What new opportunities can Cancun upgrades bring to L2?

Original Title: “V God Claims That Without L2, Ethereum Will Fail. What New Opportunities Can the Cancun Upgrade Bring to L2?”

Source: R3PO

2023 has seen two significant upgrades in Ethereum's history. The first was the Shanghai upgrade completed on April 13. After the Shanghai upgrade, the staking withdrawal feature of the Beacon Chain was opened, officially transitioning Ethereum from a PoW mechanism to a PoS mechanism, marking an important milestone in Ethereum's upgrade roadmap. Now, Ethereum is about to welcome the Cancun upgrade, which aims to increase data storage to reduce costs and improve efficiency for L2, expecting to enhance L2's speed by 10 to 100 times while lowering costs. According to the latest Ethereum core developer meeting, the Cancun upgrade is expected to go live by the end of this year.

How will the Cancun upgrade accelerate Ethereum's scalability and what new development opportunities will it bring to Layer 2? R3PO believes that through the Cancun upgrade, Layer 2 will better integrate into the Ethereum ecosystem, providing users with a faster and lower-cost transaction experience. Whether it is Optimistic Rollup or ZK Rollup, both will benefit from this upgrade, jointly promoting the development of the Ethereum ecosystem.

I. A Certain Future ------ Layer 2

In Vitalik Buterin's latest article, “The Three Transitions,” he outlines three major technological transitions that Ethereum needs to undergo: transitioning to L2 scalability, where everyone moves to Rollup; transitioning to wallet security, where everyone uses smart contract wallets; and transitioning to privacy, ensuring that the transfer of funds protecting privacy is feasible.

The article clarifies the importance of L2 and Rollup, with Vitalik pointing out that without the development of L2, Ethereum will fail due to high transaction costs. Compared to the world-renowned transaction system VISA, which can handle tens of thousands of transactions per second, Ethereum's performance of only 15 transactions per second is hardly sufficient to meet normal transaction demands. The cost threshold of $3.75 per transaction also deters many ordinary users.

Ethereum supports a large number of transaction activities daily, and as the ecosystem continues to develop, the limitations of block space have led to increasing congestion in the network, revealing issues such as high fees and low speeds on Ethereum's Layer 1 mainnet, creating an urgent need for cost reduction and speed improvement.

How to scale and accelerate Ethereum has always been a key focus for Ethereum developers. According to the roadmap released by V God, after the Shanghai upgrade resolves the consensus mechanism issues, the next focus will be on scalability, aiming to increase the Ethereum network's transaction processing capacity to over 100,000 transactions per second.

Currently, there are two scalability solutions for Ethereum: Layer 2 and Sharding. Layer 2 is an off-chain solution for scaling the underlying blockchain (Layer 1), which works by executing requests off-chain and performing calculations for actual transactions off-chain, then validating their final effectiveness through a minimal number of transactions on Ethereum. The mainstream Layer 2 solution is Rollup, which works by bundling hundreds of transactions executed and calculated on-chain into a single transaction summary, sending that summary data to Ethereum, thus only needing to store the summary data without performing complete calculations and storage on the Ethereum chain, achieving scalability while ensuring Ethereum's security.

II. Optimistic Rollup VS ZK Rollup

Rollup is mainly divided into Optimistic Rollup and ZK Rollup.

Optimistic Rollup uses a fraud-proof mechanism. The system assumes the reliability of transaction data and allows it to enter a waiting period without validity verification. During the waiting period, if any node raises an objection and provides evidence of malicious behavior in the transaction, that transaction will be canceled. If there are no objections, after the waiting period ends, the transaction will be confirmed and written into a block. By using fraud-proof transaction schemes, large-scale verification deployments are omitted, saving computational resources while ensuring transaction accuracy. Currently known solutions include: Arbitrum, Optimism.

ZK Rollup employs a zero-knowledge validity proof mechanism. It generates a zero-knowledge proof to demonstrate that all transactions are valid and uploads the final state changes after executing all transactions to Ethereum. ZK Rollup does not need to upload all compressed transaction details like Optimistic Rollup; it only needs to upload a zero-knowledge proof and the data of the final state changes. The main players in the ZK Rollup space include ZKsync, Starkware, Scroll, etc.

