Analysis of Ethereum’s Expansion Plan

By the end of 2021, Ethereum has developed to support thousands of applications from DeFi, NFT, GameFi and other fields. The entire network settles trillions of dollars in transactions every year, and more than 170 billion dollars are locked on the platform.

But as the saying goes, more money means more problems. The decentralized design of Ethereum ultimately limits the transaction volume it can handle to 15 transactions per second. Since the popularity of Ethereum far exceeds 15 transactions per second, the result is a long wait and a fee of up to $200 per transaction. Ultimately, this will discourage many users and limit the types of applications that Ethereum can handle today.

If smart contract-based blockchains continue to evolve to support billions of users of financial and Web 3 applications, solutions need to be expanded. Thankfully, the cavalry began to arrive, and many proposed solutions have recently come online.

In this issue of “Around The Block”, we discussed the encryption world’s pursuit of scale.

Competitive or complementary?

The goal is to increase the number of transactions that a publicly accessible smart contract platform can handle while maintaining sufficient decentralization. Keep in mind that it is trivial to scale the smart contract platform with a centralized solution managed by a single entity (Visa can process 45,000 transactions per second), but we will soon return to where we started: one owned by a few people A powerful centralized participant in the world.

There are two ways to solve this problem: (1) establish a new network that competes with Ethereum, which can handle more activities, or (2) establish a complementary network that can handle the excess capacity of Ethereum.

Broadly speaking, they are divided into several categories:

1) Tier 1 blockchain (competing with Ethereum)

2) Side chain (partially supplemented with Ethereum)

3) Layer 2 network (complementary to Ethereum)

Although each architecture and method is different, the goal is the same: let users actually use the network (for example, interact with DeFi, NFT, etc.) without having to pay excessive fees or experience long waiting times.

Layer 1s

Ethereum is considered a layer 1 blockchain-an independent network that can protect user funds and execute transactions in one place. Want to use DeFi applications such as Uniswap to change 100 USDC to DAI? Ethereum is where all this happens.

The first layer of competition can do everything Ethereum does, but in a brand new network. The difference between them is that the new system design can achieve higher throughput, thereby reducing transaction costs, but usually at the cost of increased centralization.

In the past 10 months, new Tier 1 networks have come online in droves, and the total value of these networks has soared from $0 to around $75B during the same period. The field is currently dominated by Solana, Avalanche, Terra and Binance Smart Chain, each chain has a growing ecosystem, valued at more than 10 billion U.S. dollars.

Analysis of Ethereum's Expansion Plan

TVL’s leading non-ETH L1

All Tier 1 are competing to attract developers and users. It is very difficult to easily build and use applications without any Ethereum’s tools and infrastructure. To bridge this gap, many Tier 1 adopt a strategy called EVM compatibility.

EVM stands for Ethereum Virtual Machine, which is essentially the brain that performs calculations to make transactions happen. By making their network compatible with EVM, Ethereum developers can easily deploy their existing Ethereum applications to the new layer 1 by basically copying and pasting their code. Users can also use their existing wallets to easily access the EVM-compatible layer 1, making migration simple.

Take Binance Smart Chain (BSC) as an example. By launching an EVM-compatible network and adjusting the consensus design to achieve higher throughput and cheaper transactions, BSC witnessed a surge in the usage of dozens of DeFi applications last summer, which are similar to Uniswap and Curve. Popular Ethereum application. Avalanche, Fantom, Tron and Celo also took the same approach. In contrast, Terra and Solana currently do not support EVM compatibility.

Analysis of Ethereum's Expansion Plan

Comparison of EVM compatible and non-EVM compatible L1 TVL

Interoperability chain

In slightly different Tier 1 storage areas are blockchain ecosystems such as Cosmos and Polkadot. Instead of building new independent blockchains, these projects build standards that allow developers to create application-specific blockchains that can communicate with each other. For example, this can allow tokens from the gaming blockchain to be used in applications built on a separate blockchain for social networks.

Currently, there are more than $100B on the chain built using the Cosmos standard, which can eventually be interoperable. At the same time, Polkadot has recently reached a milestone and will also unify its blockchain ecosystem.

In short, Ethereum’s direct competitors are now showing a diverse pattern, and there will be more in the future.

Side chain

The difference between the side chain and the new layer 1 is undoubtedly a fuzzy difference. Sidechains are very similar to EVM-compatible layer 1, except that they are specifically designed to deal with the excess capacity of Ethereum, rather than competing with the entire Ethereum. These ecosystems are closely integrated with the Ethereum community and host Ethereum applications in a complementary manner.

