Ethereum, the world’s second-largest cryptocurrency by market capitalization, has been facing scalability challenges for years. With a limited capacity of transactions per second, the network is unable to handle the growing demand for decentralized applications (dApps) and decentralized finance (DeFi) services. To address this issue, Ethereum has been exploring Layer 2 scaling solutions.
For the definitions of layer 2, we have already published an article introducing All Layers of Blockchain, head toward this first and then dive.
To sum up, layer 2 solutions aim to increase the network’s transaction capacity by processing transactions off-chain. By doing so, layer 2 solutions can greatly enhance Ethereum’s scalability and reduce transaction fees, while maintaining the security and decentralization of the blockchain, which derived from the Ethereum mainnet.
The importance of layer 2 scaling solutions for Ethereum’s growth cannot be overstated. As more users flock to the network to use DeFi services and dApps, the need for a scalable infrastructure becomes increasingly urgent. Without it, Ethereum risks losing market share to its competitors who can offer faster and cheaper transactions, such as BNB Smart Chain, Solana, etc.
In this article, we will explore the current state of the layer 2 war on Ethereum, analyzing the major players in this space, technical and tractions consideration. We will also examine how the success of layer 2 solutions could impact Ethereum’s future growth and market capitalization.
II. Players in The Layer 2 War
Currently, the market share of Layer 2 is gradually being divided due to the appearance of many players using different technologies, the most popular being Optimism with the participation of Optimism and Arbitrum, zk -rollups with zkSync, dYdX, StarkNet, etc. However, Optimism and Arbitrum are occupying the majority of the pie, at the time of writing, both have 85% market share with the TVL of $5.8 billion. The remaining methods have not been developed yet, so the article will focus on the rollups solution with the participation of Optimistic rollups and zk-rollups.
Optimistic rollups like Arbitrum and Optimism utilize the optimistic approach to secure their network. At the time of their development, they represented an important incremental improvement over other available options. However, a widely held opinion including Vitalik Buterin, is that optimistic methods represent yet another temporary solution and in the long run the only permanent and truly scalable solution will be blockchains based on Zero-Knowledge proofs. For more specific technical differences between both kinds, refer to our previous article of zkSync.
Optimism and Arbitrum are two of the most prominent Layer 2 solutions currently available on Ethereum. Both solutions are based on Optimistic Rollup technology, which allows for faster and cheaper transactions by aggregating them off-chain and submitting them to the Ethereum blockchain as a single batch.
Optimism was the first Optimistic Rollup solution to launch on Ethereum mainnet, in July 2021. It offers fast and low-cost transactions, with an average confirmation time of around 5 minutes and a transaction fee of around $0.10. However, Optimism has faced criticism for its high gas costs for withdrawing funds from its Layer 2 solution, which can make it expensive for users to exit the network.
Arbitrum, launched in August 2021, is also based on Optimistic Rollup technology and offers similar benefits to Optimism. However, it has lower gas costs for withdrawing funds, making it more user-friendly in that regard. Additionally, Arbitrum is compatible with the Ethereum Virtual Machine (EVM), which makes it easier for developers to port existing Ethereum smart contracts onto the Arbitrum network.
Another type of Layer 2 solution that is gaining traction on Ethereum is zk-Rollups. Unlike Optimistic Rollups, which rely on fraud proofs to maintain the security of off-chain transactions, zk-Rollups use zero-knowledge proofs to ensure that transactions are valid without revealing their content. This results in even faster transaction times and lower fees, with some zk-Rollup solutions boasting sub-second confirmation times.
While zk-Rollups are relatively new to the scene, they have already gained significant attention from developers and investors. Projects like Starkware and Matter Labs are leading the charge in this space, offering high-speed, low-cost transactions that could potentially outcompete Optimistic Rollup solutions in the long run.
Ultimately, the choice between Optimistic Rollups and zk-Rollups comes down to a tradeoff between speed, cost, and security. Optimistic Rollups are currently more established and have a larger user base, but zk-Rollups offer the potential for even faster and cheaper transactions with stronger security guarantees. As the Layer 2 war on Ethereum continues to unfold, it will be interesting to see which solutions gain the most traction and how they shape the future of the network.
Although both types of rollups work with the goals of moving computation off-chain while keeping data on-chain in mind, optimistic rollups and ZK-rollups differ in a range of aspects in their modes of operation. The key difference between them is that optimistic rollups rely on fraud proofs, while zk-rollups rely on zero-knowledge proofs to verify changes to the main chain (a state transition).
III. Some Considerations
Rollups, while they borrow Ethereum’s core security guarantees, still come with some risks relative to Ethereum’s mainnet.
For one thing, a rollup’s smart contracts can contain bugs – not unlike any other program built on Ethereum. While fail-safes and audits should help prevent exploits, relying on an external program to handle transactions will always carry some added risk.
Both types of rollups are also still in their infancy, and as such the networks on which they operate are often somewhat centralized. In some cases, the developing team behind a rollup maintains partial control over the network, and can theoretically pause or switch it off wherever they like.
