What does Layer2 mean to the crypto world?

As early as a year ago, Ethereum had problems with network congestion and high gas costs. At that time, the concept of Layer 2 had been mentioned. It’s just that at that time, the feeling that L2 gave us was more like Ethereum’s defensive measures in order to compete with other public chains in the market. However, up to now, the topic of L2 is getting hotter and hotter, and the significance of L2 to the entire crypto world does not seem to be just as a “defense mechanism” for Ethereum.

Impossible triangle and monolithic blockchain

First of all, let us go back to the source, starting from the impossible triangle of blockchain.

The impossible triangle of blockchain points out that due to technical limitations, you can only improve two of the three attributes of the blockchain at the same time, and you must sacrifice one of them.

These three attributes (and their technical points) are:

1. Decentralization: the number of network nodes; whether there is a central node;

2. Security: the difficulty of attacking the network;

3. Scalability: system data throughput and TPS.

In addition, the realization of these three attributes requires corresponding underlying components, which are:

1. Consensus: Provide security and define the authenticity of stored data.

2. Execution: Convert the old state to the new state, this process needs to be completed through calculation execution. (Update block N to N+1)

3. Data availability: The authenticity of the quoted data (all the data constituting the block N) is guaranteed through the main chain.

At the beginning of the design of BTC, because it saw the trust risk of centralized institutions, it chose a sufficient degree of decentralization. At the same time, as a financial payment system, it also needs sufficient security, so it has to give up scalability. After that, most public chains have chosen POW mechanisms (such as ETH, etc.). The purpose is to be sufficiently decentralized and secure, so the scalability is very poor, so the popularization of blockchain has always been a problem.

In fact, we have always been bound by the Impossible Triangle. The main reason is that most blockchains are currently trying to complete the three things of consensus, execution and data availability on L1 (main chain) at the same time , which has caused the current dilemma.

For security and decentralization, we have reduced the supply of block space and lowered the hardware requirements of nodes , so that everyone can participate in the network to become nodes, but this also prolongs the transaction time and makes the scalability very poor. .

However, if the number of nodes is reduced, although there are fewer computers to perform redundant calculations, it also means that we can only trust a few nodes, and the degree of decentralization will be weakened.

In short, in the past 10 years, in order to ensure the centralization and security of the blockchain, we have reached the limit of its scalability.

This kind of blockchain that is responsible for the three underlying components of consensus, execution and data availability at the same time, we call it a monolithic blockchain, the road of monolithic blockchain seems to have come to an end.

Rollups solution and modular blockchain

So let us change our thinking, let the person responsible for the consensus only be responsible for how to make the consensus, let the person who executes the transaction be responsible for improving the transaction efficiency, and everyone will divide the labor and cooperate. Can this solve the dilemma of the monolithic blockchain “impossible triangle”? ?

Let’s take the Rollups solution of Ethereum L2 as an example.

L2 will create an off-chain transaction execution environment independent of Ethereum L1, and update the state of L1 after processing the transaction. In addition, Rollups can increase the transaction speed of the execution layer by two orders of magnitude, while reducing transaction costs by an order of magnitude (there is still room for optimization), and at the same time, it does not have to bear the cost of maintaining consensus and data availability.

Specifically, Rollups compresses transaction batches and releases a single state root update to the Ethereum main network from time to time. The state root update contains the results of many transactions that occur at the Rollups layer.

Rollups L2 does not need to focus on consensus and data availability, but only needs to focus on improving transaction efficiency. Because the Rollup network requires only a small number of nodes (or directly 1 node) to be active at any time, its maintenance cost is very low. But there is no need to worry about its security and decentralization issues, because Rollups is closely related to Ethereum L1 in an encrypted manner, and Ethereum L1 is responsible for security and decentralization.

This kind of architecture of the blockchain, we call it a modular blockchain.

