Dialogue with Qi Chao: Detailed Explanation of Celer's New Path for Layer 2 Scaling

Recently, the 24th session of the Catcher Academy, hosted by Chain Catcher, invited Qi Chao, the head of Celer Network in China, to give a thematic presentation on "New Battles in Layer 2: Celer's Strategy and Vision."

During the session, Qi Chao shared with community users how Celer Network designs its Layer 2 solutions, as well as his thoughts and predictions on the upcoming competitive landscape in the industry. The full text is organized below, hoping to inspire readers.

Chain Catcher: The number of DeFi users continues to rise, and the congestion on Ethereum is becoming more frequent. Layer 2 scaling is currently the focus of the industry. First, could you briefly introduce Celer's recently launched Layer2.Finance and its differentiated features?

Qi Chao: Layer2.Finance is a brand new scaling approach. Once users recharge to Layer 2, they can participate in various DeFi protocols on Layer 1. We are not moving DeFi protocols from Layer 1 to Layer 2; instead, we are "sending" users from Layer 2 to Layer 1. This is a novel reverse thinking.

Compared to other solutions, the main feature of Layer2.Finance is that it allows users to enjoy the low-cost, low-fee experience brought by Layer 2 in the shortest time, while also avoiding the liquidity fragmentation issues caused by migrating protocols to Layer 2.

Chain Catcher: I understand that the on-site scaling solution of Layer2.Finance does not require DeFi to migrate to Layer 2. Could you elaborate on how Layer2.Finance achieves on-site scaling?

Qi Chao: Layer2.Finance collects the instructions for each user and DeFi protocol interaction through a customized Rollup on Layer 2, and periodically aggregates them to send to Layer 1. From the perspective of the protocol on Layer 1, the entire Layer2.Finance appears as a single user, but in fact, this user represents a large number of users on Layer 2.

The so-called "on-site scaling" means that the DeFi protocols currently on Layer 1 do not need to make any modifications or adaptations to seamlessly and imperceptibly welcome users from Layer 2. Other Layer 2 solutions require DeFi project parties to actively integrate, while Layer2.Finance's solution does not require project parties to make any technical integrations, which is very helpful for the popularization of Layer 2.

Chain Catcher: The Layer2.Finance testnet activity has ended. How was the user feedback? Are there areas that need improvement?

Qi Chao: Our testnet attracted nearly 2,000 users and processed about 400,000 transactions on Layer 2, saving users a significant amount of gas fees. Overall, users are very satisfied with the low fees and frictionless experience of Layer 2.

There were some challenges during the process, mainly due to frequent block reorganizations on Ethereum's Ropsten testnet Layer 1, which required Layer 2 to roll back accordingly. Since all transaction histories have been packaged onto Layer 1 through Rollup, we can quickly restore the state on Layer 2 using these historical records and continue the operation of Layer 2. This also reflects that Rollup has the same level of security as Layer 1.

Additionally, we collected a lot of feedback on UI/UX through this testnet, helping product, design, and engineering teams to make rapid improvements. The currently launched mainnet product has been completely revamped, and we are very grateful for the high-quality opinions and suggestions from these users.

Chain Catcher: The large-scale migration to Layer 2 is imminent, and the emergence of multi-chain applications has reduced the cost of using DeFi, but it also comes with higher operational costs that diminish user experience, leading to liquidity being isolated across different Layers. How do you view this issue?

Qi Chao: From the perspective of operational costs, I believe that multi-chain and multi-Layer 2 will impose higher UI and UX requirements on front-end infrastructure and multi-chain deployed projects. We see that mobile wallets have done a great job, allowing seamless switching between multiple chains. The desktop version of MetaMask is gradually improving its support in this regard.

One of the biggest issues is that the same token can have different addresses on different chains, which can easily lead to erroneous transfers. I hope MetaMask can better address this issue.

Regarding liquidity fragmentation, Layer2.Finance is precisely a way to avoid liquidity fragmentation. We believe that for a long time to come, Layer 1 will still have a large amount of liquidity, so we choose to keep most of the liquidity in the large pool of Layer 1, allowing Layer 2 to reverse connect to Layer 1's liquidity.

On the other hand, we have built cBridge using mature state channel technology, which can achieve instant transfers between different Layer 2s, as well as between Layer 2 and Layer 1. This is also very helpful for the rapid migration of liquidity. We will further launch related products, so stay tuned.

Chain Catcher: Now that mainstream DeFi applications have basically completed their Layer 2 alignment, how do you attract more Dapps to use Celer's solutions? How long do you think the window period for Layer 2 development is? How many Layer 2 solutions can the future market accommodate?

