Is Layer 2 still needed for scalability after the Ethereum merge?

Author: Daniel Li, Planet Daily

Recently, Ethereum co-founder Vitalik Buterin predicted during his speech at ETHSeoul that ZK-Rollups will defeat Optimistic Rollups in the Ethereum scaling war and become the main Layer 2 solution for Ethereum in the future. As a result, discussions related to Layer 2 quickly surged to the top of industry trends. So, what is Layer 2? What is the relationship between ETH 2.0 and Layer 2? How will Layer 2 develop in the future? Let's explore these questions in the following text.

Layer1------Layer2

To understand what Layer 2 is, we must first discuss Ethereum's scalability. The congestion on Ethereum is well-known and felt by many. As a solution to improve Ethereum's performance, scalability has been a hot topic for users and enthusiasts over the past two years. Currently, there are two popular solutions: one is to scale on the Ethereum main chain (Layer 1), known as Layer 1 scaling. The other solution is to build new chains alongside the main chain to achieve scaling, referred to as Layer 2 scaling, with ZK-Rollups being a standout option.

Whether it is Layer 1 scaling or Layer 2 scaling, the main goal is to increase Ethereum's scalability to alleviate network congestion, reduce high Gas fees, and improve network efficiency. To help everyone understand the two solutions, let's illustrate with an example.

If we compare the current Ethereum main chain Layer 1 to a house, then the DApps, DeFi, and smart contracts running on the main chain can be seen as the people living in the house. As the number of residents continues to increase, this old house (Layer 1) becomes increasingly difficult to accommodate more people. The two current solutions are as follows: Solution 1: Layer 1 scaling is like expanding the old house by adding more rooms to accommodate more residents; Solution 2: Layer 2 keeps the old house unchanged and builds a new house next to it, then transfers some residents to the new house to achieve the scaling effect.

Layer 2 exists in relation to Layer 1. When considering scaling solutions, the initial thought was to scale the public chain itself, i.e., Layer 1 scaling, such as the early Bitcoin large block idea and Ethereum's ETH 2.0, which are both examples of Layer 1 scaling. Layer 2 is a collective term for a series of off-chain scalability solutions. Layer 2 platforms and protocols handle data in a way that reduces the burden on the base layer (root chain) by transferring part of the data processing from the main chain to Layer 2, thereby enhancing the overall scalability of the blockchain network. Both Layer 1 and Layer 2 have their own advantages in Ethereum scaling and play important roles.

Classification of Layer 2

Currently, there are several solutions for Ethereum Layer 2, including: state channels, sidechains, Plasma, Rollups, Validium, and hybrid solutions.

Among the many solutions for Layer 2, Rollup is undoubtedly the most favored by the public. Rollup aggregates a large number of transactions into a single batch and then generates a "proof" for that batch. This proof is then published on the mainnet. Rollup executes transactions outside of Layer 1 but publishes transaction data on Layer 1. Since the transaction data is included in Layer 1 blocks, Rollup effectively inherits Ethereum's security.

Based on the validity of compressed data (i.e., data correctness), Rollup can be further divided into Optimistic Rollup and ZK Rollup. The prevailing view in the market is that Optimistic Rollup is favored in the short to medium term, while ZK Rollup is favored in the long term.

Optimistic Rollup

Optimistic Rollup is easier to implement in the short term compared to ZK Rollup, one of the main reasons being its stronger portability. It is precisely due to its excellent portability that Optimistic Rollup has been valued by DeFi leader Uniswap, which deployed Uniswap V3 on Optimism. This is of decisive significance for the adoption of Layer 2 solutions by the entire DeFi project, making Optimistic Rollup one of the most important Layer 2 implementation solutions in the short and medium term.

The advantages of Optimistic Rollup are clear, but it also has a fatal flaw: it needs to solve the issue of fraud proofs, which leads to a withdrawal period of up to a week. Users withdrawing their funds from Layer 2 exchanges to Layer 1 must wait a week, which is unbearable for most users. However, this drawback is not insurmountable; some projects, such as Optimism DAI Bridge, can assist Optimistic Rollup in shortening this time.

