Why are L2, Rollup important?

Tier 1. Tier 2. side chain. Rollup.

Web3 is full of jargon, so let’s first set the stage and provide an easy way to think about the field.

If you’ve browsed crypto Twitter, you’ve probably heard people mention Layer 1 (L1) like Bitcoin/Ethereum and Layer 2 (L2) like Arbitrum/Optimism. If you’ve listened carefully, you’ve probably heard people mention sidechains like Polygon PoS and Rollup like StarkNet. If you’ve gone down this rabbit hole, you probably know that there are many other types.

However, for this article, we will ignore all of them.

Instead, we will simply treat each solution as a blockchain. Whether L2 and Rollup are technically blockchains is an esoteric topic for debate, but it’s useful to think about them this way.

Evaluate the blockchain

Now we have a bunch of blockchains – which are the best?

Each blockchain can be evaluated based on different properties. According to the following main characteristics:

  • performance
  • cost
  • Safety
  • decentralization

Let’s unpack them through a non-technical end-user perspective.

Performance refers to bandwidth and throughput—how many transactions a blockchain can process at one time and how fast it can process them. This is similar to how many lanes a highway has (bandwidth) and a speed limit (throughput). As far as the end user is concerned, performance is how fast an application runs – whether the application is sending money to someone, trading one asset for another, or tweeting on Web3 Twitter.

The cost is pretty simple – how much the end user has to pay for the blockchain to use the app.

Performance and cost are easy to talk about and make all the headlines.

“New L1 financing $1 billion, TPS 1 billion, zero handling fee!”

In turn, many people entering the Web3 space place disproportionate importance on these two attributes. Sometimes people only think about one of the two – just see one blockchain as cheap and the other as expensive. To be fair, this is how most of us are accustomed to evaluating technology products, but with blockchain, there are more.

Two other properties are security and decentralization.

Security can be confusing because people use it to mean all the different things, and you usually see blockchain experts discussing it when talking to each other. In this Twitter thread, Polynya nicely breaks down security into three components. Two are hard to build:

  • Economical security: In a proof-of-stake (PoS) blockchain, users gain meaningful control over the network if they own a majority of the “stake” tokens. Since the system relies on tokens that generate value (the more expensive the tokens, the harder it is to buy most of them), it is very important for a blockchain to have a sound monetary policy and build the credibility of its currency over time important.
  • Protocol stability: The protocol is implemented in software, and the software is at risk of bugs. In software development, there are some best practices to minimize errors, such as keeping the software simple (fewer lines of code means less room for errors) and keeping the upgrade process conservative (more testing time). Examples in the blockchain context include protocol decisions not to add functionality to on-chain governance, and taking longer to upgrade as total value locked (TVL) grows.

Decentralization is hotly debated, and like security, it can mean many things.

Balaji wrote a comprehensive article on the topic‌, breaking down the blockchain into subsystems. However, he did admit that “some of these decentralized subsystems may be more important than others” and for simplicity we will focus only on nodes and ownership. Polynya also wrote an article that highlights these two key aspects.

  • Node decentralization: How easy is it for the average person to run blockchain software (become a network “node” and verify transactions), and how many people are actually doing it? If you run a node, no one can change your protocol rules because your computer will reject invalid transactions. If the software can run in the background on a laptop or phone, more people will run it (it can even integrate with devices) If the software requires expensive servers in the cloud, fewer people will run it .
  • Decentralized Ownership: We said earlier that in a proof-of-stake blockchain, if one person owns the majority of the staked tokens, they can exercise meaningful control over the network. It’s not good if one or a few people own tokens that are close to the majority, so it’s important to distribute tokens widely.

a few examples

Now that we know the evaluation criteria, we can look at some examples.

  • Solana: great performance and cost
  • Ethereum: Good at security and decentralization
  • StarkNet: Excellent performance, cost, security and decentralization

Solana has built a strong brand around speed, and of course there’s a lot of hype. When using Solana, you feel like you are using a typical Web2 application. Of course, you still have to pay transaction fees, but they are negligible.