Simply put, the modular blockchain means to split the three underlying components of consensus, execution, and data availability that the current L1 main chain is responsible for at the same time, so that each level can only focus on improving its own level of work. Efficiency, so as to realize the division of labor and form a modular form.

In fact, we have a similar operating mode in real life. For example, our commonly used Alipay and WeChat, as platforms, are like L2, responsible for executing transactions, and the settlement and security of the cash on our bank cards are actually in charge of the commercial bank’s system, which is like It is L1.

The modular form can greatly improve our transaction efficiency.

Ethereum’s modularity

We explained the first step of Ethereum modularization—Rollups. Next, let’s take a look at the other two steps—POS and Sharding.

Through the PoS mechanism, Ethereum no longer needs a specific computer to be responsible for network security. Now theoretically all computers can be used to be responsible for network security.

The current Ethereum PoS beacon chain reduces the economic cost of running a verification node to 32 ETH and a computer, which increases the potential total number of blockchain verifiers. Although the cost of 32 ETH is still relatively expensive, it is already an order of magnitude lower than the smallest feasible POW mining (starting at millions of dollars).

Moreover, decentralized staking pools such as Lido and Rocketpool or third-party project parties allow users to gather any amount of ETH for staking, making the limit of 32 ETH no longer a hard condition, which increases the number of potential validators , It also strengthened the decentralization of the Ethereum network.

In addition, after the transfer of POS, the scenario where 10 million ETH is pledged to be considered safe is really expected to be realized-10 million ETH pledged, each validator pledged 32 ETH, which is equivalent to 312500 in the network Verifiers.

When ETH is transferred to POS, the entire network will have a modular security resource pool (validator pool), forming a strong consensus layer (may be worth 40 billion U.S. dollars), and sufficient decentralization can evolve into a provider The infrastructure of the consensus layer.

Sharding (sharding technology) allows security redistribution on more sharding chains instead of concentrating the security of the entire system on one chain. Because letting 300,000 validators protect a monolithic blockchain is an inefficient way of resource allocation. And if these validators are allocated to multiple shard chains (64 shard chains will be online in the first phase).

Ethereum L1 can create 18 monolithic Ethereum by allocating approximately 4,500 validators on each shard chain. (At first, the realization of 64 shard chains did not mean that we increased the capacity of Ethereum by 64 times, but the number of Ethereum chains we had increased by 64 times, but the capacity of each chain would be 1/ 3. So the overall size will increase about 18 times)

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The beacon chain after the transfer to POS is the dispatcher of system resources. Through random sampling, the beacon chain assigns each verifier to a specific shard chain and makes them responsible for the verification work in the shard chain; and all verifications Players will be randomly assigned again in each epoch (about 6 minutes). In general, sharding maximizes the available block space in L1!

The beauty of modular design is that the optimization of each module amplifies the optimization (synergy) of other modules.

Increase the decentralization of the network through POS, which in turn increases the number of shards on Ethereum;

Add more shards on Ethereum L1, which can increase the number of Rollups in L2 by an order of magnitude;

The increase in the scale of Rollups will bring about new feasible types of on-chain transactions, which will eventually increase the overall fee that Rollups pays to L1;

The more net transaction activity that occurs on Rollups, the higher the total fee paid when buying L1 block space. Gas war will be triggered between L2, which will trigger the need for increased computing resources without increasing additional inflation. Down (more verification nodes are added, but the price of ETH will rise due to burning deflation,) the network adds more computing resources

These computing resources can be used to create more shards, and more shards mean faster transaction speeds. (The first stage of Ethereum is to achieve 64 shards, but its ultimate goal is to increase to 1024 shards. According to Moore’s Law, and as home computer CPUs become more powerful, the number and capacity of shards will increase. )

The combination of sharding and Rollups turns computing resources into network assets instead of liabilities.

Economic sustainability of modular blockchain

After the modularization of Ethereum, in addition to being feasible in technical architecture, it is also economically feasible in line with common sense.