ZK Rollup

ZK Rollup is a Layer 2 scaling solution based on zero-knowledge proofs. The data availability of ZK Rollup allows anyone to restore the global state of accounts based on the transaction data stored on-chain, thereby eliminating security risks arising from data availability. In contrast to the long withdrawal period of Optimistic Rollup, ZK Rollup avoids this issue through mathematical reliability proofs and is technically secure, closely approaching Layer 1. Additionally, deposits and withdrawals can be conducted instantly according to user needs, which is the biggest advantage of ZK Rollup.

Like Optimistic Rollup, ZK Rollup also has its shortcomings: currently, ZK Rollup cannot fully support EVM compatibility because it needs to generate zero-knowledge proofs for transactions on Layer 2 and then send them back to Layer 1 for verification. The entire transaction process must comply with the zero-knowledge proof specifications. However, at the time of EVM's design, zero-knowledge proofs were not yet widespread, and there was no consideration for supporting them.

This issue is being addressed, as Layer 2 projects like Scroll, zkSync, and Polygon have announced intentions to deploy ZK-EVM computing environments, allowing ZK-Rollups to independently run various forms of general smart contracts. Once ZK Rollup achieves full compatibility with EVM, it will have the opportunity to gain increasing favor from DeFi, and as more DeFi projects adopt ZK Rollup technology, a trend will gradually form, ultimately achieving interoperability among Layer 2 ZK Rollups. This is also why ZK Rollup is valued by industry leaders like Vitalik Buterin.

Current Dilemmas of Layer 2

Although Layer 2 is a necessary and logical solution for scaling Ethereum, it has its own limitations and potential issues that may hinder the platform from realizing its true vision of becoming a world supercomputer.

Limited Composability

Layer 2 has numerous solutions, all aimed at addressing the scalability issues of ETH. However, the principles and directions of different solutions vary, leading to a significant problem: if different projects adopt different Layer 2 solutions, it will result in ineffective value transfer and protocol circulation among them. This will cause DApps and DeFi applications running on Layer 2 to become isolated. In Layer 1, a single transaction can interact and combine with multiple DeFi protocols to create new financial products, while in Layer 2, composability will be greatly restricted, as transactions can only interact with DeFi protocols existing on their own chain, leading to fragmentation of DApps across different Layer 2 chains.

Liquidity Fragmentation

Another reason for the fragmentation of DApps on Layer 2 is that their related liquidity is also fragmented. Liquidity is extremely important in any financial market, especially in the blockchain industry, where liquidity is a prerequisite. Without liquidity, some DApps and DeFi on Layer 2 lose their value. In Layer 2, we see existing liquidity being allocated to Ethereum Layer 1 and different Layer 2 scaling solutions, resulting in liquidity being fragmented across multiple layers. Different chains, due to adopting different scaling solutions, cannot flow into each other, which greatly limits the liquidity of Layer 2.

Relationship Between ETH 2.0 and Layer 2

The early existence of Layer 2 was to address the scalability and high Gas fee issues of ETH. It seems that Layer 2 has achieved this, and before ETH 2.0 matures, public chains like Polkadot and BSC are also emerging, ready to shake Ethereum's position. Layer 2 solutions have addressed the significant challenges faced by Ethereum's vast application ecosystem, allowing ETH to maintain its position as the king of public chains.

Complementary and Indivisible

The scalability of ETH 2.0 cannot be separated from Layer 2, and similarly, Layer 2 cannot exist independently of ETH 2.0, as Layer 2 is built on the foundation of Layer 1 and does not exist in a vacuum. Without Layer 1, there would be no Layer 2. Furthermore, Layer 1, as the main chain, provides the decentralization and security that Layer 2 requires. Currently, important information from DApps and DeFi running on Layer 2 still needs to be verified through Layer 1. Therefore, not only does ETH 2.0 need Layer 2 for scaling, but Layer 2 also relies on ETH 2.0. The relationship between the two is complementary and indivisible.