On the downside, this is subsidizing the cost of running nodes through the need for very powerful and expensive computers to run nodes (leading to poor decentralization over time) and an unsustainable token economy (leading to poor security). As a two-year-old project, Solana’s token distribution and protocol stability are still subpar.

Ethereum makes the opposite tradeoff. It is the most secure programmable blockchain to date – in its current form of proof-of-work (PoW) or what will soon be proof-of-stake (PoS). With around $23 billion in ETH currently staked, it’s a solid monetary asset and the protocol has proven stable over the past six years. Ethereum also maintains low hardware requirements to run nodes and a culture of promoting behavior.

The downside is that the scarcity of ideal block space leads to congestion and high transaction fees, greatly limiting the types of applications and users that can utilize the network. Over the past few years, Ethereum has performed well for high-value/low-throughput use cases like financial services, but not so well for low-value/high-throughput use cases like social media.

Are two sets of trade-offs feasible?

This is unlikely. Chains that ignore security and decentralization will be unsustainable in the medium to long term — a view supported by fundamental economics and predictable hardware predictions.

Next up is Rollup!

StarkNet and other similar Rollups (blockchains) solve this problem and unlock the best of both worlds. The way they do it is by focusing on performance and cost while inheriting security and decentralization from another blockchain using fancy cryptography.

We won’t delve into how Rollup technically works, but will boil down its benefits to the specifics. If you are using an application built on StarkNet, you will benefit from the security and decentralization of Ethereum under the hood. For example, even if the StarkNet operators are corrupt, it is mathematically impossible for them to steal your funds unless they also disrupt the Ethereum network.

Thanks to the cryptographic guarantees, Rollup can focus on optimizing performance and cost to support high- and low-value applications. As a related example, developers could fork Solana and adapt it to Ethereum Rollup. Even better, a group of developers could deploy a bunch of Solana, all running in parallel and inheriting the security and decentralization of Ethereum.

Back to StarkNet – developers could also design Rollup from scratch to be faster and cheaper than Solana, which is certainly what many are doing. Design space is wide open!

You might be thinking now: “Sounds good, but what’s the problem? Solana is everywhere, and this is the first time I’ve heard of StarkNet. Why would people choose a solution that doesn’t have an advantage?”

The reality is that most Rollups are still in their early stages, and building them has only become fashionable in the past few years. Before that, VCs were more inclined to fund “Ethereum killers” than solutions built on Ethereum. Even Polygon, which has already invested $1 billion in Rollup development, has had to accept a competing L1 narrative to some extent to get off the ground.

More importantly, the magic behind Rollup is based on state-of-the-art cryptography. This is tough math and takes longer to deploy than simply copying the code of an existing blockchain.

Despite the above challenges, some rollups are performed with training epochs enabled (such as a centralized sequencer), while others are just around the corner.

early signal

Developers and users cannot be expected to sit still, so naturally, applications and supporting infrastructure (such as wallets and fiat on-ramp) are built around available solutions. Fortunately, some Rollups are compatible with existing blockchains, making it easy for developers to port applications. Likewise, migrating from Ethereum to Avalanche is trivial, and as they mature, migrating from Avalanche to EVM Rollup will be trivial.

So, are there any Rollups that are attractive today?

Yes! Actually a lot. E.g:

  • dYdX has about $1 billion in TVL in its decentralized exchange Rollup.
  • Immutable X, an NFT-specific Rollup, is working with some impressive businesses like Mastercard and Gamestop, which are building an NFT marketplace.

StarkNet recently launched their alpha product on the Ethereum mainnet, which has shown impressive adoption.

Why are L2, Rollup important?

If early activity is any indication, Rollup’s future looks bright.

Why Rollup Matters

The need for strong security and decentralization is intuitive when dealing with valuable assets, but less so when playing games or scrolling through social media feeds.

It starts to make more sense when you recognize the mid- to long-term connection to application sustainability. If you know that social media platform A will go out of business in 2-3 years and social media platform B will last for decades, you might start posting on social media platform B and build your reputation.

Hopefully this article has helped guide your thinking, whether you’re building or using a blockchain application.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-are-l2-rollup-important/
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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