MEXC Exchange Research: In a World of Layer2 Solutions, Who Fired the First Shot?

Before the arrival of Ethereum 2.0, Layer2 was the most important thing in the blockchain world. No matter the developments of the NFT or DeFi market, they all relied on Layer2 solutions to achieve low gas. Like the sudden surge of DeFi in 2020, this can be attributed to the improvement of infrastructures such as AMM and oracles. Therefore, the Layer2 solutions are imperative. Layer2 must be the launchpad for DeFi so that it can be propelled to greater heights.

On May 29, two important events occurred. The first is that the Uniswap community has passed the proposal to deploy Uniswap V3 on Arbitrum with nearly 100% support.

The second thing is that on the same day, Offchain Labs, the Arbitrum development team, announced that it has deployed a beta version of Arbitrum One for the Ethereum main network and opened it to developers. More than 250 teams are currently applying to join this developer testnet.

It can be said that Arbitrum was the one to fire the first Layer2 shot a month earlier than the Optimistic team.

What is the Layer2 Plan?

As an expansion tool for Ethereum, Layer2 is the middle layer connecting the underlying network and the upper layer applications. The application layer needs Layer2 for quick liquidation. The main network and its users need Layer2 to ensure the correctness of computing results and financial security.

In short, the idea of the Layer2 solutions is to put the calculation process that should be running on Layer1 off-chain and return the results back on-chain for confirmation. This is only for one purpose: to achieve fast transactions and reduce Gas fees.

From the above point of view, side chains do not strictly belong to the Layer2 expansion plan because they do not share the security of the main Ethernet network.

Current Layer2 solutions mainly include the following:

· Optimistic Rollups: On-chain data, fraud proof. The application team includes Optimism, Arbitrum rollup, and Fuel Network.

· ZK Rollups: On-chain data, zero-knowledge proof. The application team includes Loopring, Starkware, zkSync, Aztec2.0.

· Validium: Data stored off-chain, zero-knowledge proof. The application team includes Starkware, zK Porter.

· Plasma: Data stored off-chain, fraud proof. The application team includes OMG Network, Polygon (Matic Network), Gazelle, LeapDAO.

· State Channels: The application team includes Connext, Raiden, Perun.

The three most popular options currently are Optimism, Arbitrum rollup and Polygon (Matic Network). From the market’s choice, Arbitrum rollup undoubtedly is the favorite.

Arbitrum rollup is the favorite because it is also an Optimistic Rollup-based Layer2 expansion plan that has Optimistic Virtual Machines (OVMs) that are fully compatible with Ethereum Virtual Machines (EVMs) and can support simple payments and complex smart contracts.

Optimism is also a Layer2 expansion program based on Optimistic Rollup, but Optimism uses single-round fraud proofs. Arbitrum uses multi-round fraud proofs, which are characterized by the fact that only one status proof is generated for a whole batch of transactions and published on-chain leading to reduced costs. In this way, the upper gas limit for the Layer1 block is no longer important.

At the same time, Optimism is not fully compatible with EVMs. Arbitrum is not only fully compatible with EVMs, but also supports all EVM languages (vyper, YUL+, etc.). Experts in the industry commented: “It is a major strategic mistake for Optimism not to be 100% EVM compatible, let alone the delay in its market launch. These people do not understand that 99.9% compatible and 100% incompatible are the same thing.”

EVM is fully compatible with application-layer projects such as dApp and DEX. Despite sacrificing a certain degree of security, this is acceptable. It allows easier porting of code to Arbitrum and there is a higher possibility for project launch in a short time, which is why projects like Uniswap chose Arbitrum.

Because the launch of Optimism’s main network was delayed to at least July, most users in the NFT and DeFi markets are eager for the gas fees to fall fast. As the leader of DEX on Ethereum, its role as the leader cannot be ignored.

In addition to Uniswap’s supports like Arbiswap and Arbitrum, the other leading projects include Bancor, Balancer, Bounce, MCDEX, Chainlink, and The Graph.

What Are Layer2’s Existing Challenges?

Layer2 aims to solve the problem of high gas costs, but it also presents some facts that should not be ignored: the fragmentation of Ethereum’s ecosystem and security issues.

· Prior to Layer2, all Ethereum projects were on Layer1. With current choices of Arbitrum, Optimism, Starkware and Matic Network, there is a split in liquidity of the entire Ethereum-based ecosystem assets.

· Maximize the security of pre-confirmations: Many rollups add the “pre-confirmation” feature to enhance user experience. However, if a sequencer (one of the contracts in the rollup to sort out the user’s transaction information) promises that a transaction will be included in the next batch of to-be-verified transactions, but the sequencer breaks its promise, then “pre-confirmations” are not safe. There will be a limited solution to this issue through tokenomics incentives. But will there be a better solution?

· Cross-rollup transactions and transfers: rollups can communicate with Layer1 and transfer between the accounts, but there is no direct real-time transfer between rollups. Transfers between rollups still incur high gas fees through the main network and will need to wait one hour or even seven days for withdrawals. Direct and real-time transfer between rollups needs to be decentralized as soon as possible. Both Orbiter finances and Hop exchange are protocols to solve this problem. The difference is that in a transaction, an Orbiter cross-rollups transfer only requires one contract for the target rollup, while Hop requires one contract for each rollups on both ends of the transfer.

· Audit incentives: For large-scale rollups, there is still a need to study how to maximize the probability of an honest node submitting fraud proofs when the optimistic rollups make a mistake.

Other issues include insufficient infrastructure to support user and ecosystem migration, such as Layer2 wallet, Layer2 payment methods; How to maximize the probability of an honest node submitting fraud-proof information and many other issues.

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