At this stage, the value of Ethereum has greatly overflowed, and these 6 Layer2 projects may be the biggest beneficiaries

In 2018, we thought that Layer2 (hereinafter referred to as L2) was just around the corner. Three years later, we find that it is still a long way from the goal of "changing blockchain".

Fortunately, this year we finally have some L2 ecosystems. After Vitalik set the tone for Rollup last year, it now has a general direction.

This article is written when the L2 war is about to start. It mainly talks about several projects that are worth paying attention to and focusing on. I believe that you may have some different feelings when you read this article again in a year.

01

Current Status of Layer2 Technology
Rollup is unified, channels and sidechains are almost gone

Before writing about these projects, let’s first review the history and current status of L2.

The earliest L2 should be Bitcoin's Lightning Network, which uses channel technology. The earliest L2 on ETH is also a channel technology, called the Lightning Network. Have you heard these two words in recent months? So you should know what I want to express.

Similarly, the first project to propose sidechain was actually Loom. The concept at the time was that the Loom sidechain would run DPOS, learn EOS, and then return to ETH L1 for settlement, perfectly combining the high performance of DPOS with the security of ETH POW.

However, ideals are full of hope, but reality is very skinny. How are the 21 DPOS nodes on the side chain selected? Will there be collusion? Is the side chain security trustworthy? This is why the concept of side chains has basically been replaced by high-speed public chains.

Several star public chains, such as Solana, Near, and Fantom, can divert assets on ETH through compatibility with EVM+bridge, and then go back to ETH for settlement, which is exactly the same as what the side chain can do. Moreover, these star public chains have stronger development capabilities, larger market capitalization, and higher security than most side chains.

Therefore, the side chain function of L2 has been basically replaced by the star public chain L1 side chain. The recently popular BSC can essentially be regarded as an ETH side chain.

So the question is, what if I am still not confident about these side chains and want better security or better composability?

It still depends on L2, but it is the Rollup technology chosen by V God.

The biggest difference between Rollup and sidechain can be simply understood from a non-technical perspective. That is, in theory, any sidechain technology, whether it is the L1 of other public chains or the L2 sidechain of ETH, has the possibility of "conspiracy" between nodes to do evil and tamper with transaction data without being perceived by ETH L1.

Because the sidechain and ETH L1 are two completely different chains, they only need to communicate during settlement. Rollup is completely different. L2's Rollup can be seen as an extension of ETH L1. Whether it is ZK or OP, the data is compressed and directly uploaded to the L1 main chain.

ZK's data is directly verified through zero-knowledge proof calculations, while OP assumes that the data is true. The second-layer detectors will discover errors and initiate disputes. These verifiers need to download all Ethereum node and second-layer data before they can verify.

Therefore, Rollup L2 is integrated with ETH L1. Even if the nodes "conspire", it is basically impossible to tamper with the transaction data without being perceived by ETH L1. This is why the security of our Rollup is close to or equal to that of ETH L1.

Next, we will mainly talk about several Rollup-related L2 projects that have issued tokens and those that have not yet issued tokens. (Due to space limitations, each project can only be briefly introduced. Interested friends can search for relevant information on their own)

02

LRC, Matic, Celer

1.LRC

Loopring can be called the pride of China and has been praised many times by Vitalik Buterin. The reason is simple: LRC is the first project to make Rollup technology a large-scale application.

Loopring’s main products are smart wallets, payments, and Loopring DEX - a SWAP that has both AMM and order books.

There is no problem with the technology and the product experience is also good. The biggest problem is that LRC is just an application of Zk-rollup, not a universal solution for Zk-rollup.

Therefore, its DEX is still in an isolated state. Although the trading experience is good, its depth is far behind L1 DEX such as Uni and Sushi.

In the long run, I personally feel that the opportunity for LRC lies in whether LRC can be expanded into an L2 protocol layer, or at least become a protocol layer of a DEX branch. Otherwise, it will be difficult to achieve greater results by simply expanding applications under the constraints of DeFi composability.

2. Matic

At present, it can be said that it is the only L2 project that can be regarded as having an "ecosystem", which is mainly based on DeFi, games and NFTs. The more well-known projects cooperating on it include Aavegotchi, Terra Virtua, Quickswap and Injective Protocol.

Matic recently changed its name to Polygon, and its strategic direction has been transformed from Plasma sidechain to L2 aggregator. In simple terms, it does everything. Now it has sidechain technology, and will also launch Rollup, ZK, OP and Vadidium in a while.

How should I put it? Just keep an eye on it. After all, ZK and OP are not something that anyone can make if they want to. They require extremely high development capabilities from the team.

Furthermore, Layer2 aggregation does not seem as easy as L1 aggregation like YFI. The concept sounds great, but in actual operation, it is much more difficult than imagined.

3. Celer

Celer previously focused on channel technology, and after the channel was "falsified", it proposed the concept of Layer2.finance. Simply put, you can understand it as a decentralized Rollup intermediary from L1 to L2, or a purchasing agent.

Users deposit funds on the L2 chain and, through special L2 transaction forms, indicate which DeFi protocols on L1 they wish their funds to be placed in.

When the funds linked to the instructions to a certain DeFi protocol accumulate enough, Layer2.fianace aggregates these transactions and calls the function of this DeFi protocol at one time, thus simplifying the multiple transactions that were originally required into one transaction.

From this point of view, it is a bit like the Yfi machine gun pool saving gas. This solution makes up for the current embarrassment of L2 composability to a certain extent. Before the L2 project solution matures, it is remarkable as a temporary solution.

