After the Ethereum merger, is Layer 2 still needed for expansion?

Recently, Ethereum co-founder Vitalik Buterin predicted in his speech at ETHSeoul that ZK-Rollups will defeat Optimistic Rollups in the Ethereum expansion war and become the main Layer2 solution for Ethereum in the future. For a time, topics related to Layer2 quickly became a hot topic in the industry. So what is Layer2? What is the relationship between ETH2.0 and Layer2? How will Layer2 develop in the future? Let's find out through the following article.

Layer 1——Layer 2

To understand what Layer2 is, we must first start with Ethereum expansion. Ethereum congestion needs no elaboration, and everyone has deeply felt it. As a solution to improve Ethereum performance, expansion has always been a hot topic for users and geeks in the past two years. There are currently two popular solutions. One is to expand the capacity based on the Ethereum main chain (Layer1), which is called Layer1 expansion. The other solution is to build a new chain next to the main chain to achieve expansion, which is called Layer2 expansion, and ZK-Rollups is one of the best.

Whether it is Layer 1 expansion or Layer 2 expansion, its main purpose is to increase the scalability of Ethereum to alleviate network congestion, reduce high gas fees, and improve network efficiency. To make it easier for everyone to understand the two solutions, let's give an example.

If the current Ethereum main chain Layer1 is compared to a house, then the DApps, DeFi and smart contracts running on the main chain can be seen as the people living in the house. As the number of residents continues to increase, this old house (Layer1) is increasingly difficult to accommodate more people. There are currently two solutions: Option 1: Layer1 expansion is equivalent to expanding the old house, increasing the number of rooms, and thereby accommodating more people; Option 2: Layer2 keeps the original old house unchanged, builds a new house next to the old house, and then transfers some people to the new house, thereby achieving the effect of expansion.

Layer2 exists relative to Layer1. When solving the expansion solution, the first thing that comes to mind is to expand the public chain itself, that is, the expansion of Layer1. For example, the early Bitcoin large block idea and Ethereum's ETH2.0 are both Layer1 expansions. Layer2 is a general term for a series of off-chain scalability solutions. The Layer2 platform and protocol process data in a way that reduces the burden on the base layer (root chain). By transferring part of the main chain's data processing to Layer2, the scalability of the entire blockchain network is enhanced. Layer1 and Layer2 have their own advantages in Ethereum expansion and play an important role.

Layer2 Classification

There are currently several solutions for Ethereum Layer2, including: state channels, side chains, Plasma, Rollups, Validium and hybrid solutions.

Among the many Layer2 solutions, the most popular one is undoubtedly Rollup. Rollup "aggregates" a large number of transactions into a large batch, and then generates a "proof" for the batch. This proof is then published on the mainnet. Rollup executes transactions outside of Layer1, but publishes transaction data on Layer1. Since the transaction data is included in the blocks of Layer1, Rollup is equivalent to inheriting the security of Ethereum.

According to different schemes for the effectiveness of compressed data (i.e. data correctness), Rollup can be divided into Optimistic Rollup and ZK Rollup. At present, the general view in the market is that Optimistic Rollup is optimistic in the short and medium term, and ZK Rollup is optimistic in the long term.

Optimistic Rollup

Compared with the ZK Rollup solution, Optimistic Rollup is easier to implement in the short term. One of the important reasons is that it has stronger portability. It is precisely because of its super portability that Optimistic Rollup is valued by Uniswap, the leader of DeFi. Uniswap V3 is deployed in Optimism, which is of decisive significance for the adoption of Layer2 solutions by the entire DeFi project, making Optimistic Rollup one of the most important implementation solutions for Layer2 in the short and medium term.

Optimistic Rollup has obvious advantages, but it also has a fatal disadvantage, which is that it needs to solve the problem of fraud proof, which causes its withdrawal cycle to be as long as one week. Users need to wait for a week to withdraw their funds from Layer2 exchanges to Layer1, which is unbearable for most users. But this disadvantage is not unsolvable. Some projects such as Optimism DAI Bridge can help Optimistic Rollup shorten this time.

