Will the future competition for Ethereum Layer2 be a flourishing one or a single one?

As we all know, there is an impossible triangle in blockchain. Blockchain cannot take into account the three dimensions of scalability, security and decentralization at the same time. For any blockchain, at most only two of the dimensions can be satisfied at the same time. Since its birth, Ethereum has been unquestionably secure and decentralized. However, its poor scalability (throughput of 15 transactions per second) has caused network congestion and high handling fees, which are often criticized. The emergence of Layer2 on Ethereum is to solve the scalability problem of ETH, in short, to increase the transaction speed of Ethereum. Ethereum co-founder Vitalik announced the start of the promotion of eth2.0. So far, the development process is still very slow. During this period, some developers have sought a compromise and second-best method, and the Layer2 solution has therefore come into being - trying to migrate the transaction data processed by Ethereum Layer 1 to outside Ethereum to increase transaction speed and load.

At present, there is a general view that Layer2 will be the most effective expansion solution before the arrival of ETH2.0. Although as a compromise, it has to be said that Layer2 is developing rapidly. As of the time of writing, according to L2beat data, the overall locked amount of Ethereum Layer 2 has reached 9.32 billion US dollars, and its rapid development momentum is evident. This article will briefly review the development history of Ethereum Layer2 and the development status of existing projects, and briefly analyze the competitiveness and development prospects of various Layer2 projects from the dimensions of technology and ecology.

Layer2 Technology Iteration

State Channels

The earliest second-layer solution of Ethereum was not Roll-up, but state channel. Similar to Bitcoin's Lightning Network, both are based on state channel to solve the scalability of blockchain by completing transaction data and calculations off-chain and then aggregating them to Layer 1.

As a solution that has existed for a long time, here we use the most classic example to briefly introduce what state channels are:

Xiao Ming is an avid coffee lover. Every day, he goes to Xiao Hong's cafe to buy coffee, which costs $2 per cup. However, every transaction on the Ethereum main chain requires expensive transaction fees and waiting time for confirmation, which makes them feel inconvenient. For this reason, they decided to use a state channel: Xiao Ming locked $100 in the Ethereum smart contract as the initial funds for the state channel. This contract (smart contract) runs on the Ethereum main chain and contains the signatures of Xiao Ming and Xiao Hong. Each time you buy coffee, you only need to sign a message, without the need for a main chain transaction, which greatly saves transaction fees and shortens waiting time. At settlement, the contract verifies all previously signed messages, pays Xiao Hong the corresponding amount based on the total amount purchased, and the remaining funds are returned to Xiao Ming.

State channels are very restrictive. Transactions can only be conducted between state channel members, and a large amount of locked funds must be prepaid. The project that applies the state channel solution on Ethereum is Layer2 Finance. As of now, its total locked position is only $207,300 (data source: app.l2.finance). It is not difficult to see from the official data that state channels have not developed into the mainstream solution of Ethereum Layer2. In addition, it is worth noting that Layer2.Finance currently also supports other Layer2 solutions: OP Roll-up and zk-proof.

Plasma

Compared with the state channel, the advantage of Plasma is that it does not need to lock funds on Layer 1 in advance, which releases liquidity to a certain extent. The operator of Plasma replaces Ethereum, aggregates the transaction information of customers, and submits the aggregated information to Ethereum within a certain period.

Still taking the example of buying coffee, Xiao Ming does not need to prepay funds to Layer1 in advance. Plasma will aggregate information within a period of time and aggregate Xiao Ming's transaction information to the Ethereum main chain in each period. This means that the transaction information that occurred in this period cannot be processed in time. If this period is one hour, Xiao Ming will not be able to complete the transaction of buying coffee within one hour. In addition, Plasma has a 7-day fraud proof.

Similar to state channels, Plasma also has the risk of being too centralized, because each Plasma chain requires an operator to publish the Merkle root commitment to the main chain. This requires us to rely on a third party to accurately publish the Merkle root commitment to the chain. And here there is the problem of malicious operators. Operators can perform so-called "data availability attacks" and refuse to publish certain transactions to the main chain. In addition, when users want to transfer assets from Plasma contracts back to Ethereum, they have to wait 7 days for fraud verification.

Polygon (sidechain)

Polygon is an Ethereum Layer 2 solution that is more than just a standalone scaling solution, it is more like a versatile framework and protocol that can be used to create blockchain networks compatible with Ethereum.

There are two types of blockchains that can be deployed on Polygon: independent chains and secure chains. Independent chains are blockchains that do not rely on Ethereum's consensus mechanism for security and are usually suitable for projects that already have their own verification nodes or seek other scalability solutions. These independent chains are usually used by enterprise networks or mature chains that want to integrate with the Polygon-Ethereum ecosystem.

