2021 L2 track review: rapid progress and impressive results

Since the creation of the genesis block on July 30, 2015, more than 1.4 billion transfers have occurred on the Ethereum network, and daily active users have also stabilized at more than 800,000. Since 2016, even with many high-performance public chains, Ethereum has still Contributed to the encryption market DeFi/NFT/DAO/ and other major asset classes, and further gave birth to the concept of Web3, which pointed out the direction for the ultimate destination of decentralization.

However, the TPS of Ethereum 15 is far from being able to meet market demand, leading to a soaring gas fee, so that a single transfer fee is as high as 100 US dollars. In terms of the sharing of many high-performance public chains, ETH2.0 and Ethereum L2 (Layer 2) are to solve this problem, but compared to the long development process of ETH2.0, Ethereum L2 is obviously a faster solution.

Among the many Ethereum L2 solutions, zkSync/StarkNet/Optimism/Arbitrum is particularly outstanding. The lightweight Metis, the L2 project Immutable X specializing in games, and the massive acquisition of L2 solution Hermez Polygon are all worthy of attention. However, there are also many problems in the development of L2, such as interoperability and composability issues/Optimistic project inherent asset inefficiency issues, etc.

How will many veteran DeFi projects make decisions in the face of such changes? What kind of form will the future Ethereum L2 develop into?

Ethereum L2 development background

Although Ethereum is cumbersome and expensive at the moment, the powerful user ecosystem is the strong backing of Ethereum. However, if the performance of Ethereum cannot be solved, it is likely to be caught up by many rapidly developing public chain ecology. The surge in SOL/BSC/AVAX/Matic in the second half of 2021 is the best example. On the one hand, the public chain track is becoming bigger and stronger, and on the other hand, the cake that belongs to Ethereum is being eaten.

So, how to improve the performance of Ethereum?

We know that the normal operation of the blockchain requires three resources, namely bandwidth, computing and storage, which play a decisive role in the performance of blockchains such as Bitcoin and Ethereum. Finally, through throughput (the number of transactions that the system can process per second) ) And delay (the time required to process a transaction) two indicators, the methods to improve these two indicators are divided into four.

The first is to use traditional centralized methods, the second is to use larger blocks and more frequent transaction confirmations, the third is to choose to use L2, and the fourth is to choose shards, such as ETH2.0.

First of all, if you choose to use a centralized solution, the blockchain protocol will have to choose a trusted third party to facilitate the transaction, and the user will get a Paypal-level transaction experience. On the surface, the effect achieved is the same as that of the blockchain. However, the accounting logic behind has undergone earth-shaking changes. We will lose the advantages of blockchain decentralization, and centralized review will lead to the loss of assets and information.

Then, you can choose large blocks and faster block generation speeds to improve performance, but the result of this is that the operating cost of the node is greatly increased. The 21 super nodes of the former Ethereum killer EOS doubled the operating efficiency. However, the current development status of EOS shows that the community does not buy into the over-centralized blockchain. Although Solana and Ripple that adopt this strategy are still sought after by capital, in terms of community and future development, there is obviously a big gap with Ethereum. In addition, in the 2017 BTC fork dispute, the final winner is still the BTC that chose the fast route of the community. The reason is that small blocks are more conducive to the development of blockchain projects in the direction of decentralization.

Third, choose L2 as the expansion method, that is, build a layer of blockchain outside the main chain to share the calculation and storage tasks of the main chain. The main chain is only responsible for verifying the final result to ensure that every transaction on L2 Transactions are reliable, and currently the head L2 such as zkSync/StarkNet/Optimism/Arbitrum adopts this idea. This set of solutions can ensure the authenticity of data under the premise of decentralization, and the difficulty of development is much lower than that of sharding (ETH2.0).

Finally, choose the shard expansion idea of ​​ETH2.0. The ETH2.0 process is divided into three stages: Phase0, Phase1, and Phase2. At present, Ethereum is in Phase 0, that is, the beacon chain is online, and POS verification is enabled. Only ETH tokens are transferred to the contract address for pledge mining. Transfers are not supported. According to forecasts, it will take several years for ETH2.0 to go live and fully implemented. Time, far can’t dissolve near fire. Currently, Polkadot/Near in the head public chain adopts a fragmented architecture.

In summary, the expansion idea of ​​Ethereum L2 is a compromise choice under the three dimensions of low development difficulty/guaranteed decentralization/guaranteed data security. If ETH2.0 is the end point of the expansion long-distance race, L2 is the rest stop on the track.

It is worth noting that although the current main L2 expansion solutions include State Channels, Sidechain, Plasma, Rollup and Validium, under comprehensive consideration, Rollup was finally selected by the Ethereum community as the final expansion technology , Other technologies are mostly used in cross-chain bridge solutions, such as Maker DAO’s DAI capital bridge, Connext/Celer’s cBridge/Hop Protocol and other cross-chain bridge projects that use state channel/sidechain/Plasma technology.