ZK Rollup

ZK Rollup is a second-layer expansion solution (Layer2) based on zero-knowledge proof. ZK Rollup data availability allows anyone to restore the global state of the account based on the transaction data stored on the chain, thereby eliminating the security risks caused by data availability. Compared with the long withdrawal cycle of Optimistic Rollup, ZK Rollup avoids this problem through mathematical reliability proof, and is basically close to Layer1 in terms of technical security. At the same time, deposits and withdrawals can also be carried out instantly according to user needs. This is the biggest advantage of ZK Rollup.

Like Optimistic Rollup, ZK Rollup also has its own shortcomings, that is, the current ZK Rollup is not fully compatible with EVM, because ZK Rollup needs to generate zero-knowledge proofs for transactions on the second layer, and then pass them back to the first layer for verification. The entire transaction process needs to comply with the specifications of zero-knowledge proofs. At the beginning of EVM design, zero-knowledge proofs were not yet popular, and there was no consideration of supporting zero-knowledge proofs.

However, this problem is being solved. Layer2 projects such as Scroll, zkSync and Polygon have announced their intention to deploy the ZK-EVM computing environment, allowing ZK-Rollups to independently run various forms of general smart contracts. Once ZK Rollup is fully compatible with EVM, it will have the opportunity to gain more and more favor from DeFi, and as more DeFi projects adopt ZK Rollup technology, a trend will gradually form, and finally the interoperability of ZK Rollup on the second layer will be realized. This is also the reason why ZK Rollup can be valued by a number of industry leaders such as Vitalik Buterin.

Layer2’s current dilemma

While Layer 2 is a much-needed and logical solution for scaling Ethereum, it comes with its own limitations and potential issues that could hinder the platform from achieving its true vision of being the world’s supercomputer.

Composability is limited

Layer2 has many solutions. Although the purpose is to solve the scalability problem of ETH, the principles and directions adopted by different solutions are different, which leads to a big problem. If different projects adopt different Layer2 solutions, it will lead to the inability to achieve effective value exchange and protocol circulation between them. This will make the DApp and DeFi applications carried on Layer2 isolated. In Layer1, a single transaction can interact and combine with multiple DeFi protocols to create new financial products, while the composability of Layer2 will be greatly limited, because on Layer2, the transaction can only interact with the DeFi protocol that exists on its own chain, which also leads to the fragmentation of DApps on different Layer2 chains.

Liquidity is fragmented

Another reason for the fragmentation of DApps on the Layer2 chain: their related liquidity is also divided. Liquidity is extremely important in any financial market, especially in the blockchain industry, where liquidity is a necessary condition. Without liquidity, some DApps and DeFi on the Layer2 chain will lose their value. In Layer2, we see that the existing liquidity is allocated to Ethereum Layer1 and Layer2 with different expansion schemes, which results in liquidity being divided in multiple layers of chains. Different chains adopt different expansion schemes, which makes it impossible for liquidity to flow between each other, which greatly limits the liquidity of Layer2.

Relationship between ETH2.0 and Layer2

In the early days, Layer2 existed to solve the scalability and high gas fee problems of ETH. At present, it seems that the development of Layer2 has also achieved this. Before ETH2.0 matured, public chains such as Polkadot and BSC were also coming in full force, ready to shake the position of Ethereum at any time. The Layer2 solution solved the problems faced by the huge application system of Ethereum, allowing ETH to retain its position as the king of public chains.

The two are inseparable

The expansion of ETH2.0 is inseparable from Layer2, and Layer2 cannot exist independently from ETH2.0, because Layer2 is built on the basis of Layer1, not out of thin air. Without Layer1, there will be no Layer2, and Layer1 as the main chain, its decentralization and security are also needed by Layer2. At present, some important information of DApp and DeFi running on Layer2 still needs to be verified by Layer1, so not only does ETH2.0 need Layer2 to achieve expansion, but Layer2 is also inseparable from ETH2.0. The relationship between the two is complementary and inseparable.

