Did Layer 2 really scale Ethereum?

Has Layer 2 truly allowed for scalability in Ethereum?

Source: Footprint

The vision of building a secure and user-friendly decentralized network relies on the development of critical infrastructure. This vision is supported by a shared economic framework and has gained the support of billions of people. Layer 2 scaling solutions play a crucial role in building this foundation and enhancing the capabilities of Ethereum. These projects collaborate to form a powerful ecosystem that drives Ethereum to fully unleash its potential.

This article will delve into the innovations, narratives, challenges, and transformative impact of Layer 2 on the widespread adoption of Ethereum. Our analysis will be based on the data from the Layer 2 research page of Footprint Analytics, providing valuable insights into this evolving ecosystem.

Why do we need Layer 2?

Blockchain technology has long been appreciated for its decentralization, security, and scalability advantages. However, the “blockchain trilemma” suggests that achieving all three in a simple architecture is extremely challenging. Ethereum currently processes over 1 million transactions per day, but due to increasing demand, it often faces issues of network congestion and high transaction fees. To address this problem, Layer 2 networks have emerged as innovative solutions.

• Bankless Joint Creation What I learned about Solana on Solana BreakPoint
• Chainalysis India ranks first in grassroots cryptocurrency adoption.
• Conference Guide Devconnect Istanbul 2023 Schedule and Surrounding Activities (Continuously Updated)

The primary goal of Layer 2 is to improve transaction throughput by achieving higher transactions per second (TPS) while maintaining decentralization and security. These Layer 2 solutions aggregate multiple off-chain transactions into a single Layer 1 transaction to achieve this objective. As a result, transaction costs are significantly reduced, making Ethereum more user-friendly and inclusive for a wider range of users.

Types of Layer 2

Currently, there are three main types of Layer 2 solutions: Rollups, State channels, and Plasma.

Rollups

As a Layer 2 solution, Rollups aggregate multiple transactions into a single transaction on Layer 1, saving user costs by distributing transaction fees among participants within the Rollup. Rollups primarily come in two types: Optimistic Rollups and Zero-knowledge Rollups (ZK-Rollups). Optimistic Rollups utilize fraud proofs to ensure the validity of off-chain transactions, while ZK-Rollups enhance privacy and security through zero-knowledge proofs.

Examples of Optimistic Rollups include Arbitrum (Arbitrum One), Optimism (OP Mainnet), and Base.

• Arbitrum, launched by the Offchain Labs team in August 2021, has become one of the top players in the industry, occupying over 50% market share. Through the Nitro upgrade, Arbitrum achieves full EVM compatibility, allowing developers to seamlessly migrate smart contracts from Ethereum to Layer 2 with minimal or no modifications.

• Optimism is the second largest Ethereum Layer 2 solution, which soft-launched in January 2021 and fully opened to the public in December of the same year. Optimism adopts an EVM equivalent architecture, providing a seamless scaling solution for Ethereum applications.

• Base is a collaboration with Optimism, built on the OP Stack, and went live on the mainnet in July 2023. Within a few short months, it achieved great success, capturing the third largest share in the Layer 2 market. Base was incubated by Coinbase, leveraging Coinbase’s expertise in building crypto products.

On the other hand, applications of ZK-rollup include zkSync Era, Starknet, Linea, and Polygon zkEVM.

• zkSync Era is the world’s first zkEVM blockchain, launched on the mainnet for all users in March 2023 and quickly gained the fourth market share in the Layer 2 market. In terms of user activity (including TPS and transaction volume), zkSync Era has become the dominant Rollup solution.

• Starknet went live on the mainnet in November 2021. It uses the STARK cryptographic proof system, achieving security, low cost, and high performance. Starknet uses Cairo as the development language and is not compatible with EVM. There are current efforts to achieve compatibility between Solidity and Cairo through a translator called Warp.

• Linea, a Layer 2 solution owned by ConsenSys, went live on the mainnet in July 2023. It provides EVM compatibility, allowing developers to easily migrate and build applications on its network.

• Polygon zkEVM’s public testnet was launched in March 2023, aiming to be EVM equivalent. Polygon (formerly Matic) is a blockchain platform that provides diverse blockchain solutions. Polygon zkEVM is one of the products of Polygon.

State channels

State channels are a mechanism that allows participants to conduct fast and unrestricted off-chain transactions and settle the final results on Ethereum. This approach can reduce network congestion, fees, and transaction latency.

• Raiden Network is an off-chain scaling solution that focuses on researching state channels technology, defining protocols, and developing reference applications. It enables near-real-time, low-cost, and scalable payment functionality, compatible with ERC20 tokens on Ethereum. The network aims to improve scalability and usability while maintaining compatibility with the Ethereum ecosystem.

Plasma

Plasma chain is an independent blockchain linked to the Ethereum main chain through anchoring and utilizes fraud proof (similar to Optimistic Rollups) to resolve disputes.

• OMG Network utilizes Layer 2 Plasma architecture, providing strong security guarantees and high throughput. It offers a scalable solution for third-party developers looking to build decentralized payment applications on Ethereum.

