We present Arbitrum, a cryptocurrency system that supports smart contracts without the limitations of scalability and privacy of systems like Ethereum. Like Ethereum, Arbitrum allows parties to create smart contracts by using code to specify the behavior of a ``virtual trusted party.’’ Arbitrum uses mechanism design to incentivize parties to agree off-chain on what a smart contract would do, so that the Arbitrum miners need only verify digital signatures to confirm that parties have agreed on a contract’s behavior. In the event that the parties cannot reach unanimous agreement off-chain, Arbitrum still allows honest-parties to advance the machine state on-chain. If a party tries to lie about a VM’s behavior, the verifier (or miners) will efficiently identify and penalize the dishonest party by using a highly-efficient challenge-based protocol that exploits features of the Arbitrum virtual machine architecture. Moving the verification of contracts’ behavior off-chain in this way provides dramatic improvements in scalability and privacy. We describe Arbitrum’s protocol and virtual machine architecture, and we present a working prototype implementation.