Layer 2 Won't Save Ethereum

Author: 0xjim, Cointelegraph

Compiled by: Zion

Due to Ethereum's ongoing struggles with high gas fees caused by network congestion, many have claimed that Layer 2 will be the panacea: forever solving Ethereum's dreaded gas problem.

Frankly, until a few weeks ago, I was one of those people: once Layer 2 reached a critical mass of transactions on Ethereum, it would become the absolutely perfect crypto platform.

However, as I began to delve deeper into Layer 2 solutions and engage more in the in-depth conversations around Layer 2 on Twitter and Discord, I started to realize—while Layer 2 is a very necessary and reasonable solution for scaling Ethereum, it also has its own potential issues that could hinder the platform from achieving its true vision as a world supercomputer.

Layer 2 has its own potential problems that few people are aware of or discuss.

Nonetheless, Layer 2 is definitely a step in the right direction, and even in the case of ETH2's eventual merge later this year, they are needed. The throughput and speed they offer are simply not achievable on Ethereum 2.0's Layer 1 network.

But they are far from perfect. Perhaps that’s why there are so many solutions to scale Ethereum: sidechains, subchains, payment channels, roll-ups…

Here are some potential problems/unresolved issues I see with the current Layer 2 scaling solutions.

Limited Composability

Yesterday, I talked about how the true power of decentralized finance lies in composability—stemming from the open-source nature of technology.

I personally believe that composability is the most powerful aspect of DeFi.

Yes, open finance is great—it allows unprecedented access to financial services that nearly 2 billion people in the world cannot access.

Equally great is that individuals have, for the first time since the rise of Web 2.0, reclaimed control over their finances, data, and property from intermediaries like Facebook and banks.

But for me, increased composability is really important. It creates entirely new financial products that have never been seen before, changing the way we view finance.

In my mind, I see DeFi as an endless network of innovation. Just like how the internet created companies in the 90s that we never thought possible: Netflix, Postmates, Zoom.

Unfortunately, with the implementation of Layer 2, composability may be limited—or completely disappear—because Layer 2s currently do not interoperate with each other.

In other words, one Layer 2 application cannot easily communicate with another Layer 2 application—undermining the power of composability.

On Layer 1, a transaction can interact with multiple DeFi protocols, creating an entirely new financial product.

On Layer 2, transactions can only interact with DeFi protocols that exist on their own chain.

For example, Aave is only available on Polygon, while Uniswap is only available on Optimism. We cannot execute a transaction that simultaneously calls both Aave and Uniswap smart contracts.

Due to this fragmentation, composability is limited, and thus the magic of DeFi is greatly constrained.

This can be remedied by interoperability layers like Polygon, which seeks to connect all Layer 2 solutions within a standard framework. However, getting all solutions to build according to Polygon's standards and platform will be a long process.

Liquidity

Another issue with the fragmentation of Dapps across different Layer 2 chains is that their associated liquidity is also dispersed.

Liquidity is crucial in any financial market because it provides a healthy market where buyers and sellers can meet and exchange goods in a public market without compromising too much on buy/sell prices, nor causing wild price fluctuations.

Currently, all liquidity exists on Ethereum—providing a healthy and deep liquidity market for all financial products and tokens on the platform.

As we transition to Layer 2, we will see existing liquidity split between Ethereum Layer 1 and various scaling solutions—rather than providing all liquidity on Ethereum.

Friction

Finally, as we approach the eventual state of a multi-chain Layer 2 world above Ethereum, there will be significant friction in moving between each Layer 2 to interact with DeFi.

We may see many bridges between Layer 2s, so when we try to move funds between chains, expect long transfer times.

Also expect multiple accounts—each Layer 2 chain will have one or more. From a user experience perspective, tracking funds across these scaling solutions will be a headache.

For example, we have AAVE on Polygon, and we want to swap it for UNI on Uniswap on Optimism.

We not only have to move AAVE from Polygon to Ethereum, but we also have to move AAVE from Ethereum Layer 1 to Optimism.

Conclusion

Of course, these issues are certainly solvable, and they may be resolved shortly after all major Layer 2 scaling solutions are publicly released—thanks to the strong firepower of the Ethereum developer community.

I believe we will eventually see some integration in the Layer 2 space—where a few winners will emerge based on the strengths of each technology.

I hope there will also be a strong interoperability protocol among them to maintain composability and liquidity—whether through the Polygon framework or a robust bridging network between Layer 2s.

Anthony Sassano said it best:

You can think of what’s happening in the Layer 2 ecosystem right now as a "phase of adoption and innovation," where many different solutions are trying and testing simultaneously. Of course, not all solutions will succeed in the long term. Ultimately, I don’t think any one solution will "win" the scalability war. As I said, each scalability solution has its own strengths and weaknesses. Some are great for payments, some allow for EVM compatibility, and some offer greater scalability at the expense of decentralization.