Axie Ifinity’s Ronin side chain is a good example. Axie Infinity is an NFT game originally built on Ethereum. Since Ethereum fees make playing games very expensive, the Ronin sidechain is designed to allow users to transfer their NFTs and tokens from Ethereum to a low-fee environment. This makes the game affordable for more users, and before the game’s popularity explodes.

Analysis of Ethereum's Expansion Plan

At the time of writing, users have transferred more than $7.5B from Ethereum to Ronin to play Axie Infinity.

Polygon POS

Sidechains like Ronin are application-specific, while other sidechains are suitable for more general applications. Currently, Polygon’s Proof of Stake (POS) sidechain is the industry leader, with a value of nearly US$5B and has deployed more than 100 DeFi and gaming applications, including familiar names such as Aave and Sushiswap, and a Uniswap clone called Quickswap .

Similarly, Polygon POS and EVM compatible layer 1 does not seem to be any different. However, it was built as part of a framework that extends Ethereum rather than competes with it. The Polygon team sees the future. Ethereum is still the dominant blockchain for high-value transactions and value storage, and daily transactions will be transferred to Polygon’s low-cost blockchain. (Polygon POS also maintains a special relationship with Ethereum through the checkpointing process).

Since transaction fees are less than a penny, Polygon’s future vision seems reasonable. With the help of incentive programs, users have flocked to Polygon POS, whose daily transaction volume surpassed Ethereum (although spam transactions inflated this number).

Analysis of Ethereum's Expansion Plan

Layer 2s (Rollups)

Both layer 1 and sidechains have an obvious challenge: protecting their blockchains. To do this, they must pay a new set of miners or proof-of-stake validators to verify and protect transactions, usually in the form of inflation of the underlying tokens (such as Polygon$MATIC, Avalanche’s $AVAX).

However, this brings significant disadvantages:

1) Owning the basic token will naturally make your ecosystem more competitive, rather than complementing Ethereum

2) Verifying and protecting transactions is a complex and challenging task, and your network will be responsible indefinitely

Wouldn’t it be great if we could create a scalable ecosystem that borrowed from the security of Ethereum? Enter the layer 2 network, especially “summary”. In short, the second layer is an independent ecosystem on top of Ethereum, and its security depends on Ethereum.

Crucially, this means that layer 2 does not need to have native tokens-so they are not only more complementary to Ethereum, but are essentially part of Ethereum. The Ethereum roadmap even expresses respect for this idea by stating that Ethereum 2.0 will be “rollups-centric.”

How Rollups work

Layer 2 is often called rollups because they “aggregate” or bundle transactions together and execute them in the new environment before sending updated transaction data back to Ethereum. Instead of letting the Ethereum network process 1,000 Uniswap transactions alone (expensive!), but offloading the calculations on the second layer of aggregation (cheap!) before submitting the results back to Ethereum.

However, when the results are sent back to Ethereum, how does Ethereum know that the data is correct and valid? How does Ethereum prevent anyone from posting wrong information? These are the key issues that distinguish two types of rollups: Optimistic rollups and ZK rollups.

Optimistic rollups

When submitting the results back to Ethereum, Optimistic rollups “optimistically” assume that they are valid. In other words, they let the operators of rollups publish any data they want (including potentially incorrect/fraudulent data) and assume that it is correct-without a doubt an optimistic outlook! But there are some ways to combat fraud. As a check and balance, after any withdrawal, there is a time window where anyone can point out fraud (remember that the blockchain is transparent and anyone can see what is happening). If one of these observers can mathematically prove that fraud occurred (by submitting a fraud proof), rollups will recover any fraudulent transactions and punish bad actors and reward observers (a clever incentive system!).

The disadvantage is that there will be a short delay when you transfer funds between rollups and Ethereum, waiting for observers to detect any fraud. In some cases, this can be as long as a week, but we expect these delays to decrease over time.

The key is that optimistic rollups have an inherent connection with ETH and are ready to help Ethereum expand today. Therefore, as many leading DeFi projects turn to leading optimistic rollups-Arbitrum and Opimistic Ethereum, we have seen strong new growth.

Arbitrum & Optimistic Ethereum

Arbitrum (provided by Off-chain Labs) and Optimistic Ethereum (provided by Optimism) are the two main projects that implement optimistic rollups today. It is worth noting that both are still in the early stages, and both companies maintain a level of centralized control, but plan to decentralize over time.

It is estimated that once mature, Optimistic Rollups can increase scalability by 10-100 times. Even in the early days, DeFi applications on Arbitrum and Optimism have accumulated billions of network value.

