How far can the Layer2 track go with a total market capitalization of over 200 billion yuan?

Despite the avalanche plunge on May 19, the layer2 concept represented by MATIC has performed quite strongly in the secondary market in the past half month, with MATIC rebounding more than three times at the highest after the plunge stabilized.

How far can the Layer2 track go with a total market capitalization of over 200 billion yuan?

According to third-party data, since entering May, the volume of transactions on the Ethernet chain has risen sharply, maintaining an average of about 1.3 million transactions per day. At the highest, the single transfer fee exceeded 500 gwei (a unit of measurement for Ether transaction fees), equivalent to nearly 300 yuan. The transaction fees for Ether miners have exceeded their block rewards.

The congested Ether and high transaction fees, however, have opened up new opportunities in other areas, with the Ether Layer 2 track in particular becoming notable. Despite suffering an avalanche plunge on May 19, the layer2 concept represented by MATIC has performed quite strongly in the secondary market over the past half month, with MATIC rallying more than three times at its highest after the plunge stabilized.

As of the deadline, at 16:30 on May 28, MATIC was quoted at RMB12.1, with a circulating market capitalization of about RMB62.9 billion, ranking among the top 15 cryptocurrencies in terms of market capitalization. According to third-party quotation data, the total market capitalization of cryptocurrency projects in the Layer2 circuit reached more than RMB 200 billion.

However, several industry insiders analyzed to Blockchain Daily that the Layer2 solution, which is the main concern of the community, is still in a relatively early stage of research and development or testing, and has not been applied on a large scale. Meanwhile, the security of Layer2 (whether at the level of cryptography, economic mechanism or engineering implementation) also needs to be tested for a longer time so that more users can use it with confidence.

What is the real Ether Layer 2 ?

Layer2 is the general name of the main Ethernet network expansion solution, not a specific technology, there are at least 4-5 optional technology solutions, all called Layer2. Layer2 itself is as a layer 2 protocol network in blockchain technology, completely separated from the Layer1 application layer.

The Layer2 solution, which has recently become a big hit, aims to solve the problem of transaction congestion and high fees caused by the explosion of DEFI (decentralized finance) and NFT (non-homogeneous tokens) in the main Ethernet network (also known as Layer1).

How to expand the Ethernet Layer 1 network has been one of the mainline tasks in the cryptocurrency world. In the past history, various solutions such as state channel, sidechain, Plsama, etc. have had a beautiful period, but in the end, they all failed to become a general consensus in the community due to various limitations (such as the sidechain security issue mentioned by Kolodny and the Plsama exit time issue). Until the Rollup solution appeared, with the affirmation of Vitalik Buterin, the founder of Ether, and a number of excellent teams’ research and promotion, the community gradually recognized the Rollup solution as the basic route for Ether expansion.

With the rise of Rollup consensus, Matic Network announced its upgrade to Polygon in January this year and decided to develop Optimistic Rollups, zkRollups, Validium and other new scaling directions to become the first Layer2 aggregator on the ethereum chain.

However, as of now, Polygon has still not completely completed the development of these new expansion directions, and the only solutions that can operate stably for the time being are still Plasma Chain and PoS Chain, and considering the exit problem, coins other than MATIC itself generally prefer the second option when entering and exiting Layer 1 and Layer 2.

In the current market, there are too many project parties that claim to be Layer 2 of Ether, but essentially they are in competition with the Ether network, so which are the real Layer 2 of Ether?

The most promising Ethernet Layer 2 expansion solution is Rollup (mainly divided into Optimistic rollup and ZK rollup), and several Rollup projects often mentioned by Vitalik Buterin, the founder of Ether, include ZKSync (Matter Labs), Loopring, Optimism, StarkWare (StarkNet) and Offchain Labs.

However, William, the chief researcher of OKEx Research Institute, said in an interview with Blockchain Daily that the most pending problems of Layer2 are security, network stability and application scenarios. Although it is highly sought after by the market, it has not been verified by time that its security can fully inherit the main network of EtherChain. The so-called high throughput of Layer2 is a conclusion drawn before the volume grows to a certain extent. Once the assets are substantially transferred to Layer2, whether the network will be congested is yet to be verified.

Layer2 left to the test of time

Due to the rapid development of DeFi, support for generic smart contracts has become an important direction for Layer2. Before the DeFi boom, Layer2 solutions with and without universal smart contract support were evenly matched. But with the rise of the DeFi boom, a large number of DEX applications have now gradually started to adopt Layer2, and lending platforms and others have also started to adopt it. Most public chain apps/DeFi are able to benefit from Layer2 technology that supports universal smart contracts.

However, Wang Wei, co-founder of SOLV, expressed concern about Layer2 in an interview with Blockchain Daily, saying that he thinks Layer2 is only as a transitional solution to solve the expansion problem of Ether. If Ether always needs Layer2 to solve the problem of transaction cost and speed, people have chosen other public chains to solve the problem of performance and transaction cost, and Ether degenerates into a slow consensus chain, which itself will also have a negative impact on Layer2 and make it a chicken-and-egg technology.

In fact, taking Ether as the research object, the layer2 solutions in the early years, such as “state channel” and “plasma”, have not been widely used due to the problems of capital efficiency and ease of use. At present, the main layer2 solutions that the community focuses on include Rollup (ZK Rollup/Optimistic Rollup) and Validium, and many teams have done experiments on them. In general, it is still at a relatively early stage, except for zkSync 1.0, most of the solutions are still in the R&D or testing stage and have not been applied on a large scale.

Yao Xiang, the initiator of the Shanghai Frontier Technology Workshop, pointed out to Blockchain Daily that the infrastructure for Layer2, such as wallets, browsers, node services, etc., is also not yet perfect, and the cost of switching assets to Layer2 is too high, and the user experience still needs to be improved. The security of Layer2 (whether at the level of cryptography, economic mechanism or engineering implementation) also needs to be tested for a longer time, so that more users can use it with confidence.

William, the chief researcher of OKex Research Institute, also expressed the same view to the reporter that Layer2 as a technical solution cannot be regarded as a “chain”, and its main role is to serve as a tool to assist the operation of the main network of the public chain, but its existence is a necessary element for the rapid expansion of the blockchain network effect. Traditional industries or assets that were difficult to be on the chain in the past will be able to join the on-chain ecosystem through Layer2’s technical solution. Of course it will take time to verify whether this technology can meet market expectations in the future.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-far-can-the-layer2-track-go-with-a-total-market-capitalization-of-over-200-billion-yuan/
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