Competing in the Layer 2 Race: Optimistic in the Short Term, Possibly ZK Rollup in the Long Term

This article is from the Blue Fox Notes public account, with the original title "Layer 2 Track: Short-term OP, Long-term ZK."

The congestion of Ethereum needs no elaboration; everyone feels it deeply. The Ethereum ecosystem is actively exploring the implementation of Layer 2. Layer 2 includes state channels, sidechains, Plasma, Optimistic Rollups, Zk Rollup, and so on. Currently, the most promising technologies are Optimistic Rollups and Zk Rollup, abbreviated here as OP and ZK.

For more information on Layer 2, you can refer to previous articles from Blue Fox Notes: "Ethereum's Layer 2 Track," "Layer 2, Ethereum, and the Landscape of Public Chains," and "Breakthrough Progress of Ethereum Layer 2: What Does It Mean?"

What would the situation look like from an implementation perspective?

Short-term OP, Long-term ZK

From Blue Fox Notes' observation, in the short to medium term, Optimistic Rollups are favored, while in the long term, Zk Rollup is preferred. Why?

Optimistic Rollups Vs ZK Rollup

The Optimistic Rollups solution is easier to implement in the short term, one important reason being its stronger portability. However, Zk Rollup currently cannot fully support EVM. A significant drawback of Optimistic Rollups is that it needs to solve the issue of fraud proofs, which results in a withdrawal period of up to a week.

If users need to wait a week to withdraw their funds from Layer 2 exchanges to Layer 1, very few would have the patience for that. ZK Rollup does not have this concern; it resolves this issue through mathematical reliability proofs, allowing timely withdrawals to Layer 1.

ZK Rollup technology is fundamentally close to Layer 1 in terms of security, and deposits and withdrawals can be conducted instantly based on user needs, which is its advantage.

But why will Optimistic Rollups still be the most important solution for Layer 2 in the short term? Because its drawbacks do have solutions. What OP cannot solve, other projects can help with. Some projects can assist users in directly withdrawing their Layer 2 tokens to Layer 1 instantly, with users only needing to pay a certain fee, while these projects handle the rest.

For example, the MakerDAO community proposed the Optimism DAI Bridge solution, which can address the one-week withdrawal time issue of Optimistic Rollups. Although it requires a week to ensure the correctness of the canonical transaction chain (CTC), a proof for individual transactions can be obtained in minutes. Consequently, MakerDAO will issue fDAI to represent claims on Layer 1 DAI. fDAI is verified against CTC through Maker Oracle.

(OPtimism DAI Bridge, MakerDAO)

In addition to MakerDAO, other projects will also provide fast withdrawal services. Therefore, from an implementation perspective, logically, OP is more suitable in the short term due to its stronger portability, and the long withdrawal period issue has solutions.

In the long term, ZK has advantages in security and withdrawal time. As it fully supports EVM, the likelihood of its adoption will increase.

Short-term OP

Optimist is being adopted by leading DeFi projects, making it one of the most important Layer 2 implementation solutions in the short and medium term. The Optimist project, which uses Optimistic Rollups technology, has launched its testnet and is expected to release in March. Currently, Synthetic will adopt its solution. If Synthetic's implementation proves effective, it will attract a large number of DeFi followers.

The leading DeFi project Uniswap is also said to be considering using the Optimist project's solution. If it ultimately adopts it, this will have a decisive significance for the entire DeFi project adopting Layer 2 solutions. However, according to Uniswap's style, it will be relatively cautious, and the rollout of the Optimism Layer 2 solution will not be too quick.

At the same time, V3 is currently Uniswap's focus, which may delay its adoption of Layer 2. Sushiswap, on the other hand, has a more aggressive style and may launch a Layer 2 solution earlier than Uniswap. It is said that Sushiswap is exploring Layer 2 implementation solutions with Matter Labs' Zksync, but no conclusion has been reached yet. If the Optimist solution proves feasible, it may also shift towards the Optimist solution.

If both Synthetic and Uniswap adopt the Optimist project's solution, then other DeFi projects may follow suit, ultimately forming a short to medium-term Layer 2 landscape dominated by Optimist. Currently, Optimist, Offchain Labs (Arbitrum), Fuel Network, and Cartesi are all actively exploring the implementation of this technology direction.

Long-term ZK

ZK Rollup has advantages in security and withdrawal time. Once it achieves full compatibility with EVM, it has the opportunity to gain increasing favor from DeFi projects. However, if the Optimist solution proves feasible in practice, it will also impact the adoption of ZK, at least delaying its adoption process.

In the long run, perhaps within the next few years, as more DeFi projects adopt ZK Rollup technology, a trend may gradually form, ultimately achieving interoperability of Layer 2 ZK Rollups, accommodating a transaction volume greater than Layer 1, thus forming a vast Layer 2 ecosystem. This is also why there may be one or two very powerful Layer 2 projects in the future.

Currently, Matter Labs' ZKsync, Loopring, Starware, Aztec, and others are actively laying out ZK Rollup technology. Additionally, there are even Layer 2 projects specifically designed to expand NFT trading, such as Immutable.

Layer 2 is a massive track

In the view of Blue Fox Notes, the Layer 2 track ranks fourth, just behind BTC, public chains (like ETH), and decentralized stablecoins. Of course, DeFi as a whole is undoubtedly the largest track. After the competition in Layer 2 settles, about one or two giants will emerge, becoming the overall solution for Layer 2 and fundamentally solving the interoperability issues of DeFi. This situation means that future Layer 2 will create projects of extremely high value, potentially approaching Layer 1, and surpassing most public chains. If a Layer 2 project worth tens of billions of dollars emerges in the future, it should not be surprising.

Ethereum L2 and EIP1559 will change the public chain competition landscape

Once Layer 2 DeFi is launched, everyone will find that transaction fees on Layer 2 are very low, and transaction speeds are very fast. This will greatly increase the user base and transaction volume of DeFi, especially DEXs. As transaction volume and user numbers rise, the attractiveness to liquidity providers will also increase, leading users and liquidity providers to further migrate to Layer 2.

In the evolutionary process, Layer 1 and Layer 2 will form a layered DeFi structure, creating a certain degree of separation, but ultimately, Layer 1 and Layer 2 will achieve a balanced state.

Ultimately, Layer 2 has a larger ecological capacity, but Layer 1 remains very important as it supports the security of Layer 2 and various high-value settlements; Layer 1 is the final settlement layer.

For the competition between Ethereum and public chains, the implementation of Layer 2 can partially alleviate Ethereum's high fees and slow speeds, which will also reduce the attractiveness of other public chains. With the arrival of Ethereum's expansion and the implementation of EIP1559, ETH will experience the most significant changes this year. It will have an extremely important impact on the public chain landscape this year.