Layer2 Crossroads New Public Chain War

This article was published on Deep Tide TechFlow.
In 2021, is there a certain opportunity in cryptocurrency investment?
If the answer to this question is yes, then I would give two answers: Layer2, Derivatives DEX.

The issue of scaling on the Ethereum chain is not new; it has been discussed for many years, and now we have reached a point where we must face the challenges: public chains like BSC and Heco are thriving; new public chains like Polkadot, Solana, and Near are ambitious; the pace of migration to L2 is still "loud thunder but little rain"…

We have arrived at the crossroads of Layer2, where a new public chain war is about to unfold, a war that Ethereum cannot afford to lose.

The Dual Heroes of Layer2

V God has always had a fondness for Rollup, with ZK rollup and Optimistic rollup becoming the most watched dual heroes of Layer2.

Optimistic rollup, as the name suggests, tends to believe that honest people will submit honest data, and if they are dishonest, they will be punished.

In terms of architectural design, Optimistic Rollup borrows heavily from Plasma and ZK Rollup, overall embodying a moderate philosophy that does not pursue extreme scalability but rather balances compatibility, allowing fully general smart contracts to run on Layer 2.

This is the biggest advantage of Optimistic Rollup, which can seamlessly integrate with smart contracts on Ethereum, significantly reducing the workload for developers.

The corresponding disadvantage is that the increase in TPS is limited, and exiting the network may take days, while data security is questionable.

The other rollup is the ZK rollup, which V God currently prefers.

The advantages and disadvantages of ZK rollup are exactly the opposite of Optimistic Rollup.

The biggest advantage of ZK Rollup is speed; ZK rollup uses zero-knowledge proofs to ensure data security, making it easy for Layer 1 to trust data from zk rollup during interactions, allowing for quick transfers.

In contrast, the disadvantage of ZK rollup is that it is difficult to support general smart contracts, making it unfriendly for developers. ZK rollup developers need to independently develop smart contract modules, which not only is challenging and labor-intensive but also hard to replicate and migrate. However, this also brings a benefit: when a team truly develops and uses zk rollup, it proves they have real technology.

In summary, comparing the two solutions, zk rollup is fast and secure but incompatible with smart contracts, making it unfriendly for developers; Optimistic Rollup is compatible with smart contracts, benefiting developers, but has low TPS and inefficiency.

Which solution is better?

In the short term, Optimistic Rollup has a lower threshold, and the general EVM allows developers to quickly get started, making it more suitable for current development; ZK rollup has a higher development threshold and is more suitable for areas requiring quick payments. In the long term, with the development of ZK-SNARK technology, ZK rollup will have more application scenarios and greater potential.

However, the answer to this question needs to be written by the project parties; it is not just about whose technology is better that will determine the winner. Layer2 itself is fragmented; as more L2 ecological projects emerge, the network effect will lead to the strong becoming stronger.

Currently, various projects have begun to align and migrate.

For example, Synthetix and Uniswap have decided to adopt the Optimistic Rollup solution.

To incentivize users to migrate to Layer2, Synthetix has launched an incentive program where users staking in Synthetix L2 can earn SNX token rewards.

The highly anticipated Uniswap V3 version may also migrate to Layer2. Uniswap's founder, Hayden Adams, stated on Twitter that V3 will "solve all problems."

As early as October 2019, Uniswap released a demo of Uniswap + Layer2, which described that the Unipig using the Optimistic Rollup solution could achieve almost zero gas fees, with throughput expanded to 200 tx/s, equivalent to 10 times the efficiency of the mainnet.

Tether is considering migrating the ERC-20 USDT to the ZK Rollup Layer2; the derivatives trading platform dYdX is using Starkware's solution…

A key question is, will the development teams of Optimistic and ZK systems issue tokens?

Of course, it is just a matter of time. Alex Gluchowski, founder of Matter Labs, has made it clear that a governance token for the ZK Rollup-based Layer 2 scaling solution zkSync will be released, and Offchain Labs and Starkware will also follow suit.

The latest news is that the crypto venture capital fund Andreessen Horowitz (a16z) has announced it will lead a $25 million Series A funding round for Optimism and will launch a public mainnet in March.