So, what is the current status of L2 development?

The development status of Ethereum L2: the amount of locked positions has skyrocketed, and the handling fee has dropped significantly

2021 is a year of leaps and bounds in Ethereum L2. According to L2BEAT data, the entire Ethereum L2 lock-up volume has risen from USD 49 million in January 2021 to USD 5.78 billion at present, an increase of over a hundred times, and an increase of nearly 18 times in the past six months. Among them, the Arbitrum network has the highest lock-up volume at US$2.54 billion, accounting for 44% of the total L2 lock-up volume; secondly, the dYdX lock-up volume is US$977 million, accounting for 17%; the third-largest lock-up volume is Loopring, which is 583 million US dollars, accounting for 10%.

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In terms of project development progress, Ethereum L2 has developed a pattern that is led by the four core L2 projects of zkSync/StarkNet/Optimism/Arbitrum and supplemented by L2 projects such as Immutable X/Hermez/Metis/Polygon.

According to the technology used in project development, it can be divided into ZK Rollup (abbreviated as ZR) and Optimistic Rollup (abbreviated as OR). The representative projects of the former are zkSync and StarkNet. Among them, zkSync is a ZR project adopted by the Matter Labs team using the zk-SNARK solution; StarkNet is a ZR project developed by StarkWare, a zero-knowledge proof research and development organization, using the StarkEx solution. The latter’s representative projects are Optimism and Arbitrum, where Optimism is an OR developed by the OVM solution, and Arbitrum is developed by the Israeli team Offchain Labs.

Other L2 projects worthy of attention include Immutable X/Hermez/Metis. Among them, Immutable X, as the infrastructure of GameFi applications, is positioned as Steam in the blockchain world, using Validium (optimized by ZR) technology as the expansion architecture. Hermez (acquired by Polygon for US$250 million in early August) also adopted ZK technology as the expansion architecture, developed by the Ethereum expansion solution technical team iden3. Metis is a Metis forked from Optimism. It is known for its low cost, high speed, and Ethereum-level economic security.

Among all the projects with the main L2 concept, the most special project is Polygon. Although the industry has always labeled it as “using Plasm expansion technology, over-centralization, and low security”, Polygon relies on excellent development. Technology, has launched three expansion solutions, Polygon Commit Chain, Polygon SDK, and Polygon Avail. In August this year, Polygon acquired Hermez for US$250 million. The latter was renamed Polygon Hermez, becoming the fourth expansion solution. In the past December, Polygon once again acquired Mir, a zero-knowledge technology developer, for US$400 million, which was later renamed “Polygon Zero” and integrated into the existing Polygon ecosystem. Since then, Polygon has gathered Plasm/sidechain/ZK Rollup expansion technology. It has become the L2 aggregation project with the most comprehensive expansion plan in the Ethereum L2 ecosystem, and the performance of MATIC in the secondary market also shows that the capital has a high degree of recognition for this solution.

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Expansion technology and project summary

Ethereum L2 has indeed played a role in greatly reducing handling fees.

According to statistics from the l2fees website, when using L2 to transfer ETH/Tokens/Swap, the savings in handling fees can generally reach more than 90%. For example, when Polygon Hermez transfers ETH, the fee is only US$0.25, which is 3.1% of the cost of the Ethereum mainnet directly. For another example, when using Loopring to transfer ERC 20 Tokens, the fee is only 0.29, which is the direct use of the Ethereum mainnet. 1.6% of the cost.

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The handling fees of different transfer methods of Ethereum L2

Although the development of Ethereum L2 is in full swing, there are also many problems.

The problems and solutions of Ethereum L2

The problems of Ethereum L2 include interoperability and composability issues, cross-chain issues between L2, the long exit cycle of Ethereum L2, and the time cost of developers migrating from L1 to L2.

First, let’s look at the interoperability and composability of OR project assets from L2, or the problem of value transfer.

We know that for the Optimistic Rollup solution based on fraud proofs, it takes at least 1 week for L2 to exit, and the cross-chain between different L2 platforms also takes a long time, which is extremely unfriendly to users. In response to this problem, existing projects are currently providing capital bridges across L2 networks. User assets can be cross-chained from one L2 network to another L2 network instantly, requiring a small fee to be paid during use. Specifically, such as Maker DAO’s DAI capital bridge, Connext, Celer’s cBridge, and Hop Protocol are also trying to provide such a universal solution.

The second is the time cost for developers to migrate from L1 to L2.

For most L2, there are additional development costs for application developers to migrate from L1 to L2, and they may need to learn the specific development environment of the network, such as Zinc of zkSync, Cairo of StarkWare, of course, the official should provide some basic The tool allows developers to easily convert L1 applications to L2 versions.

Of course, this can also use Celer’s in-situ expansion solution. The so-called in-situ expansion means that L1 applications can be used by L2 networks without additional adjustments. In this scenario, L2 is more like the instruction layer of funds, dedicated to the deployment of funds. The teams contributing in this field are mainly Celer’s Layer2.Finance and StarkWare’s DeFi Pooling solutions.

