Detailed Explanation of the Layer 2 Expansion Plan: Metis Features and Competitive Advantages and Disadvantages
Layer 2 will usher in a wave of launches, and the competitive landscape of the scalability track is rapidly evolving.This article is sourced from: ChainNews
Written by: Rasheed Saleuddin, Analyst at Messari Hub
The cost of using Ethereum is rising sharply. Over the past 18 months, the average transaction fee on Ethereum has increased by about 50 times, from around $0.10 to about $5. Recently, during a speculative trading frenzy in the second quarter, the average fee skyrocketed to nearly $70, making the $5 price seem quite affordable by comparison.
From a macro perspective, high fees are not entirely negative. They represent user demand for Ethereum's block space. Therefore, the increase in transaction costs indicates that the network is providing greater utility and higher value. Many acknowledge that high gas fees are a necessary cost to ensure high-value transactions.
However, fees will ultimately accumulate, and the continuously rising costs will push some users and use cases out of the market. With new applications being launched on Ethereum every day, network utilization nearing saturation, and the Eth2 scaling upgrade still in development, the base layer of Ethereum seems to have no short-term relief in sight.
This is where Layer 2 scaling solutions come into play. Their goal is to address Ethereum's congestion issues by significantly reducing fees while minimizing the impact on security.
One such solution is Optimistic Rollups, which bundle and order a series of transactions on a layer above Ethereum, then send them as a single transaction to the Ethereum Layer 1 main chain. The computational layer running above Ethereum (referred to as "Layer 2") is expected to have a throughput approximately 100 times that of its underlying chain.
Although Optimistic Ethereum and Arbitrum with Arbitrum One are gearing up for public launch (editor's note: Arbitrum One officially launched on August 31), attracting the most media coverage and community sentiment, they are just two of several upcoming Rollup solutions.
Metis is also one of these solutions. Metis is a fork of Optimism, aiming to make further improvements on the currently more popular competitor.
Metis seeks to provide the standard advantages of Optimistic Rollups, such as low fees (<$1), high speed (under one second), and Ethereum-level economic security. Additionally, it plans to differentiate its platform by offering native data storage, faster withdrawals to the Layer 1 Ethereum main chain, and improved usability for DApp providers.
1. Rollups and Sidechains
So far, the scaling war has been dominated by sidechains and other Layer 1 solutions, with Polygon being the most favored in many hot DeFi and Metaverse projects. Sushiswap, Aave, and Curve have all scaled to Polygon, and SushiSwap has also deployed on several other chains.
The popular blockchain game Axie Infinity now runs on a custom sidechain called Ronin, shielding this high-profile "play-to-earn" game from Ethereum's expensive fees and volatility. Dapper Labs, the developer behind NBA Top Shot and Crypto Kitties, launched an independent Layer 1 to avoid Ethereum's daunting fees.
The DeFi ecosystem has also begun to take root on newer networks like Solana, Terra, Binance Smart Chain (BSC), and Avalanche.
Every scaling solution project benefits directly from the rising Ethereum fees, as evidenced by their recent increases in on-chain activity and total value locked (TVL).
The biggest issue with sidechains and some Layer 1s is that they may have different attack surfaces (often related to their lower levels of decentralization) and economic security guarantees below Ethereum's standards. Therefore, any scaling solution that minimizes security risks and sacrifices decentralization has been a core focus of the Ethereum community.
Ethereum founder Vitalik Buterin began to support the use of "Rollups" as a way to scale Ethereum and its security into the next growth cycle in September 2018.
Rollups are an execution layer that exists above the Layer 1 network. Before pushing transactions to its underlying blockchain, Rollups batch and order transactions in this off-chain environment. Since the base layer of the public chain acts as the arbiter of truth, Rollups "inherit the blockchain security properties established by Layer 1." There are two forms of Rollups: Zero-Knowledge (ZK) Rollups and Optimistic Rollups.
ZK Rollups use complex proofs to almost instantaneously confirm the final state from Layer 2 to Ethereum Layer 1. Some application-specific ZK Rollups are already live, including Loopring DEX, Immutable X (Gods Unchained), and the derivatives protocol dYdX.
Optimistic Rollups "optimistically" assume that all transactions are valid. However, there is a challenge period for transaction confirmations on the main chain, serving as a fraud prevention mechanism. Withdrawing tokens from Optimistic Ethereum DApps usually requires some delay (slower compared to ZK Rollups) to prepare for any challenges.
In the past, the difference between Optimistic Rollups and ZK Rollups was that the former could easily support an Ethereum Virtual Machine (EVM) compatible application environment. EVM compatibility allows developers to port existing Solidity contracts from Ethereum with minimal changes.
However, as Matter Labs' ZKSync and Starkware approach achieving EVM-compatible computation capabilities in ZK Rollups, the gap in programmability between Optimistic and ZK Rollups seems to be narrowing.
