Ethereum Layer 2 Is Becoming Liquid
Ethereum has a robust decentralized security model and that’s why it has remained the preferred blockchain for the DAPP developers but the base layer scalability is a big issue for Ethereum. Ethereum 2.0 is going to solve many problems but the roadmap seems to be very long. While Ethereum has become the most popular value settlement layer with the exponential growth of transactions, the arbitrary gas fee of Ethereum often makes the network unusable for retail investors. The user experience isn’t really good for many Ethereum DAPP users. A blockchain application can’t be unnecessarily expensive and some use cases like blockchain games make no sense with the current speed of transactions or transaction fees. A blockchain must be scalable enough to match the throughput of Paypal or Visa for mass adoption and nobody will like to pay a $50 fee for doing a transaction of $100. Is such scalability achievable in the base layer of Ethereum? No, it’s a distant dream.
Ethereum Layer 2 solutions aim to make Ethereum scalable without compromising the decentralization and security. Layer 2 solutions are basically off-chain solutions and they take away the transactions from the main chain just like the Lightning Network of Bitcoin. Many developers are currently working on Ethereum Layer 2 solutions and a few projects have already delivered working platforms. While Layer 2 solutions have their own issues and vulnerability, the ‘world computer’ definitely needs Layer 2 to fulfil its original vision. Let’s try to analyze the state of adoption or potential of adoption of a few popular Layer 2 projects.
Vitalik Buterin proposed Plasma architecture in 2017. Plasma is a side-chain solution that creates side-chains and bonds them with the main chain. Polygon is based on Plasma architecture. Withdrawal time from Plasma is one week and that’s a big problem. It’s really painful for DAPPs or users who are looking for instant withdrawal. The PoS bridge of Polygon, launched sometime back, provides PoS security and faster exit with one checkpoint interval. Polygon is seeing great traction nowadays and it’s the number 4 DeFi platform as per defipulse with $7B+ TVL. Mark Cuban, the billionaire investor, has recently invested in Polygon and the price of MATIC, the native token of Polygon, soared up heavily. Polygon has been integrated with many popular platforms like Opensea, Sushiswap etc. and the Ethereum users have embraced the network to escape from the high gas fee. The exchanges supporting withdrawal and deposit for Polygon (mainnet) are MXC, Ascendex, Okcoin.
Optimism was founded by some former Plasma group researchers in 2019 to implement an Ethereum scaling solution – Optimistic Rollup. Optimism is a non-profit organization as of now. The construction of Optimism is similar to Plasma and mimics the almost infinite scalability of Plasma to run an EVM compatible Virtual Machine called OVM (Optimistic Virtual Machine). Optimism offers almost feeless and instant transactions. Synthetix, a popular DEX, is working with Optimism to offer easy Layer 2 migration. Staking on Synthetix is already live on L2 testnet of Optimism experimentally. Here is the official blog post of Sytnthetix which describes why Optimism was chosen. Uniswap has also declared to adopt Optimism. Optimism isn’t completely production-ready now.
Arbitrum is an open-source platform built by Offchain Labs. Arbitrum uses Optimistic Rollup protocol. The official blog post says: “An Arbitrum Rollup chain is a super scaled Layer 2 (L2) chain. Like all Rollups, the Arbitrum Rollup chain is built on top of and secured by the Ethereum blockchain, and all transaction data is logged on Ethereum. From a user and developer perspective, interacting with Arbitrum feels exactly like interacting with Ethereum.” Migrating contracts from Ethereum to Arbitrum is damn easy. Bancor contracts are already live on Arbitrum testnet. A recent Uniswap poll launched by Compound founder Robert Leshner signals Uniswap may accept Arbitrum. Okex has declared to support direct deposits and withdrawals onto Arbitrum.
StarkWare is powering DeFi platforms of DeversiFi & dydx currently. StarkWare uses STARK technology and provides cryptographic proofs that are zero-knowledge, succinct, transparent and post-quantum secure. The L2 scalability solution of StarkWare can be deployed as ZK-Rollup or Validium.
zkSync is Matterlab’s trustless scaling & privacy engine built on ZK-Rollup. The project has given emphasis to create nice user and developer experiences. The official blog post says: “zkSync is designed to bring a VISA-scale throughput of thousands of transactions per second (TPS) to Ethereum while keeping the funds as secure as in the underlying L1 accounts and maintaining a high degree of censorship-resistance.” zkSync has been integrated with Gitcoin for easy payment.
Loopring uses ZK-Rollup. The ZK-Rollup of Loopring has a maximum throughput of 2K TPS on ETH 1.0. On proposed ETH 2.0, the max throughput is going to be rocking 20K+ TPS. The Loopring V2 DEX was launched some months ago and their liquidity mining attracted significant users.
This writeup doesn’t aim to enlist all Ethereum Layer 2 projects but the cited projects have generated buzz. While we are hating the congestion of the Ethereum network, the congestion itself is proof of demand. If people can trade on Ethereum DeFi and NFT platforms with such a high gas fee, Layer 2 solutions can definitely draw a huge number of users by providing instant economic finality and cheap transactions. It is important to note that all Layer 2 solutions settle the final value on the Ethereum blockchain only. So, they basically don’t compete with Ethereum. The Ethereum developers can migrate their DAPPs to Layer 2 networks with minimal coding and thus it keeps the migration process smooth. The liquidity on Layer 2 was a big problem earlier but as big centralized exchanges (CEXs) and popular decentralized exchanges (DEXs) are supporting the Layer 2 phenomenon, mass adoption is bound to happen. The competition between Layer 2 Ethereum projects and Ethereum killers is going to be very exciting in the near future. The large-scale production-ready Layer 2 projects are already showing high promise.
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The key to the long-term success of Ethereum is 100% dealing with the high gas fees that make the blockchain virtually unusable for everyday transactions. Indeed, if Ethereum had solved for this issue prior to the recent bull-market, it realistically could have put in a serious challenge to Bitcoin supremacy.
Alas, it was not ready, and while Ethereum did enjoy a historic move up price-wise, it did not capitalize to the magnitude that it could and probably should have.
What Ethereum did and still does have though, is the first mover advantage. The project is responsible for bringing to life the power of smart contracts and everything that comes with them. This revolutionary innovation secured an immense amount of equity for the blockchain that is still far from exhausted.
With this in mind, it’s no wonder that solutions like Polygon, Optimism, Arbitrum, Starkware, zkSync and Loopring are seeing such personal successes. They are cleverly trading on the equity manufactured by Ethereum’s first mover advantage while simultaneously betting against Ethereum 2.0.
Personally I think many would-be investors have been lured away from Ethereum by the efficiency promises of competitors such as Cardano and Polkadot, as clearly evidenced by their price movements in relation to Ethereum since the beginning of the recent/current bull market.
Unfortunately for these investors I think they will ultimately kick themselves for not seeing the forest through the trees and recognizing that the first mover advantage of Ethereum, coupled with layer 2 solutions like the ones discussed in this article, are an unstoppable force that can almost certainly never be challenged.
For this reason my view is that Ethereum is undervalued by the crypto community and that when we look back at the current market correction, many of us will be kicking ourselves for not filling our bags.
I never see OMG on these lists, OMG has great investors and partners developing competitive tech.