The encrypted economy system pays the network security providers (POW miners or POS verifiers) by using transaction fees and issuing new coins.

The more transaction fees that a blockchain network can collect, the fewer new coins it needs to issue, the lower the inflation rate of the entire network, and the more valuable the coin will eventually be.

We can compare Polygon, Solana and ETH inflation and fee consumption:

Polygon’s PoS network collects approximately US$50-100,000 in transaction fees per day, or US$18-36 million per year; however, at the same time, Polygon is allocating more than US$400 million in annual inflation rewards;

The daily transaction fee collected by Solana’s POS network is around US$100,000, or US$36 million per year; however, Solana is issuing an even more shocking annual inflation reward of US$4 billion;

In contrast, under the POW mechanism of ETH, the daily transaction fee collected is at the level of 60 million US dollars, which is about 22 billion US dollars per year. At the same time, the annual inflation reward of ETH is about 20 billion US dollars. (At present, Ethereum produces one block in about 15 seconds, and each block rewards 2 ETH. It is calculated that the inflation rate is 11,500 ETH a day and 4.2 million ETH a year)

Moreover, after ETH is converted to POS, the inflation rate is lower. The annual inflation is expected to be around 570,000 to 1 million ETH. Through comparison, it can be seen that in the long run, the economic sustainability of Ethereum after modularization is enhanced. , The market competitiveness is also stronger.

Future predictions for Layer 2

Rollup, which separates the execution trading environment from the main network, divides ETH into a consensus module (on the chain) and a transaction module (off the chain), which creates a huge imagination for the market. As a result, we have made speculations on the future market conditions on the premise that Rollups is the most ideal network solution at the moment :

2022 will be the first year of L2. Many teams will start to create their own L2 to expand the market. The L2 network does not need to worry about the huge maintenance cost of the consensus/security layer. All they need to do is to pay Ethereum L1 for Gas costs for storing proofs and data to provide security guarantees for themselves so that they can concentrate all their attention to improve their execution/calculation process.

Secondly, the off-chain environment makes use of Rollup for rapid iterative updates. This architecture allows new technologies and cost-efficiency optimization functions to be deployed faster. Moreover, L2 in the form of Rollup is compared to many projects called ETH sidechains. It has legitimacy; compared with many EVM public chains, it also has the security and decentralization brought by Ethereum, so the L2 market has great potential.

As the market advances further, there will be some L1 side chains or old public chains who find that they are not competitive, and they can only abandon their costly consensus layer and data availability layer and transform into Ethereum’s L2, pack lightly, and concentrate on operating themselves. The ecology of the currency, the price of the currency ushered in a wave of revival (by transforming into the L2 network on Ethereum.

Not only can they continue to retain their own native tokens, communities, applications, etc., they will also benefit from the entire Ethereum ecosystem without having to worry about the consensus/security layer).

Going on, there will definitely be web2 Internet giants, because Rollup’s operation method is not more familiar to them in the web2 era. They will use this method to quickly enter the Web3 era, and then focus on building their own excellence. Application, no longer worry about security and degree of decentralization.

In the next four years, in the next cycle, there will be a “public chain” war. Topics such as technology, capital, users, and culture will be discussed repeatedly, but at this time the protagonists will no longer be L1s, but L2; The top Rollup L2 ecosystem will surely prosper, and the valuation will rise to 100 billion U.S. dollars; then capital will raise the valuation of all L2s to around ten billion U.S. dollars.

Finally, Ethereum will gradually evolve into a cloud-based blockchain infrastructure, providing the world with a strong consensus layer that has been tested (two rounds of bulls and bears) and built with huge economic costs to provide security and decentralization. , All Rollups purchase expensive block packaging fees from it to complete on-chain settlement. As a result, everyone will gradually accept Ethereum as the first public neutral global settlement network in future history.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-does-layer2-mean-to-the-crypto-world/
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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