Data Insights

Consensus is forming: Ethereum will achieve widespread adoption, it’s just a matter of time. So, how is it progressing?

Similar to the spread of other technologies, the adoption trajectory of Ethereum can be described by the classic bell curve. It started with a small group of innovators quickly embracing the technology, then attracting early adopters. As Ethereum continues to develop and mature, it gradually expands its coverage, attracting the majority of both early and late adopters and eventually entering the phase of mass adoption. Ultimately, in the final stage of adoption, the technology will benefit the remaining population, the so-called “laggards.”

Let’s explore the impact of Layer 2 on Ethereum’s widespread adoption from the following perspectives:

Total Value Locked (TVL)

Total Value Locked (TVL) is considered a leading indicator of adoption.

As of the end of October 2023, Arbitrum leads by a wide margin with a TVL of $6.04 billion and a market share of 61.03%, solidifying its position as the market leader. Optimism follows closely with a TVL of $2.598 billion and a market share of 26.41%, demonstrating its broad adoption and user engagement.

Other chains make up the second tier but lag far behind with less than 5% market share. The newly introduced Base, which went live on the mainnet on July 13, 2023, takes third place with a TVL of $463 million. zkSync Era ranks fourth with a lock value of $451 million, while Starknet ranks fifth with a TVL of $135 million.

Data source: Layer 2 Overview

Number of Users and Transaction Volume

User activity, such as the number of unique users (bridgers) interacting with Ethereum and transaction volume, is a key metric for measuring adoption.

Among various Layer 2 solutions, zkSync Era leads by a significant margin, accumulating 2.67 million unique users, accounting for 37.10% of all Rollups, and facilitating 2.23 million transactions, representing 50.84% of Rollup activity. zkSync Era’s initial airdrop campaign attracted a large number of users and has maintained its leading position since then. In terms of transaction volume, Starknet closely follows with 1.7 million transactions, accounting for 23.70% of Rollups.

Base and Linea, launched on the mainnet in July 2023, have gained popularity in the market. They have surpassed Optimism and Polygon zkEVM in terms of user participation and transaction volume.

Transaction Throughput

Transaction throughput is one of the major scalability challenges frequently discussed in the blockchain community.

Currently, the processing capacity of the Ethereum mainnet is about 15 transactions per second (TPS). In comparison, Visa has the ability to process about 24,000 TPS, while Mastercard can handle 5,000 TPS.

Layer 2 is closing the gap. In October, well-known Rollup solutions such as Arbitrum and zkSync Era had an average TPS of about 9.5 to 10, which is the closest performance to Ethereum among existing Rollups. Rollups have made significant contributions to scalability, with total transaction throughput in October exceeding the Ethereum mainnet by 321%, and the scalability coefficient reaching 4.21.

Although Rollup technology helps improve scalability, currently no Rollup exceeds Ethereum in terms of throughput. Attracting and retaining users in a bear market is challenging for both Layer 1 and Layer 2 networks. Building a thriving Layer 2 ecosystem requires not only robust solutions but also high-traffic applications. Furthermore, the lack of seamless interaction between multiple Layer 2s and between Layer 1 and Layer 2 affects user experience, such as the need to switch wallets and incur liquidity costs.

Cost

Layer 2 plays a crucial role in reducing Ethereum network costs. By consolidating multiple off-chain transactions into a single Layer 1 transaction, transaction fees on Ethereum are significantly reduced.

According to Footprint Analytics, in October 2023, the average transaction fee for Rollup was 3% to 10% of Ethereum.

Data source: Average Gas Fee

These numbers indicate that Layer 2 is becoming increasingly popular and adoption is growing, highlighting their potential in alleviating Ethereum congestion and improving scalability.

Innovation in Layer 2

In the ever-changing field of blockchain technology, leading Layer 2 solutions such as Optimism, zkSync, and Arbitrum actively pursue innovative approaches to address ongoing challenges and maintain a focus on interoperability. These well-known participants maintain a fast pace of innovation in technology and applications, striving to stay ahead and maintain a competitive advantage in the market.

Superchain, proposed by the Optimism ecosystem, is a network composed of multiple networks that share a common code library called OP Stack. The framework aims to establish an interoperable environment where various Layer 2 networks can communicate and transact with each other, similar to how the Internet enables communication between devices. By providing horizontal scalability, Superchain addresses challenges related to traditional multi-chain architectures. These challenges include different security architectures between parallel chains, which may increase system risks as more chains join, and the cost of establishing new nodes for each added chain.

Source: Superchain – OP Stack Docs

In June 2023, zkSync introduced Hyperchains, a new type of network that runs as a fractal instance of zkEVM. These Hyperchains run in parallel with Layer 1 for settlement and can be flexibly used as Layer 2 networks with zkSync Era or as Layer 3 Validium networks. Hyperchains in the zkSync ecosystem can be developed and deployed by anyone without permission. To ensure trust and seamless interoperability, each Hyperchain must be driven by the same zkEVM engine on the ZK Stack. GRVT is the first Hyperchain in the zkSync ecosystem, serving as a hybrid cryptocurrency exchange that combines the advantages of centralized and decentralized exchanges. Its alpha version is expected to be released for internal testing in November 2023, followed by the mainnet version in the first quarter of 2024.

