Multi-chain, side-chain, and Layer 2 Who is the future of Ethereum’s expansion plan?

As of the end of 2021, Ethereum has developed to support thousands of applications from decentralized finance, NFT, games 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 at the same time, problems also follow.

Ethereum’s decentralized design ultimately limits the amount of transactions it can handle to 15 transactions per second. Since the popularity of Ethereum far exceeds 15 transactions per second, this leads to transaction congestion in Ethereum and high gas fees. Ultimately, this also discourages many users and limits the types of applications that Ethereum can currently handle.

If the smart contract-based blockchain wants to grow into a financial and Web 3 application for billions of users, it needs a scalable solution. Fortunately, there are many Ethereum solutions on the market now. This article will conduct an in-depth analysis and discussion on the current Ethereum solutions on the market.

Competitive or complementary?

The goal of the Ethereum solution is to increase the number of transactions that can be processed by a publicly accessible smart contract platform while maintaining sufficient decentralization. Keep in mind that it is trivial to scale the smart contract platform through a centralized solution managed by a single entity (Visa can process 45,000 transactions per second), but we will soon return to the starting point: a small number of powerful centralized participants Owned world.

There are two ways to solve this problem:

  1. Establish a new network that competes with Ethereum, which can handle more activities;
  2. Build a complementary network that can handle the excess capacity of Ethereum.

Broadly speaking, they are divided into several categories:

  1. Layer 1 blockchain (competing with Ethereum);
  2. Side chain (partially complementary to Ethereum);
  3. Layer 2 network (completely 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.

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Layer 1

Ethereum is considered a Layer 1 blockchain, an independent network that can protect user funds and execute transactions in one place. For example, in Ethereum, users can use DeFi applications such as Uniswap to exchange 100 USDC for DAI.

Competing Layer 1 can accomplish everything that Ethereum does, but it is difficult to say everything 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 Layer 1 has been launched in droves. During the same period, the total value of these networks soared from $0 to around $75 billion. The field is currently led by Solana, Avalanche, Terra and Binance Smart Chain, each with a growing ecosystem, valued at more than US$10 billion.

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Non-Ethereum Layer 1 led by TVL

All Layer 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. In order to bridge this gap, many Layer 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 existing wallets to easily access Layer 1 compatible with EVM, making migration simple.

Take 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, etc. Popular Ethereum application. Avalanche, Fantom, Tron and Celo also took the same approach.

In contrast, Terra and Solana currently do not support EVM compatibility.

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EVM compatible and non-EVM compatible with Layer 1 TVL

Interoperability chain

Generally speaking, Layer 1 represents the blockchain ecosystem, such as Cosmos and Polkadot. These projects are not building new independent blockchains, but building 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.

At present, there are more than 100 billion US dollars 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 instead of competing with the entire Ethereum. These ecosystems are closely integrated with the Ethereum community and host Ethereum applications in a complementary manner.

Axie Infinity’s Ronin side chain is a good example. Axie Infinity is an NFT game originally built on Ethereum. Since Ethereum’s high gas 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 gas fee environment. This makes the game affordable for more users and promotes the popularity of the game.

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

Polygon POS

Side chains like Ronin are application specific, while other side chains are suitable for more general applications. Currently, Polygon’s Proof of Stake (POS) sidechain is the industry leader, with a value of nearly $5 billion, and has deployed more than 100 DeFi and gaming applications, including Aave and Sushiswap, as well as a clone version of Quickswap called Uniswap. .

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 competing 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 a process called checkpointing).

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

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Layer 2(Rollups)

Both Layer 1 and sidechains face an obvious challenge, which is to ensure the security of their blockchains. To this end, they must pay a new batch of miners or equity verifiers to verify and ensure the security of the transaction, usually in the form of inflation of the underlying token, such as Polygon’s $MATIC and Avalanche’s $AVAX.

However, this also brings significant disadvantages:

  1. Owning the basic token makes the ecological network more competitive, rather than complementary to Ethereum;
  2. Verifying and protecting transactions is a complex and challenging task, and the ecological network will be responsible indefinitely.

Wouldn’t it be great if we could learn from the security of Ethereum to create a scalable ecosystem?

So, let us enter the Layer 2 network together.

In short, Layer 2 is an independent ecosystem on top of Ethereum, and its security depends on Ethereum. Crucially, 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 pays tribute to this idea by stating that Ethereum 2.0 will be “Rollups-centric.”

How Rollups work

Layer 2 is often called Rollups because they “Rollups” 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 individually, the calculations are offloaded on Layer 2 Rollups before submitting the results back to Ethereum.

However, when the results are released back to Ethereum, how does Ethereum know that the data is correct and valid? How does Ethereum prevent anyone from posting incorrect information? These key issues distinguish two types of Rollups: Optimistic Rollups and Zero Knowledge Rollups (ZK-Rollups).

Optimistic Rollups

When submitting results 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 it is correct, which is undoubtedly an optimistic outlook.

But there are ways to fight 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.

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 it is expected that these delays will decrease over time.

The key is that Optimistic Rollups has an inherent connection with Ethereum and is ready to help Ethereum expand today. Therefore, as many leading DeFi projects turn to leading Optimistic Rollups, such as Arbitrum and Optimistic Ethereum, we have seen strong initial growth.

Arbitrum and Optimistic Ethereum

Arbitrum and Optimistic Ethereum are the two main projects that implement Optimistic Rollups today. It is worth noting that both companies are still in the early stages and both maintain a level of centralized control, but both 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 in network value.

Optimisticism is 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.

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

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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

Optimistic Rollups always assumes that the transaction is valid and provides space for others to prove fraud. ZK-Rollups will actually prove to the Ethereum network that the transaction is valid.

As 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 transferring funds between Ethereum and ZK-Rollups is an effective instant operation.

Although instant settlement and no withdrawal time sound great, ZK-Rollups is not without trade-offs. First, generating valid proofs requires a lot of calculations, so high-performance machines are needed 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 was first introduced to the market and is more capable of solving the expansion problems of today’s Ethereum, but in the long run, ZK-Rollups may become a better technical solution.

ZK-Rollups adopts

The situation of ZK-Rollups is very deep, with multiple teams and implementations in work and production. Some well-known participants include Starkware, Matter Labs, Hermez and Aztec. Nowadays, ZK-Rollups mainly supports 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 more than $1 billion in TVL.

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However, what is really commendable is the ZK-Rollups solution, which is fully compatible with EVM and therefore 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.

Many people in the industry (including Vitalik) are considering combining ZK-Rollups with Ethereum 2.0 as a long-term solution for expanding Ethereum, mainly because they can fundamentally without compromising security or decentralization. It processes hundreds of thousands of transactions per second. As the process of expanding Ethereum continues, the upcoming ZK-Rollups, which is fully compatible with EVM, will become one of the key issues worthy of attention.

The “fragmented” 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 for users and carries potential risks. For example, several cross-chain bridges have become targets of attacks of more than 100 million U.S. dollars.

More importantly, the fragmentation of the multi-chain world has broken composability and liquidity. Consider that Sushiswap is currently implemented on Ethereum, BSC, 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, which limits usability and brings users and developers challenge.

Uncertain future

Will new Layer 1 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, I feel comforted that everyone can have so many smart teams dedicated to solving the most challenging problems faced by open, permissionless networks. Just as broadband ultimately helped the Internet support a series of revolutionary applications such as YouTube and Uber, we believe we will eventually look at these winning extension solutions in the same light.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/multi-chain-side-chain-and-layer-2-who-is-the-future-of-ethereums-expansion-plan/
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