Cosmos&Polkadot V.S. Layer2 Stacks Series Three: How does Layer2 develop cross-chain networks?

Author: Gryphsis Academy

After sorting out the technical solutions of CP and Layer 2 Stacks, the value of tokens, and the ecosystem, we have provided corresponding selection ideas for developers and project parties based on the technical characteristics of both and the current empowerment of ecological tokens. Each party can choose a suitable solution according to their actual needs.

So, subjectively, what is the current community's attitude towards this new force of Layer 2? How should major L2s develop their superchain networks? In this article, the author will focus on these two questions.

I. Industry Perspectives

To gain a more comprehensive understanding of the current market voices, we have collected different opinions within the industry regarding the Layer 2 Stacks solution and summarized them into three categories: Bulls, Bears, and Observers.

1. Bulls:

• Public Chains: Projects like opBNB, ZORA, Base, Mantle, etc., have announced their intention to deploy on the OP Stack. BNB, for instance, announced its support for the OP Stack as early as February this year and created its own opBNB. After 1.5 months of testing, there have been over 7M transactions, 435972 addresses, and more than 40 Dapps deployed, including well-known projects like iZUMi Finance, Math Wallet, and BaBYGODE, indicating a high acceptance of opBNB by the community and developers.
• Project Parties: Taking Worldcoin as an example, it expressed its intention to deploy Worldcoin and World App on the OP mainnet in May this year and began implementing it on the OP superchain in July. Worldcoin aims to create a global identity and DID system, and combining it with the OP superchain allows any user to freely manage their identity ID and also assists the OP Collective in on-chain governance. Additionally, Debank announced on August 11 that it would deploy a dedicated asset social L2 chain on the OP Stack. As a well-established brand in data asset services for over five years, regardless of success, it is evident that project parties are enthusiastic about deploying L2 and that choosing OP Stack as the preferred solution brings positive effects to OP.
• Community: The community has a high level of recognition/consensus regarding Ethereum, which itself is a financial superchain with a rich application scenario. Therefore, launching L2 on Ethereum is more recognized by the community compared to independently developed Cosmos & Polkadot ecosystems; it is believed that Layer 2, due to its complete consensus layer, will develop much faster than CP and will complete the construction of the superchain ecosystem more quickly.

2. Bears:

• Developers: Some developers believe that relying on a single Ethereum for the consensus layer of all superchains is too risky. If Ethereum, as a single infrastructure, fails or is attacked, all superchain networks will be affected. In contrast, CP considers security more thoroughly; Cosmos allows each chain to customize validators for verification security, meaning that even if a failure occurs, it only affects a single chain and its related chains, not the entire ecosystem. Polkadot provides more options, allowing for shared security with the relay chain or customizing the security layer like Cosmos, significantly reducing risks by maintaining the security of its own chain. Therefore, regardless of the situation, the current Layer 2 Stacks should develop more solutions regarding security.
• Projects: The superchain network of Layer 2 Stacks is slightly oversupplied. Without considering technical differences, ordinary projects do not have a strong perception of it, as it essentially remains Ethereum. Some project parties believe that the industry needs L1 (like CP) and that not all chains are suitable for L2.
• Community: As a scaling solution for Ethereum, Layer 2 is unlikely to exist independently from Ethereum in the short term, making it challenging to address the economic model between ETH and native tokens. Compared to Cosmos, which has already integrated 246 chains, and Polkadot, with a market cap of 6.5 billion, without a well-developed community drive, competing with CP appears somewhat weak.

3. Observers:

• Some developers believe that Layer 2 Stacks are all about attracting more developers to create ecosystems. After leading L2s like OP and Arb announced their superchain ideas, taking proactive measures can be seen as a response to market enthusiasm, which is understandable. Moreover, since L2 only handles and packages transactions (execution layer), when superchain L3 packages transactions for L2, and L2 repackages them… forming a recursive compression, greatly expanding throughput may not be a bad thing. However, acting hastily without examining the current on-chain ecosystem and economic incentives may be somewhat premature.

The author believes that given the current situation, the Stack solution, especially OP Stack, is a favorable direction. BNB, Base, ZORA, Mantle, Worldcoin, Debank, etc., backed by top exchanges and well-known Web2 giants, give OP Stack a leading position in Layer 2 and may become the preferred choice for major projects to launch chains in the future. This also indicates that the market and industry recognize the logic of L2 Stacks, which can already be implemented in practice.

However, in the long term, the Ethereum ecosystem, built jointly by ETH and Layer 2, will become increasingly prosperous. Yet, within the ecosystem, there are also some issues. For instance, how Layer 2 handles its relationship with Ethereum, how to capture value from its constructed multi-chain system, how to establish core competitive barriers, and how to collaboratively create L2 superchain networks with other Layer 2s will all be challenges that Layer 2 faces moving forward. Every step taken thereafter will significantly influence the future direction of Layer 2.

