Dialogue with Nervos' Lv Guoning: Detailed Explanation of Layer 2 Solution Ideas and Progress

Recently, Chain Catcher invited Nervos co-founder Lu Guoning to hold an AMA event themed "Detailed Explanation of the Current Status and Future of Layer 2" at Catcher Academy.

According to official information, Nervos is an open-source public blockchain system focused on building core blockchain protocols or infrastructure, which can largely solve the scalability issues of blockchain. Layer 2 technology is often referred to as "off-chain" solutions, which handle data by reducing the burden on the base layer (root chain) and transferring part of the data processing from the main chain to Layer 2, thereby enhancing the scalability of the entire blockchain network.

During the event, Lu Guoning introduced the main solution ideas of Layer 2 to community users, the major challenges currently faced, and what development trends will emerge next. The full text is organized as follows, hoping to inspire readers.

Chain Catcher: As applications like DeFi increasingly demand higher blockchain performance, Layer 2 has become a market focus. Could you briefly introduce the operational mechanism of Layer 2 and related concepts?

Lu Guoning: Broadly speaking, Layer 2 allows transaction computations to be completed on a virtual layer outside the underlying blockchain, with the final results submitted to the underlying blockchain for verification, thus achieving scalability.

With recent developments, the broad concept of Layer 2 has evolved into different schools at various points in time. Currently, it can be simply divided into several branches:

1. Channels and Channel Networks: Open an off-chain channel for specific individuals, groups, or networks until all their transactions are completed and need to be settled on-chain, at which point the off-chain channel is closed. This technology has given rise to State Channels and Lightning Networks.

2. Sidechains: Build a completely independent blockchain from the main chain, and package transactions on the sidechain through its own validators, then add them to the main chain's ledger through mapping and other methods. For example, before the rise of Rollup, Plasma was widely discussed, along with independent sidechain projects like Skale and Omesigo.

3. The principle of Rollup is to package many transaction data in a block into a single "space-compressed" transaction. Through spatial compression, we can ensure an increase in throughput on the main chain. Under this premise, various methods have emerged to ensure that transactions on Rollup can be verified by Layer 1, leading to ZK-Rollup based on zero-knowledge proofs and Optimistic Rollup based on penalty mechanisms.

Chain Catcher: What are the mainstream Layer 2 solutions currently in the market? What is their progress?

Lu Guoning: It seems subjective to say which solution is more mainstream, but according to the classification established in the previous question, I will share some common projects and their progress within these categories.

First, based on Channel Network solutions, off-chain channels are one of the earliest scalability solutions, as transactions occur in off-chain channels. Therefore, payment channel networks have a significant feature: they can achieve almost unlimited scalability and can efficiently utilize funds for fixed objects and transaction frequencies.

In the early Bitcoin network, limited by Bitcoin's performance and the limited verification capacity of the Bitcoin blockchain itself, the most successful Bitcoin Layer 2 solution is the Lightning Network in the channel domain.

The Lightning Network is currently the most successful scalability channel solution for Bitcoin. It not only addresses the malicious behavior encountered by previous Bitcoin payment channel solutions through design mechanisms like penalties but also ensures that both parties can open and close the channel. Even at the design stage, considerations for transaction "privacy" were taken into account.

To this day, the Lightning Network continues to iterate, and recently, the development team Lightning Labs launched Lightning Pool, providing a liquidity rental market for the Lightning Network, initiating Lightning Finance (LiFi) on Bitcoin.

The second type is the Sidechain solution.

A Sidechain is a chain independent of Layer 1. Besides the general Sidechain projects, Plasma, which was abandoned by the Ethereum community last year, is also one of them. Currently, many teams are still researching sidechains, such as Skale Network, Celer Network, Omesigo, Matic, and our Grants team LeapDao.

Currently, the advantage of sidechains is their flexibility to accommodate L1 smart contract platforms, such as EVM. However, sidechains face two significant issues: security and how to interact with Layer 1.

The third type is the Rollup solution, which currently does not have a Chinese name. Rollup may be the most popular Layer 2 solution on ETH recently, divided into two main camps: ZK Rollup and Optimistic Rollup. They use zero-knowledge proofs and game-theoretic mechanisms to ensure the usability of Rollup technology, each with its supporters, many of whom are star projects in DeFi, reflecting that DeFi must face scalability issues after experiencing the last wave of hype.

For example, behind ZK Rollup are the Loopring protocol and Curve; Optimistic Rollup has projects like Synthetix and Uniswap expressing support. Compared to sidechains, Rollup is a more pragmatic and compromise approach. Although Rollup's scalability is not as strong as that of sidechains, because Rollup compresses transactions and organizes them into a specific data structure submitted on-chain, this mechanism partially resolves the data availability issues that previous Layer 2 solutions, especially Plasma, faced when interacting with Layer 1.