Security chains rely on the chains of the Polygon security layer to obtain a high level of security and allow developers to choose between various security solutions. These security chains are designed to support startups and projects, enabling them to build reliable and secure systems. Among them, the Polygon PoS (Proof-of-Stake) chain is one of the most typical security chains. The chain adopts a proof-of-stake consensus mechanism and regularly submits snapshots of the chain to the Ethereum blockchain, which are submitted by Polygon's 100 validators. This method overcomes the problem of low Ethereum throughput and provides faster transaction processing speeds, thereby reducing gas fees and improving user experience. The total locked amount of the Polygon ecosystem is currently US$787 million (DeFilama data), and the ecological prosperity is extremely high, with many high-quality DeFi projects such as AAVE, QuickSwap, and Compound. At the same time, Polygon is also currently working on a full-stack solution, and Polygon Zkevm has also recently launched the mainnet.

Polygon TVL data (DeFilama)

Roll-up

Web3CN has previously introduced Rollup in detail many times. The following content will briefly summarize the technical features of Rollup. The essence of Rollup is to package a large amount of transaction information into a single transaction for processing. The most widely used underlying technology in the market is OP-Rollup (Optimistic Rollup). It achieves expansion through fraud proofs. In Op-Rollup, the transaction data is optimistically believed to be correct by the system without real-time verification, and directly enters a waiting period. During the waiting period, if a node raises an objection and provides evidence to prove the existence of a malicious transaction, the transaction will be cancelled; if there is no objection, the transaction will be automatically completed and verified on the main chain after the waiting period. At this point, the fraud verification mechanism of Plasma is used. By default, users will not commit fraud, but in order to ensure security based on optimism, a seven-day verification period must be required. ZK-Rollup mainly relies on zero-knowledge proof technology. By separating the calculation and verification process, the verification of contract execution is completed off-chain, and then the verification result is submitted to the Ethereum mainnet. The calculation process is carried out off-chain, and the verification result is only submitted to Ethereum as a proof. Therefore, this method provides the highest level of security and user privacy protection. Since Zkrollup uses cryptographic zero-knowledge proof technology, it contains mathematical operations and is based on a lot of mathematical operations, so it is more difficult to be compatible with eth. Ethereum founder Vitalik Buterin once expressed his own views on Op-Rollup and Zk-Rollup: In the short term, Op-Rollup will be accepted more quickly, but with the familiarity and continuous exploration of zero-knowledge, Zk-Rollup will be more favored in the long run.

In summary, no matter which type of Rollup is used, it provides moderate scalability for Ethereum without sacrificing decentralization, security, and versatility. However, compared with other second-layer solutions that store data off-chain, Rollup has certain scalability constraints. In addition, Rollup is more dependent on centralized sorters in the short term, which has certain centralization risks. But with the continuous development of decentralization, at present, Zk-rollup represents the core stack of Starknet, which has been fully open sourced on September 6, which has played a huge role in promoting the complete decentralization of Rollup. Therefore, the security of Rollup that relies on centralized sorters is only a short-term issue. Over time, Rollup's decentralized sorter makes it a technology superior to Plasma, side chains, and state channels.

Starknet full stack open source

Validium

Most people may not know about Validium. In fact, Validium was proposed by Stakeware as early as June 2020. Validium combines Plasma and zero-knowledge proof. It can be understood as a hybrid that combines the advantages of plasma and zkrollup. This allows Validum to process operations faster and in larger quantities. The most important feature of Validum compared to Zkrollup is that transaction data is also stored off-chain, further reducing costs and improving performance. At present, ZK rollup has a strict usage limit of 2,000 transactions (TPS) on the current Ethereum mainnet, while StarkEx using Validium is an astonishing 9,000 transactions per second. In addition, it combines the advantages of zkrollup and verifies validity faster than plasma. Validum zero-knowledge proof reduces dependence on operators and thus reduces the risk of centralization. Its use scenarios are mainly concentrated in DEX. Validium only relies on the mainnet for settlement and consensus. Currently, the projects that use Validum well are Immutable, ApeX, and Sorare, which are DEXs supported by Starkware.

Volition - Your Data, Your Choice

Volition combines zk-rollup and Validium to provide users with a richer combination of solutions. In Voliiton, Zk-rollup and Validium share a state root, which makes the funds on Zk-rollup safe even when Validium is attacked. Institutions and retail investors can therefore choose different solutions according to different needs: DEXs that provide hundreds of millions of dollars in liquidity will choose high-cost Zk-rollup in exchange for the highest level of security, while retail investors will choose more cost-effective Validium. Flexibility in data availability models will once again provide Starknet developers and users with greater freedom, allowing them to choose the security level that best suits their specific needs in a cost-effective manner. According to the official roadmap, Volition will be implemented on the test network in the fourth quarter of 2023. Web3CN will also introduce Volition in detail in subsequent articles.