Compete with each other and achieve each other

After the merger, ETH2.0 will realize the expansion of the main chain Layer1, and the computing speed will be improved. At the same time, the PoS model will replace the PoW model, and the high Gas fee is expected to be reduced. In the future, Layer1 will be able to carry more and more complex DApps and DeFi. This creates competition with Layer2, which also has fast computing speed and low fees. In the process of evolution, Layer1 and Layer2 will form a layer of DeFi, causing a certain split, but in the end, Layer1 and Layer2 will reach a balanced situation. Layer2 is the main area for DeFi because of its lower Gas fee and faster speed, while Layer1 is still very important. It carries the security of Layer2 and will be used as the settlement layer for important data. By then, the relationship between ETH2.0 and Layer2 will no longer be a subordinate relationship, but a mutual competition and mutual achievement.

Will the merged ETH2.0 abandon Layer2?

The ETH2.0 merger is imminent. Some people are worried that after the merger of ETH2.0, the scalability and high gas fee problems of the main chain Layer1 will be greatly alleviated. At that time, whether Layer2 will still be needed for expansion and whether Layer2 will be abandoned are actually unnecessary.

First of all, the ETH2.0 merger is not done in one go. Judging from the timetable for the implementation of ETH2.0, it is implemented in stages, and each step from the discussion of the plan to the final implementation is a long process, because the implementation of a plan on ETH based on the principle of decentralization must be agreed by the vast majority of community members. The first few stages of the ETH2.0 merger were also postponed because some community members disagreed. And even if the plan is actually implemented, it will be a slow process for the PoS model to replace the PoW model. So ETH2.0 will still need Layer2 for a long time in the future.

Even after the ETH2.0 merger, the main chain Layer1 runs much faster, but who would refuse to make it faster? As Trusttoken's product manager Harold Hyatt explained: "Layer2 based on Ethereum will scale with Ethereum, so if Ethereum scales, Layer2 will also scale. If Optimism is 10 times faster than the Ethereum mainnet, then Ethereum is 10 times after sharding, and Optimism is 100 times." Bifrost's strategic director Thibault Perréard directly affirmed the necessity of Layer2 in the future: "The real catalyst for unleashing Ethereum's future potential and truly realizing the DeFi vision is not PoS, but Layer2." So ETH2.0 needs Layer2 now, and it will still be needed in the future.

Layer2 will form an independent ecosystem

Layer2 was proposed to solve the scalability and expansion problems of ETH. Although ETH2.0 is about to complete the merger, ETH2.0 does not provide Ethereum with unlimited scalability. Even if ETH2.0 itself will expand, it still needs Layer2. Therefore, in the long term, the development direction of Layer2 will still be towards how to better improve the scalability and expansion of the Ethereum network.

The future development of Layer2 will not be limited to Ethereum. As more and more DeFi projects are installed on the Layer2 chain, you will find that the transaction fees on Layer2 are cheaper and the transaction speed is faster. This will greatly increase the number of DeFi users and transaction volume, especially DEX. As the transaction volume and user volume increase, it will also increase the attractiveness to liquidity providers, which will lead to further migration of users and liquidity providers to Layer2. Slowly forming a trend, it is possible that Layer2's own ecosystem will eventually be formed. By then, Layer2 will become the fourth track after Bitcoin, Ethereum, and decentralized stablecoins.

Summarize

In the future, ETH2.0 and Layer2 will complement each other and achieve each other. As more bridges between Layer2s are established, the issues of Layer2's own interactivity and liquidity will be resolved. I believe that in the future, Layer2 will carry more and more complex DeFi and DApp applications, and the implementation and popularization of blockchain technology will be faster and better integrated into people's daily lives.