- Layer 1 (L1) alternatives are gaining popularity, mainly because high gas fees on the Ethereum network make DeFi-related transactions more expensive;
- Ethereum is trying to solve the network scalability problem with a Layer 2 solution, and a move to a proof-of-stake consensus model and sharding;
- While this does not necessarily mean that L1 will become irrelevant, the value of L1 may depend on how long it takes for the Ethereum network to complete scaling.
Gas fees on the Ethereum network have been one of the biggest barriers to mass adoption of ETH and smart contract platforms in general, and this is where Layer 1 alternatives including Solana (SOL), Avalanche (AVAX) and Terra (LUNA) are The main reason why 2021 is getting a lot of attention. However, the majority of active application development on the L1 network still appears to be taking place on the Ethereum blockchain, which currently has a total lock-up of $156 billion across 214 projects on the Ethereum chain – which is almost a lock-up ranking Twice the sum of the blockchain lock-up of 2-11 digits. In this case, a question arises, namely: If Ethereum 2.0 can replace the current Ethereum network with faster and cheaper options, those L1 replacements – the so-called “Ethereum killers” will eventually How much will it be worth?
In our opinion, there is still room for some L1 blockchains in the crypto space and could coexist with Ethereum for at least a few reasons. First, although the official Ethereum 2.0 implementation schedule has been advanced to 2023 (sharding will be completed), during this transition, the L1 network will still be involved in the network, aiming to solve the excessive transaction processing time and transaction costs of Ethereum. high question. That said, at least for now, an ETH-centric Layer 2 (L2) solution could play a huge role in increasing throughput and reducing transaction fees.
Second, scalability is only one issue that affects the Ethereum network. Currently, issues such as maximum extractable value (MEV) may not be of concern to users or investors, but as these ecosystems continue to develop, related issues may change the governance mechanism of the L1 blockchain. Also, more sophisticated bridging algorithms and interoperability improvements may facilitate greater composability between different L1 networks in the future.
For some L1 alternatives, we can still see the Ethereum mainnet have a certain advantage before it merges with the beacon chain, so Ethereum 2.0 will not crowd out other network development opportunities. That said, we believe that the performance of the Ethereum mainnet in the first half of 2022 may be primarily affected by monetary policy – particularly due to the transition to proof-of-stake hours, ETH issued to miners (and miners’ ETH sales) will gradually decrease reduce. In our opinion, these changes will not have an impact on the viability or cost-efficiency of blockchain.
However, we do believe that L2 scaling solutions, merging with the beacon chain, and sharding upgrades may limit the current development of the L1 network. For example, as the scalability of Ethereum increases, DApp users may stop looking for faster and cheaper Ethereum alternatives. Nonetheless, we believe that there is still a lot of room for multi-chain coexistence in the short term, driven by cross-chain interoperability and the possible need for alternative consensus mechanisms.
Misconception: The Ethereum 2.0 Timeline
Essentially, Ethereum 2.0 is a “set of interconnected upgrades” on the Ethereum network that allow for network scalability without significantly sacrificing decentralization or security. Considering the development speed of decentralized applications (dapps) on the Ethereum blockchain and the high growth of the entire ecosystem, we believe that if Ethereum 2.0 can provide lower fees and better network performance, it will definitely have the potential to disrupt L1. the potential of the network.
But many market participants tend to confuse the upcoming ethereum mainnet-beacon chain merger with the actual deployment of ethereum 2.0 itself, which is an important misconception. The reality is that the merging of the Ethereum mainnet with the beacon chain will only transform Ethereum from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, but it is not, in and of itself, critical to achieving higher transaction processing speeds, increasing transaction Throughput and support for lower gas costs are minimal. In fact, Ethereum network fees are primarily driven by the demand for block space, so if activity on the network picks up after the Ethereum mainnet merges with the beacon chain, the underlying network (i.e. Ethereum mainnet) fees are actually still It is possible that it will continue to rise.
Monetary Policy. Although there are some problems, the merger of the Ethereum mainnet with the beacon chain does not mean that the update is pointless, because the changes in the consensus mechanism may also bring related efficiency improvements, especially in terms of monetary policy. For example, a merger of the Ethereum mainnet with the beacon chain could mean more ETH being staked and less ETH being created (considering the shift from miners to validators), reducing supply on exchanges and therefore From the perspective of supply and demand, prices can be pushed up.