From the history of Layer2 technology iteration, it is not difficult to find that there is no perfect solution. Among the many Layer 2 solutions, many solutions have been gradually eliminated due to asset security issues, such as state channels and Plasma. Solutions like Rollup, especially OP-Rollup, are the easiest to implement under the current technical background. However, they do not fundamentally solve the problem of asset security. Therefore, with the advancement of zero-knowledge proof technology, ZK Rollup is more likely to become the final Layer 2 solution, and the Starkware technical team will also become a pioneer in Ethereum's Layer2 expansion.

Current Status of Layer2 Ecosystem

At present, the well-known VISA platform has a TPS of about 1,700 per second, and the peak can reach 4,000 per second. Compared with Validium's amazing TPS of 9,000 per second, and considering that the Layer2 track is still in the early stages of development, TPS may not be the most needed indicator for the ecosystem. Generally speaking, the criteria for judging a good second layer may focus more on low gas consumption, security, and prospects. For the current status of the Layer2 ecosystem, TVL is more representative than other indicators. In this section, we will analyze some representative Layer2 projects through the TVL indicator ranking to find out the most competitive Layer2 at present.

As mentioned at the beginning of the article, the total TVL locked in the Layer2 track is currently 9.32 billion US dollars. From the following figure, we can find a more specific and detailed ranking:

As can be seen from the above figure, Arbitrum One is still the dominant player, with its TVL accounting for half of the entire Ethereum Layer2 track - 54.16%. OP Mainnet follows closely behind, with a TVL of 2.37 billion US dollars, accounting for 25.59% of the entire Layer2 track. The TVL of the top ten layer2 projects is 8.99 billion US dollars, accounting for 96.5% of the total TVL of Layer2; Layer2 using Zk Rollup technology occupies 6 seats, but the total TVL is only 787 million US dollars; OP-Rollup occupies four seats, but the total TVL is as high as 8.2 billion, which is more than ten times the difference between the two.

In short, Layer2, which is based on OP-Rollup technology, occupies most of the current second-layer ecology. Since Arbitrum and OP Mainnet based on the OP-Rollup track have already issued coins, and the expected issuance of Starknet and Zksync on the Zk track has attracted a large number of users who interact for the expectation of airdrops, it has created a certain false prosperity phenomenon, which further established the dominant position of OP-Rollup. It is worth noting that the TVL of GMX, a single derivative protocol on Arbitrum, has reached 417 million US dollars, which is 17 million US dollars more than ZKsync Era, which ranks first in TVL on the Zk track.

Layer2 Development Prospects

Super Chain

Take OP Stack as an example. OP Stack is a set of open source development tools maintained by Optimism Collective to support the Optimism blockchain. It aims to provide standardized and shared software components to simplify the process of creating new Layer 2 blockchains. The core goal of OP Stack is to support the creation of new L2 blockchains. It provides a set of shared standards to avoid different projects from repeatedly building the same software in isolated environments. OP Stack is the engine of the Optimism blockchain, including Optimism Mainnet and the future Optimism Superchain. Superchain is a set of interoperable Layer 2 blockchains that share security, communication layers, and development tools. At present, there are 19 OP Stack-based projects supporting OP Superchain, including exchanges, public chains, clients, NFTs and many other fields. Among them, BaseTVL, which officially opened the mainnet on August 9, has reached 385 million US dollars.

At present, full-stack Layer2 with shared security, communication layer and development tools will be the future development trend, and OP has taken the lead in this field; other Layer2s are also actively deploying their own unique "Superchain": Starknet officially announced on July 19 that Starknet is working on one of the most performant and innovative expansion platforms, and Paradex has also planned to function as the first Appchain on Starknet. zkSync introduced the concept of hyperchains, a customizable and trustless chain blockchain network that achieves ultra-high scalability, improved composability and enhanced security. Polygon 2.0 aims to unify its set of L2 solutions including Polygon PoS, Supernets and zkEVM through a cross-chain coordination protocol to create a "value layer for the Internet."

On the technical level, ZK-Rollup will be the future development trend, but in terms of ecology, the current Layer2 ecology is still dominated by OP-Rollup. It has to be said that the current Layer2 has its own advantages, such as Starknet's technology, Arbitrium's ecology and OP's full-stack track. Although each Layer2 has different ideas and is in different states, they are all based on a common goal, which is to achieve infinite scalability that cannot be achieved on the Ethereum network. This means that Ethereum Laye2 will create a Web3 world that is similar to Web2 and can be infinitely expanded to provide the best environment for developers and users. We are also looking forward to such an Ethereum Layer2 network that is more mature in technology, more prosperous in ecology, and more friendly in development environment.