Qi Chao: Due to the "on-site scaling" feature of Layer2.Finance, we can bring users to DeFi protocols without requiring any adaptations, so from the perspective of integrating DeFi, Celer's solution should be the most convenient and quickest way to attract more users.

I believe that Layer 2 still has a long development time ahead. Vitalik also believes that most innovations in the future will occur on Layer 2. To use an imperfect analogy, from the perspective of the traditional internet, the underlying TCP/IP protocol has not been updated for many years, but various upper-layer protocols, such as HTTP, are still undergoing iterations.

Since each application has different requirements for security, performance, and scalability, we believe that the future market will be a flourishing era of multi-chain and multi-Layer 2, and it is unlikely that a single entity will dominate.

Chain Catcher: Many people believe that public chains like BSC and Heco are essentially similar to Layer 2. Given the substantial resources supporting them, how do you think these exchange public chains will impact the Layer 2 ecosystem?

Qi Chao: I believe that these exchange public chains, including Solana supported by SBF, have a competitive and symbiotic relationship with Layer 2. From a competitive perspective, Layer 2 has to incur higher operational costs to ensure the same level of security as Layer 1, while other public chains, especially exchange public chains, do not have to bear these costs. Moreover, due to the strong financial backing, they can often offer larger liquidity incentives. These "barbarians at the gate" pose a significant challenge to Layer 2, prompting it to refine its technology and user experience further.

From a symbiotic perspective, EVM has effectively become the universal standard for smart contract and DeFi application development. All public chains that want to attract developers and users will likely need to be EVM-compatible and build relevant bridges to accommodate assets from Ethereum. Therefore, the technological advancements of Ethereum and Layer 2 will also influence other public chains. This reflects a cooperative symbiosis.

Chain Catcher: If the Ethereum EIP1559 proposal is passed or Ethereum smoothly transitions to a PoS mechanism, will the market demand for Layer 2 significantly decrease?

Qi Chao: EIP-1559 mainly aims to make gas prices more predictable while introducing ETH burning, and it is not an expansion solution. Similarly, Ethereum's transition to a PoS mechanism is more about energy savings and decentralization considerations, and it is not an expansion solution.

To take a step back, regardless of how much Layer 1 expands, any solution that requires consensus on a global scale will encounter performance bottlenecks, and limited capacity cannot meet the future massive user growth. Therefore, Layer 2 is bound to be a long-term necessity.

Chain Catcher: Please analyze the risk issues of Layer 2 from the perspective of data verifiability and security.

Qi Chao: For Layer 2 based on the Rollup solution, all transaction histories will be packaged onto Layer 1, so anyone can verify the correctness of Layer 2's state by replaying the history. Therefore, Rollup has the same level of security as Layer 1. This has also been well validated in our Layer2.Finance testnet.

Currently, the main risk of Layer 2 lies in the fact that packagers are generally still centralized, making them relatively prone to single points of failure, which can prevent users from receiving services and force them to withdraw from Layer 1. We believe that Rollup can combine with other consensus mechanisms to make the packaging operation relatively decentralized, reducing the likelihood of single points of failure.

Chain Catcher: Last year, Vitalik announced the development direction of Ethereum Layer 2 centered on Rollup. Optimistic Rollup and zk Rollup each have their advantages and disadvantages. How do you view the competitive landscape between ZK-Rollup and Optimistic? Which one do you favor?

Qi Chao: Optimistic Rollup has relatively lower development difficulty and operational costs, and better scalability. On the other hand, ZK Rollup has better theoretical security and capital utilization, but it has high development difficulty, high operational costs, and poor scalability. I believe that Optimistic Rollup and ZK Rollup will coexist for a long time. The specific technology used will depend on the choices made by the project parties.

Additionally, we have recently seen some hybrid solutions that combine Optimistic Rollup and zero-knowledge proof technology, which may also be a development direction.

Chain Catcher: Previously, Celer Network released the state channel Substrate module to increase support for the Polkadot network. However, given that Polkadot itself is a high-performance public chain, how do you understand the relationship between Celer Network and Polkadot? What are Celer's future development plans?

Qi Chao: Polkadot is essentially a sharding approach that horizontally scales by distributing applications across different parallel chains. However, transactions within each shard may still experience delays, and cross-shard transactions require very long confirmation times, which can affect the user experience when using blockchain applications.

Celer's state channel technology allows transaction parties to quickly confirm application states through peer-to-peer communication without needing to reach a time-consuming global consensus. By introducing this technology into Substrate, all developers on Polkadot can utilize it for significant scaling, which is a major step toward large-scale blockchain application deployment.

Currently, Celer has developed a complete set of state channel contracts on Substrate, including payment channels and general state channels, and is also working on the development and integration of off-chain clients.