Competing and Achieving Each Other

The merged ETH 2.0 will achieve its own scaling of the main chain Layer 1, improving computational speed, while the PoS model will replace the PoW model, potentially reducing high Gas fees. In the future, Layer 1 will be capable of supporting more and more complex DApps and DeFi. This creates competition with Layer 2, which also offers fast computation speeds and low fees. In the evolutionary process, Layer 1 and Layer 2 will form a layered DeFi structure, causing some fragmentation. However, ultimately, Layer 1 and Layer 2 will reach a balanced state. Layer 2, with its lower Gas fees and faster speeds, will serve as the main area for DeFi, while Layer 1 will remain important, providing security for Layer 2 and serving as a settlement layer for critical data. At that time, the relationship between ETH 2.0 and Layer 2 will no longer be subordinate but will be one of mutual competition and achievement.

Will ETH 2.0 Abandon Layer 2 After the Merge?

With the ETH 2.0 merge approaching, some people worry that once the merge is completed, the scalability issues and high Gas fees of the main chain Layer 1 will be greatly alleviated, leading to questions about whether Layer 2 will still be needed and if it will be abandoned. Such concerns are largely unfounded.

First, the ETH 2.0 merge is not a one-time event. According to the timeline for the realization of ETH 2.0, it is being implemented in phases, and each step from proposal discussion to final implementation is a lengthy process. This is because, based on the principle of decentralization, any proposal implemented on ETH must have the agreement of the vast majority of the community. Earlier phases of the ETH 2.0 merge were also delayed due to disagreements among some community members. Even once a proposal is truly implemented, the transition from PoW to PoS will be a slow process. Therefore, for a considerable period in the future, ETH 2.0 will still require Layer 2.

Moreover, even if the main chain Layer 1's operating speed significantly increases after the ETH 2.0 merge, who would refuse even faster speeds? As Trusttoken's product manager Harold Hyatt explains, "Layer 2 based on Ethereum will scale alongside Ethereum, so if Ethereum scales, Layer 2 will also scale. If Optimism is 10 times faster than the Ethereum mainnet, then after sharding, Ethereum will be 10 times faster, and Optimism will be 100 times faster." Thibault Perréard, the strategic director of Bifrost, further affirms the future necessity of Layer 2: "The true catalyst for unlocking Ethereum's future potential and truly realizing the DeFi vision is not PoS, but Layer 2." Thus, ETH 2.0 needs Layer 2 now and will continue to do so in the future.

Layer 2 Will Form an Independent Ecosystem

Layer 2 was proposed to address the scalability and expansion issues of ETH. Although ETH 2.0 is about to complete its merge, it does not provide Ethereum with unlimited scalability. Even if ETH 2.0 will scale itself, it still requires Layer 2. Therefore, for a considerable period in the future, the development direction of Layer 2 will continue to focus on how to better improve the scalability and expansion of the Ethereum network.

The future development of Layer 2 will not be limited to Ethereum. As more and more DeFi projects are built on Layer 2 chains, users will find that transaction fees are cheaper and transaction speeds are faster on Layer 2. 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 migrate further to Layer 2. Gradually, this will form a trend, potentially resulting in the establishment of Layer 2's own ecosystem. At that point, Layer 2 will become the fourth track, following Bitcoin, Ethereum, and decentralized stablecoins.

Conclusion

In the future, ETH 2.0 and Layer 2 will have a complementary relationship, achieving mutual success. As more bridges are established between Layer 2 solutions, the issues of interactivity and liquidity within Layer 2 will be resolved. We believe that the future Layer 2 will support more and more complex DeFi and DApp applications, and the implementation and popularization of blockchain technology will be integrated more quickly and effectively into people's daily lives.