Many rollups also continue to rely on centralized “sequencers” to efficiently coordinate transactions on the layer 2 chain. A sequencer can’t spoof or alter transactions, but it could technically censor or re-order them to extract some benefit for itself.
Rollups generally plan to decentralize in some form. Optimism began the transition to community governance earlier this year, and advances to rollup technology should ameliorate some of the issues around centralized network control.
When it comes to technical comparisons between Optimism, Arbitrum, and zkSync, there are a few key factors to consider, including transaction speeds, gas fees, compatibility with existing Ethereum infrastructure, and interoperability with other Layer 2 solutions and blockchain networks.
In terms of transaction speeds, all three solutions offer significant improvements over the Ethereum main chain, with Optimism and Arbitrum offering similar processing times of around 2000 transactions per second, while zkSync offers even faster speeds of up to 3000 transactions per second.
Gas fees are also an important consideration, as high gas fees can limit the accessibility and usability of the Ethereum network. All three solutions offer lower gas fees compared to the main chain, with zkSync offering the lowest fees due to its use of zero-knowledge proofs. However, it's worth noting that gas fees can fluctuate depending on network demand, and fees may differ depending on the specific application or use case.
Another important factor to consider is compatibility with existing Ethereum infrastructure, including smart contracts and decentralized applications. Optimism and zkSync are both designed to be compatible with the Ethereum Virtual Machine (EVM), making it easier for developers to build and deploy applications on the platform. Arbitrum, on the other hand, uses a custom virtual machine which offers greater flexibility and functionality, but may require more effort to migrate existing applications to the platform.
Interoperability is also an important consideration, as it allows for seamless communication and exchange of assets between different Layer 2 solutions and blockchain networks. Optimism and Arbitrum both offer interoperability features, with Optimism's "Optimistic Gateway" allowing for cross-chain communication and Arbitrum's "Arb-OS" operating system enabling developers to build more complex and sophisticated applications. zkSync also offers interoperability with other blockchain networks through its zkPorter feature.
In terms of market insights, all three solutions have been gaining traction and adoption in the Ethereum ecosystem. Optimism has been used by major DeFi protocols such as Uniswap and Synthetix, while Arbitrum has seen adoption by projects such as Aave and Chainlink. zkSync has also gained adoption by various DeFi protocols and gaming applications.
However, it's worth noting that the Layer 2 market is still in its early stages, and it remains to be seen which solutions will ultimately emerge as the dominant players. Factors such as developer adoption, community support, and partnerships will likely play a critical role in determining the success of each solution.
IV. Implications for Ethereum Future
From a technical perspective, Layer 2 solutions for Ethereum offer a number of important implications for the platform's future. Perhaps most importantly, these solutions allow Ethereum to scale more effectively by offloading transactions to a secondary layer that operates alongside the main blockchain. This helps to alleviate congestion on the main chain, reducing the risk of network congestion and high transaction fees that can make it difficult for users to interact with the network.
In addition, Layer 2 solutions also offer new opportunities for innovation and experimentation with novel technical solutions. For example, some Layer 2 solutions employ new consensus mechanisms, such as rollups or sidechains, which enable faster transaction processing times without compromising on security or decentralization. This opens up new avenues for experimentation with different consensus models and approaches, potentially leading to the development of new and more robust solutions for blockchain scalability and security.
From an ecosystem growth perspective, Layer 2 solutions are also a key factor in enabling the continued growth and development of the Ethereum ecosystem. By reducing transaction fees and increasing transaction speeds, these solutions can attract new users and developers to the platform, and enable new use cases and applications that were previously impractical or impossible.
Moreover, Layer 2 solutions also help to foster a more diverse and vibrant developer community, as they enable developers to experiment with new approaches and technologies without incurring the high costs and risks associated with deploying on the main chain. This can lead to a more dynamic and creative development environment, which ultimately benefits the entire Ethereum ecosystem.
V. Closing Thoughts on Rollups and Future of These Solutions
ZK-rollups are here to stay. Even after Ethereum's upgrade, they will continue to help drive scalability and reduce transaction costs on the network while adding additional perks, such as privacy by default in some cases. This is by design, as the Ethereum network highly depends on these alternatives to continue growing towards its goals.
Although they have their fair share of drawbacks, such as the possibility for censorship and centralization, ZK-rollups offer better security than other rollup solutions, as they leverage Ethereum's security model. It’s also worth pointing out that these challenges are by no means permanent and that several ZK-rollup projects are already working to address them.
As the crypto space continues to grow, ZK-rollups will play a vital role in securing the continuity of several decentralized applications and use cases. As such, it’s not too unlikely that they will quickly move from relatively niche knowledge to a centerpiece of everyday crypto lingo.
The future of optimistic rollups looks bright, as they offer a compelling solution to the scalability and affordability challenges facing the Ethereum ecosystem. As the technology continues to mature and evolve, it's likely that we will see more use cases and applications emerge on the platform, which could drive adoption and growth even further.