There is no doubt that these top projects have already been monopolized by leading institutions, and ordinary people's opportunities still lie in the secondary market.

The New Public Chain War

The concept of Layer2 is not new, but from the performance of tokens, L2 concept tokens have not been able to sustain a major market trend; most have been fleeting. The main reason is that L2 mostly remains at the conceptual stage, and there are too many drawbacks inherent in L2 itself, the most criticized being that it can create islands, fragmenting the Ethereum ecosystem.

The strength of the Ethereum ecosystem lies in the accumulation of sufficient assets, allowing various types of DeFi products to interact like building blocks through contracts, thus sparking innovation.

The emergence of Layer2 breaks Ethereum's composability, and developers face the dilemma of choosing sides. When different projects are deployed in different Layer 2 projects based on needs and networking relationships, their interaction costs will significantly increase, effectively fragmenting the Ethereum ecosystem and creating islands.

In the short term after projects migrate to L2, islands are inevitable, but if a certain solution gains widespread support, it will accelerate the pace of L2 migration and make users unable to leave L2.

From this perspective, Layer2 is akin to recreating a public chain ecosystem based on Ethereum. The war of Layer2 is essentially a public chain war, presenting a situation of three-way conflict.

First is the internal war of Layer2, where the previously mentioned Optimistic Rollup and ZK rollup, along with Offchain Labs and Starkware, will become the main players, focusing on competing for projects and encouraging migration.

To incentivize migration, "liquidity incentives + L2 airdrops" may be the focus of the next phase.

The other camp consists of exchange public chains led by Binance Smart Chain (BSC) and Huobi Eco Chain (Heco), both benefiting from Ethereum congestion, absorbing Ethereum's overflow traffic, compatible with Ethereum EVM, friendly to developers, and supported by exchange listing resources and traffic… Today, BSC and Heco have become formidable network ecosystems, arguably second only to Ethereum.

Current exchange public chains can be understood as a new Layer2.

Finally, there is the new public chain camp, led by Polkadot, Avalanche, Near, Algorand, and Solana, benefiting from similar logic, where Ethereum is no longer the sole leader, capital is overflowing, and the market needs new public chain narratives. These projects are also compatible with EVM and are competing for developers and users.

Three forces are engaged in both internal strife and external battles. Currently, the Layer2 camp does not seem as strong as BSC and Heco; rather than migrating to L2, the trend of projects and users migrating to BSC and others is more evident.

So, BSC and Heco have traffic, capital, and wealth effects; new public chains like Polkadot have technology and ecosystems… Why should we believe that Layer2 is the most certain opportunity this year?

The answer to this question is to believe in Ethereum.

Recently, the founder of Polygon (Matic) refuted claims that Ethereum killers would take the opportunity to replace Ethereum in an interview:

Ethereum is the most resilient and secure programmable blockchain in the world, serving as the ultimate settlement layer and security source. No matter how much money you have, it is difficult to replicate Ethereum's success, just like the entire digital nation is formed around Ethereum.

EVM has become the global standard virtual machine, and it will take any competitor years to achieve this. Beyond the technical aspects, the community and culture are also unique competitive advantages, deeply rooted yet hard to describe.

For example, some traders in The Defiant's Discord channel stated that they are using BSC, but once Ethereum's Layer 2 solutions are more widely adopted in DeFi dapps, they plan to return to Ethereum as soon as possible.

Meanwhile, both BSC and Heco represent competition but also serve as user education for investors migrating to Layer2.

For Ethereum, this is a war it cannot afford to lose.

In the era of ETH2.0 still in gestation, and during the congested years of Ethereum, Layer2 is a lifeline that relates to the future development of the Ethereum ecosystem.

If L2 succeeds, the valuation of Ethereum ecosystem projects will increase, and the narratives and high valuation logic of exchange public chains and new public chains will be questioned. ETH TO THE MOON, L2 TO THE MOON.

If L2 fails, the long-dominant public chain dynasty of Ethereum will collapse, returning to a warring states era—a multi-chain world, and the blockchain world will usher in a new wealth distribution pattern.

Some look forward to the former, while others anticipate the latter, but regardless, in 2021, you must pay attention to Layer2.