However, Rollup technology is still in the testing phase, and attempts are only being made under specific scenarios (such as Rollup solutions designed for DEX, etc.). Currently, Rollup still has many issues regarding security, efficiency, and interoperability that require more resources and manpower to solve.

Chain Catcher: What do you think the relationship and status between Layer 1 and Layer 2 will be in the future? What are their respective value capture mechanisms?

Lu Guoning: First of all, Layer 2 must be built on top of Layer 1; Layer 2 cannot exist independently of Layer 1. Secondly, Layer 2 verifies transactions through interactions outside Layer 1, thereby avoiding the need to broadcast every transaction to the entire Layer 1 network. Finally, the less dependent Layer 2 is on Layer 1, the lower the transaction fees for Layer 2, and the higher the efficiency. Ideally, transactions should only be verified on Layer 1 in cases of disputes between the two parties, using Layer 1 for arbitration.

This describes the relationship between Layer 1 and Layer 2, but specific scenarios can lead to different choices. If Layer 1 is not specifically designed for Layer 2, it may focus more on underlying efficiency, often emphasizing throughput and transaction latency.

Such Layer 1 provides indiscriminate support for transactions directly on it and Layer 2. This type of Layer 1 typically does not make special optimizations for Layer 2; instead, the throughput and transaction bandwidth of Layer 1 determine the clearing efficiency of Layer 2. In this scenario, the value creation brought by Layer 2 is difficult to be captured by Layer 1.

For another type of Layer 1, the underlying network's security and decentralization will be more important responsibilities, while performance can be left to Layer 2. Layer 1 only needs to verify whether the logic of the transactions generated by Layer 2 is correct. Based on this foundation, the value capture on Layer 1 should be positively correlated with the overall value creation and growth on the chain.

Therefore, how to design the economic model for value capture along this direction becomes very important. For example, transaction fees during the process may be a key part of Layer 2 capturing value, incentivizing Layer 1 to provide higher security to protect and stimulate the growth of Layer 2 transaction scale.

However, this value capture relationship must be well-designed from day one; otherwise, making adjustments after the mainnet goes live will inevitably have a greater impact on stakeholders in the network, even leading to resistance.

Chain Catcher: On November 5, the Ethereum Foundation announced that it would conduct an ETH 2.0 version update in early December, officially launching ETH 2.0. How do you understand Ethereum 2.0's choice to take action at this time? What impact will this have on the Layer 2 ecosystem and the competitive landscape of public chains?

Lu Guoning: Although we are building a completely different public chain, we have always maintained a high level of attention to Ethereum. ETH 2.0 Phase 0 was originally expected to start in mid-year but was postponed to the end of the year due to various factors. Each delay means a longer wait for subsequent Phase 1 and Phase 2.

Currently, the first step in launching ETH 2.0 is to provide enough stakers for this network, so deploying the staking contract on the mainnet at this time is a predetermined plan. We hope that Ethereum can complete the first phase of its planned roadmap on schedule.

Additionally, the entire development of Eth 2.0 is a long-term process, so in the short term, it will not involve switching contracts from Eth 1.0 to Eth 2.0. Therefore, to solve Ethereum's insufficient transaction bandwidth issue in the short term, it still relies on Layer 2 for scalability or seeks other public chains with low migration costs, even those that users are unaware of. According to Ethereum's current development progress, sharding is estimated to take at least two years, which may be the best breakthrough opportunity for other public chains.

Most people do not realize that the Phase 0 stage of Ethereum is only to start the beacon chain, and during the beacon chain phase, the staked ETH tokens are essentially locked, with an uncertain lock-up period.

Currently, participating in ETH 2.0 staking will only allow transfers in Phase 1, and withdrawals from staking will only be possible in Phase 2, which may take two to three years from today. During these three years, Ethereum faces the challenge of building a completely different new system while successfully launching sharding and supporting Layer 2, as well as migrating all developers and users to the 2.0 network. This is a massive, bottomless challenge, and I even believe that the entire process cannot be completed in three years; it may take longer, perhaps five years or even more.

I hope everything goes smoothly. In summary, the road to Ethereum 2.0 requires the entire Ethereum community and supporters to make long-term efforts for it to be realized.

Chain Catcher: So, I would like to ask where Nervos's advantages in the Layer 2 direction are reflected. Can you provide specific examples?

Lu Guoning: Nervos is currently the only blockchain system designed for layered architecture. In the Nervos Network, Layer 1 serves as the value storage layer of the entire network, aiming to maximize security and censorship resistance while acting as a custodian of decentralized value and crypto assets.

Layer 2, built on the security of Layer 1 blockchain, provides unlimited scalability and the lowest transaction fees, allowing for trade-offs in trust models, privacy, and finality for specific applications. If we liken social organizations to this, Layer 1 is like a trust + court, while Layer 2 represents specific commercial transactions. Layer 1 provides asset security and dispute resolution for transactions, while Layer 2 offers low-cost and convenient transactions.