2. Metis Layer 2
Metis will become one of the EVM-compatible Optimistic Rollups family members launching in the coming months. It uses a fork of Optimism's Optimism Virtual (OVM), referred to as the Metis Virtual Machine (MVM). MVM mirrors OVM in functionality and code execution.
Like other Optimistic Rollups, Metis relies on network participants called "sequencers" to sort and batch transactions before submitting the final state changes of MVM to Ethereum.
However, unlike other projects, Metis intends to launch multiple sequencers, which will aggregate into on-chain entities known as Decentralized Autonomous Companies (DACs).
For each block processed, the protocol randomly selects a new sequencer from the sequencer DAC, which is responsible for pushing all state changes to Ethereum.
Metis's sequencer pool and selection process sharply contrast with the single sequencer approach initially used by Arbitrum and Optimism. However, Arbitrum and Optimism have both discussed plans to shift towards a more democratized sequencer selection process.
DACs are essentially DAOs. Metis presents them as on-chain organizations that allow users to collaborate and perform certain network operations, such as running a sequencer pool (as mentioned above) or deploying a new application on MVM.
To qualify for confirming a batch of transactions, sequencers must stake METIS tokens above a dynamic bond threshold (DBT) as a mechanism to deter malicious behavior and sequencer misconduct.
Users can also participate in overseeing the activities of sequencers as "Rangers." Ranger teams sample a series of blocks and verify state roots in exchange for METIS token rewards. Successful challenges (known as fraud proofs) result in reductions of the sequencer's staked assets.
These reduced assets will be transferred to the Rangers who initiated the dispute process. Rangers who repeatedly challenge unsuccessfully may face network bans.
Source: Metis Whitepaper
The challenge process is a crucial component of Optimistic Rollups. Optimistic Rollups are designed to be "optimistic," assuming that there are no fraudulent transactions among the published transactions.
They essentially use a "presumption of innocence" approach, relying on a "checks and balances" system to prevent fraud while ensuring that Ethereum remains the arbiter of truth. All anti-fraud detection on Metis is implemented through Rangers monitoring sequencer activities and challenging any misconduct.
While Metis uses a fork of Optimism's OVM, it incorporates features aimed at improving the original design. These features include:
IPFS Integration - A cheaper data storage option than using auxiliary solutions.
Faster verification speed when publishing state changes to Ethereum due to the use of Rangers.
Polis Middleware - Provides templates and support for an enhanced development environment, aimed at new developers entering the crypto space.
Multi-execution layers - Metis will allow DACs to launch new MVM execution environments to scale capacity as block space demand increases.
Permissioned environment - DACs can customize access control for their MVM instances.
3. IPFS Integration
Due to limited block space, data storage costs on Ethereum and Bitcoin are high. Metis saves on-chain space by allowing each DAC to run separate MVM instances, which have a built-in storage layer using IPFS. Users and developers can access content from Metis through the MVM's IPFS resolver.
Source: Metis Whitepaper
Storing and accessing data in this manner has two potential benefits. First, data can be encrypted within the Metis protocol, allowing users to store confidential information. Second, the IPFS resolver enables Metis applications to directly access and link to stored data, such as the underlying artwork or music of NFTs.
4. Rangers Assist in Achieving Faster Verification Speeds
The main weakness of Optimistic Rollups is the long wait time for funds to be withdrawn to Ethereum Layer 1 (or even another Layer 2) while awaiting confirmation. Typically measured in days.
Arbitrum expects withdrawals to take around three days, while Optimism's expected time is about a week. These wait times are crucial for the fraud detection process, but they can also reduce user flexibility and create friction when attempting to transfer funds to Ethereum or between different Layer 2s.
Metis's multi-party fraud detection system can reduce the confirmation time for state changes from several days to a few hours. As mentioned, Metis randomly selects a new sequencer for each block and relies on a group of Rangers to monitor sequencer activities.
Sequencers are economically incentivized to avoid issuing fraudulent state changes (as their staked METIS will be completely lost if caught), while Rangers earn economic rewards for correctly reporting fraudulent attempts. Single-sequencer systems like Optimism and Arbitrum (when first launched) required days for withdrawal times, whereas the Metis team indicated that its multi-layer checks and balances mechanism allows it to shorten withdrawal times to about 6 hours.
Metis must ensure it has a strong team of sequencers and Rangers at launch to achieve its goal of reducing withdrawal wait times to 6 hours.
5. Polis
A key factor that may affect Layer 2 adoption is the challenges associated with porting existing contracts from Ethereum to the new layer.
If a platform requires projects to significantly adjust their existing contracts, the applications it attracts may be few, as projects will avoid development environments that require major overhauls of their codebases. Conversely, developers prefer familiar development environments, which means maximizing EVM compatibility is essential.
Metis adopts an EVM-compatible design. It aims to further simplify the transition of existing Ethereum applications to Layer 2 through its Polis middleware.
The Metis team intends to help Polis bridge the gap from Web2 to Web3 by providing developers with "low-code to no-code" templates for deploying and managing new applications.
The combination of low fees and a low development learning curve can create a fertile environment for experimentation and innovation, which is a key element in nurturing an application ecosystem from scratch.