Advantages and Disadvantages of Optimistic Rollup:

Advantages:

Compatibility: Optimistic Rollup is relatively easy to support general-purpose contracts and is compatible with the Ethereum Virtual Machine (EVM), making it easier for developers to develop and migrate applications.

Disadvantages:

Fraud-proof time delay: When malicious transactions or disputes arise, the exit time for Optimistic Rollup is longer, usually a week, which may lead to funds being unable to flow freely for a period.

Network stagnation: When disputes occur in the network, the entire Optimistic Rollup network may experience stagnation, preventing transactions from proceeding smoothly, as it needs to wait for the processing and verification of objections.

Advantages and Disadvantages of ZK Rollup:

Advantages:

Privacy protection: ZK Rollup utilizes zero-knowledge proof technology to verify transaction validity while protecting user privacy. Transaction details remain confidential, requiring only the verification of the proof's correctness, providing a higher level of privacy protection.

Security: The verification process of ZK Rollup is based on mathematical proofs, providing strong security guarantees. Through zero-knowledge proofs, the validity and consistency of transactions can be ensured without revealing transaction details.

Disadvantages:

Computational costs: Generating and verifying zero-knowledge proofs requires significant computational resources, making the computational costs of ZK Rollup relatively high, which may lead to longer processing times and higher computational overhead.

Limited smart contract functionality: Due to the design goal of ZK Rollup being to optimize transaction processing, support for complex smart contract functionalities is limited, and certain complex contracts may not be directly implemented on ZK Rollup.

Due to the early launch advantage of OP systems with lower development difficulty, they currently occupy over 90% of the market's TVL, while ZK systems have a smaller market share and need faster construction progress and ecosystem development to compete for user growth. As the Layer 2 ecosystem matures, after the Cancun upgrade, Rollup fees can significantly decrease, and user growth and ecosystem development may be the most critical winning factors in the competition between ZK and OP systems.

III. The Future of Layer 2: The Path Forward Under the Guidance of the Cancun Upgrade

In the previous sections, we compared the advantages and disadvantages of the two Layer 2 solutions, Optimistic Rollup and ZK Rollup. With the Cancun upgrade approaching, Layer 2 will encounter new development opportunities. The Cancun upgrade is an important milestone for Ethereum, aiming to enhance scalability and performance. Through the Cancun upgrade, Layer 2 will better integrate into the Ethereum ecosystem, providing users with a faster and lower-cost transaction experience. Whether it is Optimistic Rollup or ZK Rollup, both will benefit from the improvements brought by the upgrade. After the Cancun upgrade, the speed of Ethereum Layer 2 is expected to increase by 10 to 100 times while also lowering transaction costs. We have reason to expect the widespread application of Layer 2 in Ethereum, opening up new possibilities for achieving high throughput and low-cost decentralized applications.

1. Main Content

The Cancun upgrade includes five EIPs aimed at increasing data storage and reducing costs. The upgrade centers around EIP-4844, along with four other improvement proposals: EIP-1153, EIP-4788, EIP-5656, and EIP-6780. There is currently no exact date for the upgrade, but it is expected to go live by the end of 2023.

EIP-4844: As the core of the Cancun upgrade, EIP-4844, also known as Proto-Danksharding, is a scalability solution centered around Rollup. EIP-4844 is the first step in Ethereum's scalability journey. Before the upgrade, Rollup data was permanently stored on Ethereum, and the storage costs were expensive, with 90% of the transaction costs paid by users for Rollup being due to these storage costs. To address this, EIP-4844 introduces a new transaction type—Blob Transaction, where data will be temporarily stored in "Blob" for about one month, after which the data will be deleted. For long-term data storage, other service providers will store it as needed. Once Blob becomes part of the Ethereum protocol through Proto-Danksharding, it may allow for the addition of more Blobs in Ethereum blocks, significantly expanding Ethereum's throughput (>100 times) while also reducing transaction costs.