It should be noted that the speed of ETH issuance is also an important factor, as in the past miners often had to sell ETH to obtain funds to pay for their equipment operating costs. Therefore, according to our estimates, using (fewer) validators can reduce the issuance of ETH by up to 90%, and also reduce the amount of ETH sold on exchanges by at least 30-50%, because of the difference between proof of work ( The Ethereum network requires less computing power (ie: lower operating costs mean less mandatory ETH sales) compared to the Ethereum mainnet and beacon chain mergers. This was especially evident after the launch of EIP-1559 in early August, where the flow of funds to Ethereum miners appears to be more directional, as can be seen from the chart below.
Figure 1: Ethereum Miner Wallet Net ETH Inflow/Outflow, Source: Coinbase Analytics
But while the Ethereum mainnet-beacon chain merger could set a higher low price for ETH/USD, it’s unlikely to see much improvement in performance metrics like network transaction speed, scale, or cost. So, how can these problems be solved? The answer may be to shard the beacon chain. Sharding is actually an upgrade that the Ethereum network planned to implement before the Ethereum mainnet merged with the beacon chain, but was eventually postponed to 2023 for various reasons, one of which was to use ETH. The centric L2 solution has achieved good results, but now, L2 has instead become the main focus problem that the Ethereum network has to face.
L2: The key to scaling the Ethereum network
In our opinion, right now, the long-term viability of the Ethereum blockchain depends more on L2 scaling solutions than on upgrading the underlying network. That said, in terms of attracting developers and capital, and in terms of hosting smart contract platforms, we believe that the growth and adoption of L2 solutions may be the key to determining whether these so-called “ETH killers” can challenge Ethereum’s dominance.
Historically, blockchain scaling solutions have typically opted for larger blocks and/or shards, but with the advent of L2, a faster and more economical way to process transactions was discovered. Chief among these are Optimistic and Zero-knowledge (ZK) Rollups solutions, which can bundle transactions together and process execution in a new environment (i.e. off-chain), then send updated transaction data back to Ethereum. Coinbase has discussed these solutions in depth before and can be viewed here.
Rollups can drastically reduce transaction fees, but if Ethereum implements a sharding upgrade in 2023, it may strengthen the impact on transaction execution speed by allowing Rollups to utilize more block space on Ethereum. In the long run, this is critical for the Ethereum network to achieve its goal of scaling to billions of users and processing tens of thousands of transactions per second.
Figure 2: Average monthly fees on the Ethereum chain, Source: Coinbase Analytics
However, L2s are still in their early stages in our opinion, and they may not be ready for their golden age, which is actually why they can continue to proliferate as “L1 replacements”. For example, when transferring funds between a Rollup and Ethereum’s base layer and scanning for fraud, users may wait a long time on an Optimistic rollup, in some cases, even a week, for institutional investors to Said that this situation may bring greater potential risks. On the other hand, ZK Rollups also has certain limitations in terms of the types of transactions that can be supported.
Living in a multi-chain world
As Ethereum’s scalability challenges persist, we believe the attractiveness of L1 alternatives in the market will largely depend on how quickly Ethereum 2.0 and L2 solutions emerge. That said, we may see continued growth in these so-called “L1 alternative networks”, as well as cross-chain bridges, in the first half of 2022. However, the window of opportunity for L1 alternatives may begin to shrink significantly in the second half of 2022, as we expect ZK proofs to improve and Rollups to gain wider use.
However, this does not mean that the L1 alternative will disappear anytime soon. The multi-chain world is a very real existence, as we believe that solving the scalability trilemma is only the first step in the development of blockchains for smart contract platforms. First, in terms of the trilemma, users may pay more attention to transaction speed, security, and decentralization issues, and choose L1 based on these factors.
Second, other issues in the crypto industry are starting to emerge, such as maximum extractable value (MEV) and priority gas auction bots. MEV refers to the profit miners and validators can extract from others because of their ability to include, exclude, order, and reorder transactions in blocks, which has the potential to cause some problems for proof-of-work and proof-of-stake networks. Issues like this may favor blockchains that use other consensus mechanisms, such as Proof of History (PoH), that do not rely on mempools and thus may be more insulated from MEV.
Third, we are moving away from the notion of promoting composability by locking into one specific network. With the development of the L1 cross-chain bridge, as well as the L1-L2 cross-chain bridge, assets are allowed to move across the network in search of higher yields or different liquidity pools. As interoperability and more complex bridging become more commonplace, we could see the L1 ecosystem grow, as some DApp developers may not want to compete in a crowded market. In fact, we may even see certain L1 blockchains emerge that focus on specific use cases, such as gaming or social media.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/coinbase-report-the-real-ethereum-killer-may-be-ethereum-itself/
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.