This design philosophy was established on the first day of Nervos's inception, and we have rebuilt a complete blockchain system distinct from Bitcoin and Ethereum around this philosophy. I can discuss Nervos's advantages in several points:

First, Nervos's economic model ensures the alignment of interests between L1 and L2. On Nervos, the development of Layer 2 is thriving, which not only does not create any competitive relationship with Layer 1 but also allows Layer 1 to store more value because Nervos's native token CKByte also represents storage space on the chain, making Nervos resemble land.

Layer 2 is like the skyscrapers above, and dApps are the various stores within these buildings. Therefore, the more prosperous the ecosystem on Layer 2, the more valuable the land represented by Layer 1 becomes. This alignment of interests has been established since the first day of our system design.

Second, the Nervos CKB virtual machine can flexibly support the deployment of various Layer 2 cryptographic primitives. The Nervos CKB virtual machine, CKB-VM, is built on RISC-V, with the greatest advantage being its ability to support various underlying cryptography.

Recently, Vitalik published an article titled "A Rollup-Centric Roadmap." If you look closely, you will find that for Ethereum to fully support ZK Rollup, an important prerequisite is that it must first undergo a hard fork to allow the underlying EVM virtual machine to verify the zero-knowledge proofs used in ZK Rollup.

However, using a hard fork to support specific cryptographic primitives takes time… No one knows how long it will take. The current news indicates that several core EIPs to better support Layer 2 have been removed from the upcoming Berlin fork, which is expected to be executed in the first half of next year, in exchange for another inconsequential, secure, and uncontroversial fork.

Fortunately, this issue does not exist on Nervos. Any cryptographic primitive on Nervos can be deployed on-chain without the need for a hard fork, allowing more advanced signature algorithms and zero-knowledge proofs to be directly deployed on Nervos CKB, ensuring that Layer 2 on Nervos can develop more rapidly.

Third, transaction data on Layer 2 is protected by the strong security of Layer 1. In Nervos's system architecture, Layer 1 is responsible for ensuring the overall security of asset transactions, which is also a unique advantage of Nervos. Since the establishment of Nervos, we have adhered to PoW because we believe PoW is the most suitable mechanism for underlying blockchains. Fortunately, within less than half a year of going live, many manufacturers have automatically produced ASIC miners for us.

Since the computing power went live, it has grown 200 times, and in the future, after years of security assurance, Nervos will increasingly be able to ensure that the cost and difficulty of attacks gradually increase.

Chain Catcher: For ordinary users, will there be some significant changes in the process and experience of using Layer 2 applications and tokens? What opportunities exist for investors?

Lu Guoning: In principle, there has not been much significant progress in applications on Layer 2; many are still in the experimental stage. However, one thing we can be sure of is that if dApp developers want to migrate from Ethereum Layer 1 to Layer 2 (or other public chains), they hope to see a new environment that not only offers better performance but also allows users to maintain their previous usage habits. This poses a challenge for Layer 2.

At the same time, if assets need to be moved to Layer 2 or back to Layer 1, there is generally an exit period (challenge period) to ensure the overall security of the assets. However, the length of this exit period will affect the actual user experience. Therefore, in the overall design of Layer 2 mechanisms, whether there is a role similar to liquidity providers that can provide funds for ordinary users in advance will be crucial for the smooth operation of Layer 2.

In this way, the overall ecosystem must design incentive mechanisms for stakeholders that can facilitate the smooth completion of transactions on Rollup, sidechains, or channels. I believe this mechanism design may be closely related to the overall economic model and may also be associated with the use of Layer 2's native tokens.

Chain Catcher: With the increasingly diverse ecosystems of Ethereum and Polkadot, do you feel any pressure?

Lu Guoning: Of course, there is pressure; it is impossible to have no pressure. The advantage of CKB lies not only in taking a different path and attempting to solve the bottlenecks and resistance faced by blockchain development in the future but also in CKB's insistence on a hardcore technology route. However, as a latecomer, we must achieve an advantage of more than ten times to persuade developers and users to come and try or migrate, which is undoubtedly a huge challenge and pressure for any new protocol layer project, especially since we are a public chain team from China aiming to compete globally.

Chain Catcher: For project parties, how should they choose a suitable Layer 2 solution? What should they pay attention to?

Lu Guoning: Different projects with varying characteristics and businesses will have different needs for Layer 2. In principle, there are several aspects to consider.

First, the dApp's consideration of security. Many dApps have an urgent need for scalability, many of which are DeFi applications. However, DeFi applications also have high requirements for "asset security." In this regard, the security of sidechains is not as strong as that of channels and Rollup solutions.

