Ethereum Scalability: The Positioning and Role of Rollups

This article will dive into the data behind Layer2 Rollup and tell us why Rollup is the fastest solution to scaling the Ethereum network in the short term.
At present, there are two main ways to expand the performance of Ethereum:

  1. Improve the transaction performance of the blockchain itself. Such as increasing block size and sharding, which is the most efficient way to upgrade the blockchain, but also the most complex, for Ethereum, sharding and other upgrades may not be seen for another year or more .
  2. Migrate to Layer2. That is, most of the computing work on the original L1 is transferred to L2, reducing the computational pressure on the Ethereum main chain. L2 Rollup is the fastest way to help Ethereum expand in the short term.

The development of blockchain

Currently, the most notable is the Ethereum Merge in September, which will reduce the energy consumption of the Ethereum blockchain by about 99%. However, Merge itself is not a core factor in helping Ethereum solve its scalability problems, and the real change will not come until the shard goes live in 2023. Sharding is beyond the scope of this in-depth discussion, but it essentially requires splitting the network into shards or separate parts to reduce congestion and increase throughput. Compared to its ambition to become the computer of the new financial world, transaction throughput is Ethereum’s flaw. Currently, Ethereum can only process about 15 transactions per second, compared to 24,000 for Visa.

Ethereum Scalability: The Positioning and Role of Rollups

Only when Ethereum completes its sharding roadmap and other updates will it reach TPS 100,000 of the target vision. We can see that optimistic and ZK rollups provide significant throughput improvements when we consider that there are multiple protocols providing transaction capacity and getting throughput numbers close to Visa’s levels. Rollups will certainly bring more utility to the Ethereum network in the short term without extensive upgrades to the blockchain.

Ethereum fees

Transaction fees on the Ethereum network are currently at their lowest levels since December 2020.

Ethereum Scalability: The Positioning and Role of Rollups

The drop in transaction fees is exactly what Ethereum needs, but in the current situation, it is mostly related to a lack of demand. The TVL of DeFi projects has plummeted and NFTs are in their first-ever bear market, all of which have driven block space demand to lows.
However, the low fees do allow us to see that Ethereum users might interact with the protocol in the future if the fees were not so high. As DEX trading volumes have dwindled this year, it is believed that this depicts the real user profile of these platforms, however, an interesting trend is the trade count, which shows the actual usage of an exchange, trading The trade size shows whale and retail activity.
Take Uniswap and Curve, the two largest decentralized exchanges on Ethereum by volume, have users adjusted their behavior based on lower fees? The answer is yes.

Ethereum Scalability: The Positioning and Role of Rollups

The lowest transaction fees in nearly two years have seen the size of transactions plummet on decentralized exchanges such as Uniswap above, while the number of transactions has actually increased. Uniswap users are doing more transactions due to low transaction costs, and the lower fees make DeFi easier for regular users, which isn’t very suitable for whales, is the nuance of adopting DeFi.
A decentralized exchange for whales is Curve, an exchange that specializes in stablecoin trading. We observed a similar trend there, with the average deal size falling by over 80% while the number of deals increased.

Ethereum Scalability: The Positioning and Role of Rollups

In contrast, Coinbase’s volume hovered near yearly lows as both average deal size and number of deals fell.

Ethereum Scalability: The Positioning and Role of Rollups

In a bear market, trading volumes on centralized exchanges plummet as the public’s investment interest generally wanes. However, DeFi still has many use cases during bear markets (look at Curve’s role in the Terra crash), and we can see that one factor in on-chain activity is Ethereum transaction fees rather than other general interests.
Reducing fees is the number one priority for the Ethereum community to drive the underlying adoption of the network, and the fastest way to do this is through Rollups.

Status of Rollups

There are two main types of rollups, Optimistic and ZK rollups, and their cost saving advantages are obvious. Below is a comparison of fees between various Layer 2 and Ethereum.

Ethereum Scalability: The Positioning and Role of Rollups


The main difference between Optimistic and ZK rollup is their treatment of transaction authenticity – how do we ensure that blocks sent back to the Ethereum network do not contain fake transactions?

Optimistic Rollup

Optimistic Rollup(OR) assumes that transactions sent back to Ethereum L1 are honest and valid, hence the name Optimistic. It tests this hypothesis through fraud proofs, where bystanders can claim that transactions are fraudulent, typically spanning seven days, which is widely considered the biggest drawback of optimistic rollups. If the exchange needs to wait for a 7-day trading waiting period, then it will be difficult to support the function of immediate withdrawal.
The two biggest ORs are Arbitrum, which has yet to release a token, and Optimism, which released its token on June 1 this year. Investors can gain exposure to other layer 2 protocols with tokens such as Boba, another L2 that uses Optimistic Rollup.
Dydx is an L2 trading platform that relies on zK rollups technology; IMX is an L2 scaling solution for NFTs on Ethereum and can be used to pay transaction fees on the platform. Now, the market seems to be starting to conclude that Optimistic Rollup is just a Band-Aid to a bigger problem, as the Optimism (OP) token has underperformed not only ETH but other L2 protocols since its launch.

Ethereum Scalability: The Positioning and Role of Rollups

However, as the final date of the merger approached, the market became more bullish on the overall Ethereum L2 and OP started to outperform. This bullish sentiment is also evident in OP’s futures market, which has seen a massive increase in open interest amid positive funding rates last week.

Ethereum Scalability: The Positioning and Role of Rollups

ZK Rollup

While Optimistic Rollup assumes that all transactions are valid and allows bystanders to submit fraud proofs, “zero-knowledge” (zK) Rollup verifies each transaction itself by submitting a validity proof along with each set of transactions, so, its computation It is more bulky and difficult, which is why EVM compatibility was not achieved until recently. Without the fraud prevention window, it is much faster in terms of settlements and withdrawals. This near-instant settlement is extremely attractive to exchanges that need to meet user withdrawal requests in a timely manner; this is why dydx has already adopted ZK rollup at Layer 2.
All along, developers have been working on the “holy grail” of rollups — an EVM-compatible ZK rollup. Over the past few weeks, we may have witnessed the beginning of the ZK rollup era, with all three teams Polygon, Matter Labs, and Scroll announcing breakthroughs in EVM-compatible ZK rollups.

L2 and DEX

Looking specifically at the breakdown of TVL by Uniswap and Curve, we can see that only a small fraction of their value is on L2 (Optimism and Arbitrum): 1.9% for Uniswap and 1.8% for Curve.
Uniswap currently has 97% of TVL on the Ethereum main chain, while Curve has 92%. It is reasonable to expect that once the EVM-compatible ZK Rollup is launched, there will be a large number of transactions migrated to ZK L2, providing cheaper fees for more DEX users.

Ethereum Scalability: The Positioning and Role of Rollups

Ethereum Scalability: The Positioning and Role of Rollups

in conclusion

L2 Rollups are an important part of Ethereum’s short/medium term scaling strategy, even in the long term, as Rollups will also sit on top of the improved Ethereum network.
If the team working on EVM compliant ZK rollup can successfully launch their product. They will gain a lot of market share, possibly driving more traffic to decentralized exchanges.
In another interview, Vitalik Buterin said, “My advice to teams like Optimism and Arbitrum is that I think they should start ZKing themselves as soon as possible”.

Posted by:CoinYuppie,Reprinted with attribution to:
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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