It has to be said that developers and users have long been fed up with the high transaction fees of Ethereum. The latest data shows that the current average transaction fee of Ethereum is as high as $20, which is 8-10 times that of the peak in 2018.

In such a congested trading environment, almost all participants in the Ethereum ecosystem, such as developers, investors, and users, complained incessantly—except for the Ethereum miners who made a lot of money.

Some people compare Ethereum to the Internet in the mid-1990s, and believe that although the current Ethereum is bulky, expensive, and small in scale, the ecosystem of powerful users is still strong, and the vision of the future may be realized faster than imagined. However, the author believes that if the current congestion situation of Ethereum is not improved, it is likely to be caught up by many fast-growing public chain ecosystems, such as Polkadot and Cardano.

However, as Ethereum Layer 2 gradually gets more attention, the congestion status of Ethereum may be resolved.

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1. Layer 2 Observation: Deposits have soared, service fees have plummeted, and they are well received and applauded

At present, the most promising technologies of Ethereum Layer 2 are Optimistic Rollup and ZK Rollup. Although both are in the testing stage, the deposit scale and application development cannot be ignored.

Take Synthetix, an asset synthesis protocol, as an example.

On January 15th, the Optimistic Rollup expansion program, the Optimism team, launched the trial operation network of the Optimistic Ethereum mainnet. In the following month, the number of tokens pledged by Synthetix in the Optimistic Ethereum network has exceeded 6.62 million, with a value of more than 150 million US dollars.

Take the recently popular ZKSwap as an example.

According to the official news of ZKSwap, the total gas cost consumed by sending 9,000 transfers on Layer 2 (Layer 2 to Layer 1 on-chain fee) is 1,500 US dollars. In contrast, completing 9,000 transfers on the Ethereum mainnet requires a cost of 180,000 US dollars, and the transfer cost of Layer 2 on ZKSwap is only about 1% of that of Ethereum.

Regarding the recent progress of Ethereum Layer 2, Pan Zhixiong, research director of Lianwen, believes that how to build the Layer 2 ecology deserves attention, especially when it is combined with finance. This will not only bring performance improvements, but also a new experience and innovative product experiments that were completely unimaginable on Layer 1 before.

In addition, many applications can completely solve the experience and compatibility problems caused by the old protocol standards when grafting Layer 1 (for example, ERC-20 tokens need to be authorized before trading). For example, ZK Rollup, a Layer 2 expansion technology, has changed the paradigm of the Ethereum protocol itself, transformed the relationship between "computation" and "storage", and is expected to provide the Ethereum network with large-scale computing capabilities and reasonable data compression techniques under the chain. Provide a 100-fold expansion solution with almost no security loss, and even this solution may continue to play a role in other blockchain networks in the future.

Pan Zhixiong believes that the possible tipping point: when applications with a large number of users on Layer 1 are actually migrated to Layer 2, more users will flood in quickly, such as Uniswap and Synthetix, which are working hard in this direction.

Loopring COO (Chief Operating Officer) tweeted in January this year that all ERC20 should consider using Layer 2 now.

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2. Layer 2 technology flourishes

Optimistic Rollup and ZK Rollup are two technologies that are in charge of different teams, and each technology has different branches, and each branch is in charge of different teams.

There are two teams responsible for developing the ZK Rollup solution, namely the Matter Labs team and the StarkWare team. The Matter Labs team is responsible for the development of zkSync technology, and the StarkWare team is responsible for the development of StarkNet technology. The core difference between the two technologies is the adoption of zero-knowledge proof technology. The former uses zk-SNARK technology, while the latter uses zk-STARK technology.

There are also two teams responsible for the Optimistic Rollup solution, namely the Optimism team and the Offchain Labs team. The Optimism team is responsible for the development of OVM technology, and the Offchain Labs team is responsible for the development of Arbitrum Rollup technology. The core difference between the two is the different schemes of the fraud proof mechanism, which are divided into single-round interaction and multi-round interaction.

Although these technologies are currently in a very early stage, the speed of progress is worth watching.

The Optimistic Rollup mentioned above is an example. At present, Optimistic Rollup has been launched on the Ethereum mainnet. Although its functions are very limited, and only a few functions have been launched in cooperation with Synthetix, a lot of funds are still gradually migrating to this platform. In the Layer 2 network, the migration volume in one month has reached 150 million US dollars.

In addition to pure Layer 2 expansion technology, a new concept of "Layer 2 aggregator" has also emerged in the Layer 2 ecology.

