct fee payment in ARB. The value of governance rights and the market price of ARB remain separate questions.
ARB directly or through an ETP
A direct ARB holder can use the asset for governance and arrange their own custody. Virtune Arbitrum ETP gives ARB price exposure through an exchange-traded security. It is physically backed with ARB held as collateral5. The investor owns the ETP, not ARB that can be used to vote.
The product is listed on Nasdaq Stockholm.
Costs when buying Virtune Arbitrum ETP
| Cost | Charged by | When |
|---|---|---|
| Brokerage commission | Broker | On every purchase and sale |
| Difference between bid and ask price | Market | On every trade |
| Management fee, 1.95% per year | Issuer | Ongoing, from the product's value |
| Currency conversion | Broker, if applicable | If the product trades in another currency |
Risks to understand
ARB's price can move sharply. Arbitrum's apps depend on their own code and on the systems connecting Arbitrum to Ethereum. Direct ownership has wallet or custodian risk; the ETP adds issuer, custody and exchange-trading risks. Physical backing does not prevent a price loss. Crypto-assets can lose substantial value6.
Related product
Sources
- Arbitrum (Offchain Labs): A gentle introduction to Arbitrum
- Arbitrum (Offchain Labs): Quickstart: Arbitrum bridge
- Arbitrum Foundation: Arbitrum: The Next Phase of Decentralization
- Arbitrum (Offchain Labs): Bridging from a parent chain to a child chain
- Virtune Investor Relations: Collateralization Methodology
- EBA, EIOPA and ESMA (the European Supervisory Authorities): EU financial regulators warn consumers on the risks of crypto-assets