While adopting EVM is a significant growth catalyst (and increasingly necessary), this strategy also means that Metis will compete directly with all other EVM-compatible Layer 1 networks and Layer 2 solutions.
Using a different VM is a gamble, as sparking developer interest in new languages and toolsets is a massive and often costly endeavor.
However, if the new VM gains momentum, it could be a gamble worth taking, as developers may not easily migrate to newer, better solutions. A differentiated product suite can create stickiness, preventing developers or liquidity from flowing to competing platforms.
6. Token Economics
The METIS token was first publicly allocated on May 13, 2021, through an IDO on the PAID network and an IEO on Gate.io. After launching at an IDO price of $5, METIS quickly rose to $8, then consolidated around $5 for three months before climbing to new highs with the recent market recovery.
The METIS token has three basic use cases within the Metis Layer 2 platform:
Transaction fees - Users pay transaction fees using METIS.
Staking for DACs - DAC contributors must stake METIS to become sequencers, participate in collaboration, or launch new MVM layers.
Rewards - DACs and Rangers are rewarded with METIS tokens for contributing to fraud challenges. These participants may also have their METIS confiscated for violations.
Metis allocated 49.3% (or 4.93 million METIS) to community projects (airdrops and community participation incentives), decentralized exchanges, and other markets (to ensure sufficient trading liquidity), early contributors (public and private investors), the team, and the MetisLab Foundation.
Tokens allocated to the team, foundation, and private investors have a vesting schedule of 12-18 months, which keeps early price volatility of METIS relatively low.
Metis has designated the remaining 5.07 million tokens for a ten-year incentive program to reward network participants processing transactions, such as sequencers, Rangers, and community members involved in transaction processing (a process Metis refers to as "transaction mining").
The issuance schedule of METIS will serve as an incentive to provide security and prevent fraud. However, one often overlooked aspect of the token is its impact on project innovation rates and adoption rates.
Token incentives, even if inflationary, can guide ecosystem and user growth, as evidenced by Polygon's rapid rise. The Polygon team used its MATIC supply to reward validators on Aave and Curve protocols, and later incentivized liquidity providers (LPs).
Layer 2 as a whole will be a highly competitive landscape, with projects that have not yet entered the public eye able (and likely) to leverage every advantage available to compete. Given that Arbitrum, Optimism, and StarkWare have yet to share clear details about native tokens, having a token could be a competitive advantage for a Layer 2 project.
7. Specific Competitive Landscape
As Optimistic Ethereum (OE) and Arbitrum are about to fully launch, at what stage is Metis specifically developing? Metis plans to launch a public testnet in September and the mainnet in October.
The Layer 2 competitive landscape is rapidly evolving. Uniswap v3 has launched on OE and will deploy to Arbitrum. Since late July, the experienced DeFi project Synthetix has been live on OE.
Arbitrum has stated that it has granted "mainnet access to over 400 projects, with dozens successfully deployed."
As Optimism and Arbitrum gain a lead in application adoption, Metis needs to quickly fill its ecosystem after the mainnet launch. A fork of Uniswap v2, MetisSwap, has already launched on Metis's testnet, and WOWswap has committed to adding leveraged token trading protocols.
While every new network requires financial primitives, Metis's market presence is far from the development activity on Optimism and Arbitrum.
Metis plans to stimulate its application ecosystem through its Ecosystem Development Program. Developers must have an ongoing work project, a mature community, or a great idea and team to win ecosystem funding.
Metis will facilitate introductions to VCs, provide technical support, market, and community building, and offer METIS token rewards to successful applicants.
8. Roadmap
With the ongoing development of the Polis middleware tools, Metis is focused on incentivizing ecosystem growth to ultimately launch the mainnet in October.
Metis has established relationships with DeFi, infrastructure, and token launchpad partners, including Trustee Wallet, OroPocket OpenDeFi, PARSIQ, PAID Network, and many other projects.
9. Facing Fierce Competition, the Road Ahead is Still Challenging
Network effects are the primary driver of on-chain transaction volume, and well-known competitors like Optimism and Arbitrum, as well as Layer 1s with evolving ecosystems like Solana and Terra, already have large DeFi and Metaverse projects built or underway.
ZK Rollups have also rapidly evolved from early DApp-specific solutions (like Loopring and dYdX). Immutable X plans to support a second game as it progresses towards becoming a Metaverse ecosystem. zkSync and StarkWare already have EVM-compatible ZK-Rollups in their testnets.
The competition is just beginning, and Metis must deliver on its promises to improve the Optimistic Rollup experience through its proposed versatility and UX enhancements. If Metis can successfully cultivate an application ecosystem through its token incentive program, it may generate the network effects necessary for the survival of Layer 2 projects.
The transition of developers and users from Web2 to Web3 is already underway and will only accelerate in the future, with the market potentially large enough to accommodate every project.
However, projects and infrastructures that can create sufficient distance from their closest competitors will emerge as leaders in the next frontier of the internet.
