Ethereum Layer 2 Battle: Optimistic or Unknowing?

Ethereum, the second most valuable cryptocurrency blockchain after bitcoin, has been hailed for its programmable smart contracts and greater flexibility. But it faces challenges to grow: transaction speeds are slow and costs high.

Layer 2 networks that are built on Ethereum are designed to meet these challenges. Ethereum co-founder Vitalik Buterin said Ethereum’s future will depend on Layer 2 networks for scaling, even after Ethereum transitions to a faster, more eco-friendly system. environment known as proof of stake.

This intense competition to “win Ethereum” comes down to this question: will developers and users flock to the most advanced technology, or will they just go with what works when they need it? Convenience often wins out unless the technology is so much better or some other incentive drives them to try something new.

Scaling Ethereum remains its biggest problem. The company that can solve this problem will be in the driving seat to power a range of services on Ethereum, including decentralized finance, NFTs, gaming and more. Since Ethereum is the largest smart contract protocol and popular with developers, whoever becomes the dominant layer 2 on Ethereum could end up handling a significant portion of crypto transactions. The debate over which option will prevail is as fierce as any in crypto.

Layer 2 networks are still relatively small compared to other Layer 1 blockchains – the main ledger and protocol associated with a specific token, such as bitcoin or litecoin. “That will change over time” as more users move to Layer 2 applications, said Haseeb Qureshi, managing partner at Dragonfly Capital.

A key Layer 2 strategy is to roll up or bundle transactions off the main chain for faster processing. The two main approaches are optimistic cumulations and zero-knowledge cumulations, or ZK. Both approaches reduce congestion on the Ethereum blockchain, speed up transactions, and reduce costs.

The optimistic cumulations are online. Arbitrum is the largest player with $2.9 billion in total value locked or deposited on the network. Crypto entities using Arbitrum include decentralized exchanges SushiSwap and Uniswap and the NFT Treasure project.

Optimistic rollups validate and execute transactions and send them to Ethereum, and only perform computer fraud proof if a transaction is disputed – hence the “optimistic” moniker. These transactions can be disputed after being sent back to the Ethereum chain for up to seven days.

ZK rollups, on the other hand, always run an advanced cryptographic proof called “zero knowledge” and then send it back to Ethereum. ZK is designed to be infallible since the transactions are all verified and therefore cannot be disputed. New technology is still emerging in nature.

But the technology is much better and sure to improve, say supporters. “It’s really hard to do” zero-knowledge proofs, said Qureshi, whose company has invested in Matter Labs, a ZK rollup startup. “It’s only been in the last year and a half that they’ve found ways that were thought to be theoretically impossible.”

Optimistic proponents like Steven Goldfeder, CEO of Offchain Labs, which created Arbitrum, claim that ZK rollups are “orders of magnitude” more expensive than Optimists, due to the computationally intensive required. Some ZK systems that have been launched do not include the costs of proving they work off-chain for customers, which obscures their true costs, he said.

“We believe that optimistic systems are more practical and much cheaper to operate than ZK systems,” said Ed Felten, co-founder of Offchain Labs.

ZK supporters say optimistic rollups take too long to fully complete, as they can be challenged for up to seven days after running. This means that someone looking to get their ETH tokens out of a Layer 2 such as Arbitrum to the Ethereum network would have to wait seven days. That’s not viable in crypto, where people want quick access to capital, Qureshi said. A week is “worse than a wire transfer”, he said.

There are, however, several services that will pay users instantly, minus a small fee, and take the risk of being challenged. And this type of challenge is rare and hasn’t happened yet, due to the financial penalties for posting an erroneous rollup or unsuccessfully challenging a correct rollup, Felten said.

Even though there is a delay in withdrawing funds to Ethereum, these optimistic transactions have already been fully verified on layer 2. The reason for the delay is that Ethereum does not see the transactions and has not validated these yet. transactions.

Companies like Andreessen Horowitz are betting on ZK rollups as the future, and NFT-focused Immutable X uses StarkWare’s ZK rollup technology. But the best technology does not necessarily win.

Even Arbitrum’s Goldfeder admits that ZK rollups are technologically impressive and won’t rule out supporting ZK rollups in the future.

But he says it’s unfair to compare optimistic rollups in their current state to ZK rollups in the future, because optimistic technology will also improve in the future.

This isn’t the first time Ethereum has pushed for an off-chain scaling solution: Plasma was a previous effort that didn’t work out. But Buterin and others think a new system based on rollups will work, even if it takes years to become widespread.

The two technologies will co-exist for some time, said Jake Brukhman, founder and CEO of CoinFund, which has made Layer 2 investments. Longer term, ZK rollups have a technological advantage, he said. Meanwhile, he said, other Layer 1 blockchains could potentially pose an even greater threat in terms of speed, scalability and security.

That’s part of what’s at stake as layer 2 networks grow: if Ethereum can’t scale to handle the demand for transactions, it could drive developers to other blockchains. And the software industry has proven that developers are key to winning.

Donald E. Patel