Finally, let’s look at the challenge of transferring OR project assets from L2 back to L1.

For Arbitrum that adopts the OR scheme, due to the challenge period, it is necessary to wait until the end of the challenge period to withdraw coins. The speed and timeliness are not as good as ZK. In response to this problem, the state channel (Connext) and the HOP agreement have also proposed some feasible solutions. For example, Maker is providing DAI’s financial bridge, and Celer’s cBridge and DeGate are all solutions for this type of project.

In fact, ZR and OR are characterized by their architecture, which brings new problems while solving problems. For example, ZR uses zero-knowledge proofs and has good interaction capabilities with L1. However, the development of general smart contracts is very difficult, which is very difficult for the project party. The technical ability requirements are too high. Take OR as an example again. It uses a fraud proof mechanism. Although the development difficulty is greatly reduced, the interaction with L1 is greatly restricted.

In an interview with Vitalik in the middle of this year, when Lianwen mentioned whether there was the biggest challenge for so many Layer2s, Vitalik said that these Rollups do not have big challenges, but there are many smaller challenges. There may be 100 small problems, and if they can’t solve these 100 small problems, then the performance and user experience of Rollup will be particularly bad. But if they can solve, say, 50 or 80 out of 100 problems, the user experience will be particularly good. For example, there is a problem that I presupposes, the withdrawal problem of Optimistic Rollup. It takes a week to withdraw funds from the Optimistic Rollup. So they want to build a Liquidity Provider (liquidity provider) mechanism to help users extract faster.

Vitalik also believes that if the TPS of L2 is very high, it will encounter the problem of node synchronization. In the future, as the L2 ecology becomes more and more prosperous, the problem of node synchronization will be taken seriously.

Finally, Vitalik believes that with the increase of L2 platforms, there will be more and more similar platforms such as Optimism, Arbitrum, and Loopring in the future, and the interaction between different platforms (Cross-Rollup transactions) will become a problem. The current solution to this problem is to use Maker DAO’s DAI funding bridge, Connext, Celer’s cBridge, Hop Protocol and other protocols to bridge and match different L2s.

In fact, with the development of L2, many DeFi projects have also chosen to migrate to Layer 2.

DeFi in the context of L2

According to incomplete statistics, in the past year, multiple track DeFi projects such as DEX, wallets, oracles, and synthetic assets have announced plans to enter L2. Synthetix’s SNX pledge service has even been launched on Optimistic Ethereum; the blockchain data index project The Graph added support for Layer 2 in early 2021; NFT encrypted collectible project Aavegotchi token GHST began to migrate to Layer 2 solution Matic Network; oracle machine Chainlink has already built Layer 2 expansion solution; derivatives trading platform dYdX is directly integrated StarkWare Layer 2 expansion plan; Smart contract wallet Authenticreum adopts StarkWare Layer 2 solution to reduce on-chain transaction fees…

It can be said that DeFi is either completely based on L2 development, such as dYdX, or partly based on L2, such as Uniswap v3. In the foreseeable future, driven by the advantages of L2 handling fees, as the security of L2 continues to improve, all DeFi projects will collectively migrate to the L2 platform.

However, as the NFT goes out of the circle in 2021, the DeFi halo has weakened. For example, since the beginning of 2021, the total market value of NFT has increased from more than 1 billion U.S. dollars to nearly 50 billion U.S. dollars, an increase of more than 50 times, while the market value of DeFi has only increased by less than 8 times during the same period.

Ethereum L2 development outlook in 2022

First of all, Ethereum L2 coexists with high-performance public chains.

The spring of L2 and many high-performance L1s is coming. Ethereum may still be unable to get out of the quagmire of low performance/high handling fees, but the ecological scale will increase exponentially. High-availability L1s such as Solana, Avalanche, Polkadot, Mina, and Difinity It will also create a huge network effect.

Then, Ethereum L2 and ETH2.0 coexist.

Some people may ask in the future, with the launch of ETH2.0, the performance of Ethereum will be greatly improved, is there still a need for Layer 2? In fact, even if ETH2.0 is launched, Ethereum will get 64 shards, the performance will be increased by 64 times, and the TPS will reach 960. Can it really meet the market demand? uncertain! But if ETH2.0 goes online, adding Layer 2 to each shard will increase the performance of Ethereum even more. Therefore, the coexistence of Ethereum L2 and ETH2.0 will be a trend.

Finally, more and more Ethereum L2 will emerge.

At present, the development pattern of Ethereum L2 is led by the four core L2 projects of zkSync/StarkNet/Optimism/Arbitrum, supplemented by L2 projects such as Immutable X/Hermez/Metis/Polygon. In the future, with the rise of the concept of game/NFT/meta universe, Ethereum Layer 2 like Ronin will appear more and more.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/2021-l2-track-review-rapid-progress-and-impressive-results/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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