Polygon is defined as the first structured, easy-to-use Ethereum scaling and infrastructure development platform. In addition to the currently completed Plasma chains, Polygon will also support other Layer 2 expansion solutions in the future, such as Optimistic Rollups, zkRollups, Validium, etc., which will make Polygo the first "Layer 2 aggregator" on the Ethereum chain.

The core component of Polygon is Polygon SDK, which is a modular and flexible development framework that supports building and connecting two mainstream expansion paths:

Secured chains (that is, two-layer chain): This type of path can rely on the security of the Ethereum network without establishing its own verification mechanism. In addition to the currently completed Plasma chains, Polygon will also support other Layer 2 expansion solutions in the future, such as Optimistic Rollups, zkRollups, Validium, etc., which will make Polygon the first Layer 2 aggregator on the Ethereum chain. In terms of use cases, this direction is more suitable for applications that require the highest level of security and emerging projects that are difficult to build their own authentication mechanisms.

Stand-alone chains (that is, side chains): This type of path can build side chains independent of Ethereum. The side chain network has its own verification mechanism and will be fully responsible for its own network security, but it can also provide better independence and flexibility. From the perspective of use cases, this direction is more suitable for projects that do not require the highest level of security (such as games) and projects with strong community strength (able to establish a sufficiently decentralized and secure verification mechanism by itself).

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3. After Layer 2, possible problems

Does this mean that Ethereum Layer 2 is omnipotent and has no flaws?

actually not.

The first is the issue of adaptability between different projects.

For example, in December 2020, Aleksander L. Larsen, co-founder of Axie Infinity, expressed his views on the relationship between Ethereum Layer 2 and blockchain game development, arguing that a startup based on another startup’s product is actually quite risky of.

Aleksander L. Larsen said that they have been paying attention to the impact of Ethereum scalability on applications a long time ago, and have also tested it on the Loom network before, but the entire industry is still in a very early stage. A startup company Based on the products of another start-up company, the risks are actually quite high, because everyone may adjust product positioning and direction at any time. We will use our own solutions to solve the problems we encounter, and gradually improve decentralization.

The second is the interaction problem between different Layer 2s.

The so-called interaction problem is the composability between different Rollup-based DeFi applications. In simple terms, if there are different DeFi applications on different Rollup chains, the information exchange between different Rollup chains will be faster than that of the Ethereum main chain. Information exchange on the Internet is more difficult.

Finally, in my opinion, Layer 2 itself will also have a negative impact on Layer 1 (Ethereum itself), which is directly related to the operating mechanism of Layer 2.

Simply understand, the operating logic of Layer 2 is to transfer the "transactions" (ETH transfer, ETC-20 transfer, DeFi interaction) that should have been processed on Layer 1 (Ethereum itself) to Layer 2, because the operating efficiency of Layer 2 is Layer 1 is hundreds of times larger, so as long as Layer 2 is officially launched, Layer 1 will be "relieved" from the current congestion situation. Both Optimistic Rollup and ZK Rollup can achieve this effect.

Layer 2 seems to be beautiful, but everything has its two sides. As we all know, the idea of ​​solving problems of Layer 2 is not based on improving its own (Ethereum, or what we call Layer 1) performance, but on the basis of relocating a large number of businesses. The consequence of this is that the usage frequency of Layer 1 has dropped significantly.

The sharp decline in the use frequency of Layer 1 means that the future ETH1.x will become a role like the "People's Bank of China" or "Federal Reserve", and can only issue currency according to a certain monetary policy, although the number of ETH issued in the future will increase. It is also less and less, but we know that ETH is an application-type smart contract project. Once the value of use declines, the currency price will no longer be supported by effective applications regardless of the monetary policy. Because the price increase logic of ETH is different from that of BTC. The former relies on application, while the latter relies on consensus. When the application is not there, it is only a matter of time before the currency price collapses.

Additionally, we’ve seen a lot of oddities on Ethereum that will soon be history, such as high gas fees.

Around February 10, the revenue of Ethereum miners reached 4 million US dollars within one hour, setting a new record (the last time was 3.5 million US dollars/h). This year, under the premise that Rollup technology has made great progress, a considerable part of the Ethereum DeFi projects will be migrated to Layer 2, the high cost situation will be greatly alleviated, and the high miner fee will become a history.

Perhaps with the development of Layer 2 technology, the following situation will appear: the price increase of ETH will be greatly limited, the fundamental reason is that the frequency of ETH usage has decreased, and the project tokens based on Optimistic Rollup and ZK Rollup will skyrocket. The number of project tokens also exploded in a blowout.