Other selected EIPs include:

• EIP-1153: Reduces the costs of on-chain data storage, improving block space.
• EIP-4788: Improves the design of cross-chain bridges and staking pools.
• EIP-5656: Adds minor code changes related to the Ethereum Virtual Machine.
• EIP-6780: Removes code that could terminate smart contracts.

2. What Opportunities Are Worth Noting?

The Grand Narrative of Layer 2

The background of Ethereum congestion has also created the grandest narrative. Currently, the total TVL of the L2 ecosystem has more than doubled since the beginning of the year, reaching around $8 billion.

As the first step in Ethereum's scalability journey, the Cancun upgrade will make Layer 2 10x to 100x faster and cheaper! The scalability and low fees of EIP-4844 will benefit various L2 ecosystems, with the OP ecosystem becoming more diversified, and the ZK ecosystem becoming more usable due to enhanced data availability, allowing independent Layer 2 solutions that are difficult to operate due to high costs to grow rapidly. Benefiting from the reduction in on-chain fees, the L2 ecosystem will become increasingly rich, and the number of users will also increase.

Among the projects that have already launched, Arbitrum, OP, the emerging ZKsync, and the established application dYdX dominate the current L2 landscape. The strong will remain strong, and the leading protocols in popular sectors will have greater potential after the Cancun upgrade.

In addition to the projects that have already launched, upcoming mainnet projects like Scroll, Linea, and Taiko are also worth paying attention to.

Moreover, the faster transaction speeds and lower transaction fees of L2 will inevitably spur a new wave of projects on L2. On-chain futures, on-chain options, and other projects that are easily affected by Ethereum's low TPS will see substantial improvements in transaction speed requirements due to the Cancun upgrade, further expanding their development space.

Data Availability Layer (DA) Track

Due to the short storage duration of Blob data, there are issues with calling historical data. This creates a demand for decentralized storage, and Layer 2 scalability solutions also need to utilize data availability layers. Additionally, the Cancun upgrade will also benefit L1 storage expansion networks, such as Eth storage, Arweave, Filecoin, and other Ethereum DA layer projects.

3. Where is Layer 2 Heading?

In the foreseeable future, with the Cancun upgrade sounding the horn for Ethereum's scalability, it will provide higher throughput and lower transaction fees. This will enable Layer 2 applications to handle more transactions and provide users with faster, instant transaction confirmations. Whether in financial payments and settlements or in gaming and NFTs, the high performance of Layer 2 will offer users a smoother and more efficient experience.

However, technological advancements alone cannot attract users. To achieve true prosperity for Layer 2, innovative applications are essential. According to L2beat data, there are currently 29 Layer 2 solutions that have launched or are in development, with Arbitrum One, Optimism, zkSync Era, and dYdX accounting for 92.75% of the market share, while other L2s share the remaining 6.25%.

It is akin to spending a lot of time and effort building highways, but due to a lack of demand, there are very few cars on the highway, which is a common issue faced by many L2s. Without quality applications, the value of L2 cannot be realized; Arbitrum has gradually built a prosperous ecosystem precisely due to the rise of DeFi applications like GMX. Only by developing more convenient, innovative, and practical applications that meet user needs can we truly attract user attention and participation. This requires developers and entrepreneurs to boldly experiment and innovate on Layer 2, leveraging the advantages of Layer 2 to create unique and appealing application scenarios. Only in this way can Layer 2 truly integrate into users' lives. Therefore, in the future, in addition to technological development, user migration and application promotion will also be key factors for the success of Layer 2.

Reference

1. https://vitalik.eth.limo/general/2023/06/09/three_transitions.html
2. https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698
https://www.datawallet.com/crypto/zk-rollups-vs-optimistic-rollups
3. https://www.coindesk.com/tech/2023/06/08/ethereum-developers-cement-final-lineup-of-changes-in-dencun-upgrade/
4. https://l2beat.com/scaling/tvl#upcoming
5. https://ethereum.org/zh/layer-2/
6. https://medium.com/bitcoin-news-today-gambling-news/ethereums-cancun-deneb-upgrade-everything-you-need-to-know-3e67439a036