Optimism was earlier in its adoption curve, deploying more than $300 million in TVL in seven deFi applications, the most famous of which are Uniswap, Synthetix, and 1inch.

Analysis of Ethereum's Expansion Plan

Arbitrum goes further, with TVL in more than 60 applications (including familiar DeFi protocols such as Curve, Sushiswap, and Balancer) at approximately US$2.5B.

Analysis of Ethereum's Expansion Plan

Arbitrum was also selected as Reddit’s preferred scaling solution because of their long-awaited effort to mark community points for the 500 million monthly active users of the social media platform.

ZK Rollups

In the case of optimistic rollups assuming that the transaction is valid and leaving room for others to prove fraud, ZK rollups will actually prove to the Ethereum network that the transaction is valid.

With the result of the bundled transaction, they submit a so-called proof of validity to the Ethereum smart contract. As the name suggests, proof of validity allows the Ethereum network to verify whether a transaction is valid, so that relayers cannot deceive the system. This eliminates the need for a fraud proof window, so the transfer of funds between Ethereum and ZK rollups is actually instantaneous.

Although instant settlement and no withdrawal time sound great, ZK rollups are not without trade-offs. First, generating validity proofs is computationally intensive, so you need high-performance machines to make them work. Second, the complexity surrounding the validity proof makes it more difficult to support EVM compatibility, limiting the types of smart contracts that can be deployed to ZK rollups. Therefore, optimistic rollups are first introduced to the market and are more capable of solving the expansion problems of today’s Ethereum, but in the long run, ZK rollups may become a better technical solution.

Adoption of ZK Rollups

The ZK rollups environment is in-depth, with multiple teams and implementations in work and production. Some well-known participants include Starkware, Matter Labs, Hermez and Aztec. Today, ZK rollups mainly support relatively simple applications, such as payments or exchanges (due to the current restrictions on the types of applications that ZK rollups can support). For example, the derivatives exchange dYdX uses Starkware (StarkEx)’s ZK rollups solution to support nearly 5 million transactions per week and TVL of more than $1B.

Analysis of Ethereum's Expansion Plan

However, the real reward is the ZK rollups solution, which is fully compatible with EVM, so it can support popular general-purpose applications (such as a full set of DeFi applications) without the exit delay of optimistic rollups. The main players in this field are MatterLab’s zkSync 2.0, Starkware’s Starknet, Polygon Hermez’s zkEVM and Polygon Miden, all of which are currently working on the mainnet launch. (At the same time, Aztec is focused on applying zk proofs to privacy).

Many people in the industry (including Vitalik) combined with Revenge 2.0 to scale revenge for the long-term solution of ZK summary, mainly from their own ability, fundamentally processing thousands of transactions per second will not endanger security or decentralization .With the continuous advancement of the expansion of Ethereum, the upcoming ZK rollups that are fully compatible with EVM will become one of the key issues worthy of attention.

Broken world

In the long run, these scaling solutions are necessary if the smart contract platform is to expand to billions of users. However, in the short term, these solutions may pose major challenges to users and encryption operators. Navigating from Ethereum to these networks requires the use of cross-chain bridges, which is complicated and potentially risky for users. For example, several cross-chain bridges have become the target of more than $1 million attacks.

More importantly, the multi-chain world has fragmented composability and liquidity. Considering that Sushiswap is currently implemented on Ethereum, Binance Smart Chain, Avalanche, Polygon and Arbitrum. Sushiswap’s liquidity was once concentrated on one network (Ethereum), and now it is distributed across five different networks.

Ethereum applications have long benefited from composability—that is, Sushiswap on Ethereum is plug-and-play with other Ethereum applications such as Aave or Compound. As applications expand to new networks, applications implemented on layer 1/sidechain/layer 2 can no longer be combined with applications implemented on another layer, limiting usability and giving users and developers Brings challenges.

Uncertain future

Will new first layers like Avalanche or Solana continue to grow to compete with Ethereum? Will blockchain ecosystems like Cosmos or Polkadot proliferate? Will the side chain continue to operate in harmony with Ethereum and assume its excess capacity? Or will rollups combined with Ethereum 2.0 win? No one can say for sure.

Although the future is full of uncertainty, everyone can take comfort from the knowledge that there are so many smart teams dedicated to solving the most challenging problems facing open, permissionless networks. Just as broadband ultimately helped the Internet support a series of revolutionary applications such as YouTube and Uber, we believe that we will eventually look at winning extension solutions in the same light.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/analysis-of-ethereums-expansion-plan/
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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