At the same time, within Rollup, ZK Rollup's security, protected by cryptography, is greater than that of Optimistic Rollup, which relies on mechanism design. Therefore, the security requirements will lead many different dApps to choose different Layer 2 solutions.

The second aspect is the urgency of performance improvement.

The urgency of performance improvement will also affect developers' adoption of Layer 2 solutions. For example, currently, the fastest developing Layer 2, aside from the Lightning Network, is likely Rollup, which has made significant progress. This has become one of the primary factors for many DeFi projects in solving congestion issues.

The third aspect is the consideration of the cost of migration, starting with whether it is necessary to rewrite business code. Currently, Rollup, due to its advantages in data availability, is more feasible on Ethereum compared to previous sidechains or off-chain Layer 2 solutions.

However, ZK Rollup faces the challenge of not being able to support general smart contracts, leading projects like Matter Labs, which adopts ZK Rollup, to implement their own zero-knowledge proof smart contract language, Zinc. This inevitably increases the development costs and contract auditing costs for developers. In contrast, Optimistic Rollup and sidechains have relatively stronger compatibility with mainstream smart contract platforms like EVM.

Next is the user migration cost. When developers consider whether to migrate to Layer 2, a key consideration is that users must not be lost. This is also why many public chains may already outperform Ethereum in performance, yet Ethereum still holds a significant ecological advantage. Therefore, if migrating to Layer 2 requires changes in user habits, it is something that dApp operators do not want to see.

We can see that recent versions of Curve on the ZK Rollup testnet and Synthetix on Optimistic Rollup are making efforts to integrate wallets like MetaMask, which are familiar to Ethereum users, as login methods.

The last point is the consideration of business scenarios. Different business scenarios are suitable for different Layer 2 solutions. Although Rollup can compress on-chain space usage, it can only achieve limited scalability. While it can address some urgent scalability needs in DeFi, not every scenario can easily apply Rollup. For instance, in future IOT or API-driven real-time payments and high-frequency trading, payment channels excel in those scenarios.

Chain Catcher: Many viewpoints suggest that the current cost and threshold for projects to migrate from Layer 1 to Layer 2 are still high, thus not forming large-scale project migrations. How do you view this perspective? Why hasn't Layer 2 been widely adopted yet?

Lu Guoning: Currently, mainstream Layer 2 solutions are designed based on the Ethereum platform, but many Layer 2 solutions may not be compatible with EVM and must reimplement their smart contracts.

When Layer 2 cannot be compatible with EVM, developing on such Layer 2 requires rewriting the same business logic application in a different language. This not only incurs significant time costs but also requires time and money for code auditing after completion, which is a burden for developers.

Therefore, we can see that zkSync on zkRollup, even though it cannot achieve 100% compatibility with EVM, is dedicated to spending a lot of time creating a language similar to EVM. Returning to the Ethereum platform, many cryptographic primitives require hard forks for compatibility, which poses significant technical development limitations for many zero-knowledge proof-based Rollup applications.

Regarding security, the security assumptions and implementations of Layer 2 still need time to be validated. There are still very few dApps on Layer 2 because everyone cannot easily assert whether the Layer 2 environment is truly secure and reliable. In addition to technical proofs and audits, time is also needed to demonstrate its security.

The last issue is the interoperability of Layer 2. Layer 2 solutions do not interconnect with each other, making it impossible to generate network effects. Currently, Layer 2 solutions cannot interact with each other, which diminishes the network effects that applications like DeFi pride themselves on.

In the hottest DeFi field on today's blockchain, continuous innovation arises precisely because various DeFi Lego-like combinations can be created on ETH Layer 1.

In the new environment, not only are there very few dApps on a single Layer 2, but there is also a lack of opportunities for contract interactions between different Layer 2s, which significantly undermines the network effects that applications like DeFi rely on.

Chain Catcher: What do you think are the main challenges facing the Layer 2 market currently? What development trends will emerge next?

Lu Guoning: The challenges of Layer 2: competing with Layer 2 are many past projects that claimed to be Ethereum killers in Layer 1. In the future, Layer 2 will face many other Layer 1 public chains that have environments highly similar to Ethereum, which will be strong competitors for Layer 2.

They may also have features that allow for cross-chain asset transfers with Ethereum and are inherently better compatible with EVM due to inheriting Ethereum's architecture. Therefore, they may compete with Layer 2 on ETH and even have greater advantages in many aspects.

The future will undoubtedly be a world of coexistence among multiple chains, each with its own needs and strengths in business scenarios. The future world will be a grand maritime era of multiple chains coexisting, with different chains excelling in various areas, such as some public chains focusing on finance, others on NFTs or gaming, and still others on storage, etc.

I believe that among these public chains, there will ultimately be some particularly valuable assets that will shine in specific business scenarios. At that time, Layer 2 will inevitably play more roles, not only in helping with scalability but also in undertaking cross-chain and interoperability-related tasks.