Source: Architecture – GRVT

Arbitrum Stylus, launched by Arbitrum in August 2023, allows developers to write smart contracts using various programming languages such as Rust, C, and C++ on its Layer 2 network. In addition to Solidity, developers can now use WebAssembly (WASM) compatible languages to write smart contracts. WASM enables the execution of Rust and C++ code on the network, and Arbitrum Stylus enables running such code on the blockchain. Stylus introduces a second EVM-compatible virtual machine, providing a new way to write smart contracts.

The Narrative of Layer 2

Since 2022, Layer 2 itself has become an important narrative in the cryptocurrency field. Narratives play a crucial role in shaping public perception and influencing market trends in the Layer 2 space. These narratives provide insights into the future of Layer 2 and Ethereum as a whole.

Full-chain gaming. These games utilize blockchain to replace centralized game servers, putting all aspects of the game on the chain, including assets, logic, state, and storage. Starknet and COMBO (currently running on testnet) have positioned themselves as key supporters of full-chain gaming within the public chain domain.

Modular blockchains. Initially, blockchains adopted a monolithic design, where a single blockchain handled all tasks. However, the concept of modular blockchains emerged, focusing on specific functionalities instead of attempting to cover every functionality. Celestia is the first modular blockchain network. It is ready and announced its airdrop and launch plans in October 2023.

Zero Gas Fees. Gas fees have always been a major obstacle to widespread adoption of Ethereum. To address this pain point, GasZero (currently running on the testnet) has emerged as a Layer 2 network that offers a unique solution: no gas fees for trusted end users. On GasZero, users can interact with decentralized networks and smart contracts without having to pre-fund any tokens in their wallets.

Layer 3. The concept of Layer 3 in the blockchain industry currently lacks a widely accepted definition. Ethereum co-founder Vitalik Buterin believes it’s too early to define it explicitly, as the architecture of the multi-rollup ecosystem is still evolving, and most discussions are still theoretical. However, Vitalik shared three possible future scenarios for Layer 3:

• Layer 2 for scalability, Layer 3 for custom functionalities like privacy protection.

• Layer 2 for generic scalability, Layer 3 for custom scalability.

• Layer 2 for trustless scalability (Rollups), Layer 3 for weakly trust scalability (Validiums).

Challenges for Layer 2

As an alternative to the congested Ethereum network, economically efficient Layer 2 networks are gaining attention. While cautiously scaling certain capabilities, maintaining a robust base layer is crucial. The Ethereum community encourages the development of technology and applications, but it is essential to strike a delicate balance between user-friendliness and the benefits of decentralization, as emphasized by Vitalik Buterin at the Ethereum Hong Kong Hackathon in October 2023.

According to Vitalik, Layer 2 faces four key challenges:

• Proving the security and decentralization of the system. Validity (zero-knowledge) proofs and fraud proofs are used to prove the legitimacy of transactions without processing them on the Ethereum chain. However, validity proofs face centralization issues due to their dependence on specific hardware.

• Decentralization of sequencers. These sequencers validate, order, and compress transactions before they are sent to Layer 1. However, this centralized setup has been criticized for its potential to become a single point of failure, introduce audit vulnerabilities, or be easily shut down by authorities.

• Cross Layer 2 wallets. They enable seamless interaction across multiple Layer 2 solutions without the need to switch wallets.

• Data availability. It refers to the availability of on-chain data, i.e., storing complete copies of blockchain data to verify transactions. It’s worth noting that solutions like Validiums and Optimiums are often not categorized as Layer 2 because they don’t publish data on Layer 1. Instead, they introduce additional trust assumptions on top of Layer 1.

In addition, as mentioned earlier, currently no Layer 2 network can surpass Ethereum in terms of throughput. The urgent task is to develop the ecosystem of Layer 2.

• Ecosystem and applications. Currently, most applications in the Layer 2 network ecosystem are DeFi applications. They need to introduce more types of phenomenal dApps for Layer 2 to expand its ecosystem, attract more users, and encourage them to stay.

Conclusion

In conclusion, by effectively addressing the scalability and cost challenges that hinder the development of Ethereum, Layer 2 networks are driving Ethereum towards mass adoption. These networks provide innovative solutions, increase transaction throughput, reduce fees, and make Ethereum easier to use and more inclusive to a wider audience.

In addition to Ethereum’s Layer 2 networks, opBNB has emerged as a response to the scalability challenges for the BNB chain. In September 2023, opBNB successfully launched on the mainnet. In fact, facing these challenges, the measures and future development directions of other public chains are also highly anticipated. The focus for everyone remains on ecosystem development and attracting users. Infinite possibilities lie ahead, and each public chain will embark on its own unique path towards scalability and mass adoption.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!