Of course, in the long run, L2 unification is still the ultimate solution. At that time, the long-term survival of temporary solutions such as Celer will be a big challenge.

Celer’s thoughts on “Layer2 Unification” are also very insightful and worth pondering. The original text is as follows:

How should users interact with the application when the chain is running normally, and when the chain is paused or rolled back, and what status should be used as the basis?

How do centralized trading platforms connect to the L2 ecosystem? Will L2 tokens be treated the same as L1 tokens?

In the absence of support from surrounding ecological facilities, how can users quickly enter and exit the L2 Rollup chain?

Blockchain status query services (similar to Infura and Alchemy) now need to expand their capacity 100 times and connect to L2 and L1 at the same time for complex verification and transaction forwarding and diversion. Is such a service ready?

When a block producing node attempts to stop the block producing progress, how can the client effectively notify the customer and ensure that the user is quickly switched to L1 interaction mode to ensure security?

For DeFi protocols that rely on oracles, are these oracles ready to resist possible L2 muting attacks?

Without the same level of state synchronization delay assumption as L1, do most DeFi protocols need to re-evaluate their security?

03

No tokens issued

Optimism, Offchain Labs, Matter labs

The current consensus in the industry is that the future three-kingdoms competition of the L2 Dynasty will most likely be fought among these three companies (there is also Starkware, which we will mention at the end).

The technical strengths of these three companies can be said to be top-notch in the industry, so what may ultimately determine victory or defeat is not the technology, but the capital behind them and the number of people who “stand in line” with the major DeFi protocols.

1. Optimism

The most popular L2 solution at present, the representative project of Optimistic Rollup, will be launched on the mainnet this month, and I believe it will not be far from the issuance of tokens.

• Capital behind: Paradigm, A16Z - Needless to say, the strength of these two companies is top notch in the industry.

• Ecosystem: SNX, Uniswap (high probability), Compound (high probability), there is no need to say much about these three, they are considered to be the top projects in the DeFi circle.

• Advantages: Low threshold, universal EVM compatibility, very convenient for development or migration at this stage, SNX has already started using the test network.

• Disadvantages: Optimistic has a challenge period of up to one week when withdrawing funds, and its security is lower than ZK.

From the perspective of capital and ecology, Optimism is definitely a project worthy of attention in the short and medium term.

2. Offchain Labs (Arbitrum)

Like Optimism, it also does Optimistic Rollup, but it has some technical differences from Optimism.

• Capital behind the scenes: Pantera and Coinbase, both leaders in the industry.

• Ecosystem: Augur, Bancor, Mcdex and Dodo - are all good DeFi projects, but their status in the industry is not as high as the three companies that support Optimism.

• Advantages (compared to Optimism): Gas fees are much lower and can support more VMs.

• Disadvantages: More complex than the Optimism mechanism, requires more code, and has greater security risks.

Compared with Arbitrum and Optimism, the project's own reputation, the capital behind it, and the team ecology are slightly inferior, but they have their own advantages in technology, and their status as top projects is unquestionable. When the two main networks are launched, there will be a tough battle to fight.

3. Matter Labs (Zk-Sync)

Matter Labs represents the possible future of L2, but the reason why it is said to be possible is that, firstly, it will take a long time, and secondly, the technology is very difficult and there is a possibility of failure.

• Capital behind the scenes: USV, coinbase, and hashed are all at the leading level, especially USV.

• Ecosystem: In addition to the capitals mentioned above, there are also ecological partners who invested in MatterLabs in the A round, including AAVE, Balancer, 1inch and Curve, etc. These projects are likely to stand on the side of Matter Labs. There is no need to say much about the status of these projects in the DeFi industry.

• Advantages: Equivalent security to ETH L1, higher TPS expansion.

• Disadvantages: It is not a universal solution at present. The project team stated that zkSync will support Turing-complete smart contracts (Solidity) this year, which means that the application ecosystem construction of zkSync may lag behind Optimism or Arbitrum by a whole year.

Matter Labs may be taking the most difficult path in L2. Even if it succeeds, it will be the last one to come out. There are three possible outcomes:

(1) When it came out, the Optimism lineup had already dominated the world, and all projects were "too lazy to migrate" to Zk because of its composability.
(2) Project development fails or is delayed for too long.
(3) After it comes out, it will share the world with Optimism or replace it.

But no matter what, Vitalik Buterin is still most optimistic about ZK. After all, this is the L2 that is truly equivalent to the security of the main network. The original text of the interview between Guru and Vitalik Buterin some time ago can show Vitalik Buterin's attitude.

Guru: The current Optimistic Rollup solution is only temporary, and we will eventually transition to the ZKRollup solution, right?

Vitalik: ZK Rollup has a longer-term future because its mechanism and economic protocol will be simpler.

But I don’t know how long this long-term future will be, it could be 5 or 10 years. Currently, the technology of zero-knowledge proof is relatively complex and novel. It takes a lot of time to make a fully ZK virtual machine to ensure that it is safe.

But once it is implemented in the long run, ZK Rollup will have many advantages. I think many applications will be moved to ZK Rollup.

The last one, Starkware, is just a brief mention. It is a solution similar to Zk-Rollup.

In terms of capital, they also have the support of star capitals such as Paradigm, Coinbase, Multicoin, etc., but in terms of ecology, there is basically only one DYDX standing on their side, so it seems that there is little hope of winning.

Overall, the next 1-2 years will most likely be a chaotic period of competition among Optimism, Matter Labs, and Offchain Labs, and the final probability of winning may be 4:4:2 respectively.