Ethereum’s Layer 2 ecosystem barely existed a few years ago, yet at the end of last year, transacting addresses on the largest L2s had risen to nearly five million per day – a 400% increase over the previous year. While the roots of some technological innovations are endlessly disputed, the genesis of the L2 story can be traced back to a single event in December 2017. Cryptokitties, the first game based on Ethereum’s then-shiny new toy – NFTs – had just been released, and the cryptosphere had gone wild for it. So much so that it crashed Ethereum, caused gas fees to spike, and made mainstream headlines. It was the first time that Ethereum’s notorious scalability challenge had manifested, but it wouldn’t be the last.
CoinDesk reported in 2017 that developers were already aware of the issue, making reference to “proposed fixes,” including Ethereum’s move to proof-of-stake, because “solutions require major engineering work and are still unfinished.” That was a huge understatement. It would be another five years before Ethereum eventually switched to the new consensus model in September 2022.
In the meantime, the scalability challenge had caught the imagination of the blockchain research and development community, and Layer 2 technologies, focusing on relieving transaction congestion on the main chain, had begun to emerge. Initially, this turned out to be a process of trial and error, with sidechain projects like Plasma falling along the wayside. But by 2020, there was a new kid on the block(chain) – rollups.
Rollups involve bundling transactions into groups and processing them as a single unit on the underlying main chain, significantly alleviating traffic. They fall into two categories – optimistic and zero-knowledge, or ZK. Optimistic rollups, the tech underlying platforms, including Optimism and Arbitrum, use an “innocent until proven guilty” approach to validating rollup data, assuming that every off-chain transaction is valid unless shown otherwise. As such, they have a longer challenge period, creating slower withdrawals.
ZK rollups, pioneered by projects including Starkware and Polygon, generate a zero-knowledge validity proof for every batch of transactions and, therefore, are considered secure, final, and efficient.
The Dawn Of The L2 Summer
2023 emerged as a pivotal moment for L2s, with competition for users and developers heating up among the now-thriving ecosystem. In the summer of 2023, exchange giant Coinbase launched its own optimistic L2 platform as a challenger to established competitors Arbitrum and Optimism, while Coinbase’s old rival Kraken was reported to be in talks with projects, including Polygon, in a bid to launch its own L2 platform. It wouldn’t be the first to leverage Polygon’s established tools and architecture – Manta Network announced last year that it is leveraging Polygon’s modular, open-source development toolkit for developers on its own Zk platform.
All this development, combined with a surge in user activity, makes for a sunny outlook for the Layer 2 ecosystem. However, there are still many questions over the future direction. With projects choosing sides between optimistic rollup solutions and zero-knowledge implementations, will this turn into a winner-takes-all battle, or is it more likely that the ecosystem will prefer to tap into multiple models?
There’s also the question of Ethereum’s ongoing upgrade roadmap, which will ultimately see the implementation of danksharding, slated to enhance the network’s scalability to over 100,000 transactions per second. Will we even still need L2s if Ethereum finally delivers on true scalability?
Vitalik Buterin, the Ethereum co-founder, believes so. In a recent personal blog post, he observed that the L2 ecosystem is becoming more heterogeneous as more projects are drawn towards it, and he expects this trend to continue as initiatives attempt to differentiate themselves for different audiences. He’s also previously stated his belief that zk rollups could prove to be a more viable long-term solution than optimistic, while acknowledging that the latter is in a more advanced stage of development.
Amid the current crowded marketplace, it’s hard to tell, but tribal loyalties always run deep in the cryptosphere, and both optimistic and zk models have die-hard proponents as well as fierce critics. Either way, the competition is proving to be the ideal stimulus for development and adoption, meaning L2s appear set to play an instrumental role in the predicted upcoming bull market, given their increasingly important role in driving under-the-hood demand for ETH.
However, the under-the-hood element is also critical. Vitalik’s recent musings also allude to the fact that fee-free transactions will be a no-brainer for the global audience of mainstream users that the Web3 ecosystem has yet to engage on any massively successful scale. A mere passing observation? Or the next biggest milestone on the frontier of L2 development? Watch this space.
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