II. How to Develop

1. Technical Optimization

In the traditional development process of public chains, there exists the impossible triangle problem: scalability, security, and decentralization. The emergence of L2 alleviates the scalability issue, and the respective Stacks launched primarily target superchain networks, solving most of the scalability issues of underlying infrastructure. So, apart from this, what kinds of problems will arise in the development of Layer 2 Stacks?

1) Structural Security:

The emergence of superchain structures undoubtedly increases the complexity of Layer 2. Can the L2 Stacks framework support the concurrency of various application chains? We have conducted a structural analysis of the published Stack frameworks of Optimism, zksync, and Arbitrum.

OP Stack utilizes shared cross-chain bridges for asset transfer, and all OP Chains (1-n) created using the Stack solution are at the same level as the OP Mainnet. ZK Stack & Arbitrum have similar underlying structures but support the issuance of L3 and L4, forming an expandable superchain network; Polygon 2.0 (not listed in the table as a sidechain) uses Ethereum as the staking layer, and some Polygon zkEVM public chains operate in parallel with superchains, sharing an interoperability layer.

Their structural frameworks are similar and face the same type of problem: all superchains rely on the underlying Ethereum for security consensus. If Ethereum is attacked, are the superchains safe? The inter-coordination of superchains is primarily through shared communication bridges; how should issues be resolved when problems arise with the bridges? For such singular carrying solutions, Layer 2 should adopt multiple backup solutions or directly optimize the framework to address these issues.

2) Risk Assessment

The high security of Ethereum is beyond doubt, but whether Layer 2 can fully inherit the security of L1 is a question. As a mainstream Layer 2 based on Rollup, its current most important function is to transition "execution" operations to its own chain. However, when users initiate transactions on L2 chains, although costs are significantly reduced, can security be guaranteed? Is there a corresponding escape pod mechanism to timely protect user assets?

To address this, we have organized several important indicators from the l2beat website to assess the current risk deficiencies of Layer 2:

• State Validation: State validation refers to the mechanism Layer 2 uses to verify the correctness of transactions. From the table, we can see that the verification mechanism of the Optimism network, which was the first to use OP Rollup, is still not fully developed at this stage. In contrast, Arbitrum has already implemented a fraud proof mechanism for verification, and the Rollup Stage development progress is also ahead of Optimism. It can be said that in terms of transaction security/correctness, Arbitrum has an advantage.

Additionally, zkSync and StarkNet both use ZK Proofs, and their Rollup Stages are at the same level.

• DA: Data availability, the definitions of which vary slightly in the market, we will analyze based on l2beat's interpretation. l2beat believes that in data availability, "data available" means that as long as the correctness of state transformation is publicly disclosed, there is no need to broadcast the complete transaction data, which would infringe on user privacy. Moreover, all this data must be on-chain so that those capable of verifying "state transformation" can do so on-chain.

From the table, we can see that the current data of these L2s is all On-Chain. The OP Rollup chain uploads all transaction-related data to L1, while the ZK Rollup chain only sends "state variables" to the chain, significantly reducing transaction costs and block congestion.

• Proposer Failure: Proposer failure refers to a situation where a node/proposer cannot complete its task due to certain reasons, which can lead to network errors or interruptions and may cause transaction failures and data loss for nodes. This means users cannot withdraw their assets from L2 back to L1, also known as the escape pod mechanism.

In fact, currently, all L2s in the market have not fully implemented the escape pod mechanism. From the table, we can see that all L2s are Whitelist Proposers, and only they have the right to submit the L2 state root to L1. Therefore, once they are attacked, users are left helpless, and their assets can only be frozen.

Arbitrum has a slight advantage in that it allows anyone to apply to become a Proposer about a week after discovering that a node/proposer is inactive/failing. This mechanism does provide a certain level of protection, but the Whitelist Proposer mechanism is essentially a closed system, which contradicts the essence of decentralization and openness in blockchain.

Although users can apply to become Proposers, this process still has a high technical threshold. To become a node/proposer, users may need basic equipment, and such solutions have not been actively applied in the market, nor are there corresponding incentive mechanisms for these Proposers.

So, overall, the current emergency measures for Layer 2 assets are not sufficiently complete.

• Rollup Stage: Stage 2 is the endpoint for all L2s inheriting security. However, at present, it seems that only Arbitrum is the most secure among all L2s, with the most complete risk mechanisms.

Considering its upcoming BOLD mechanism, a new permissionless verification scheme that strengthens its dispute protocol to resist a form of denial-of-service attack known as "delay attacks," it may further accelerate the pace towards greater decentralization.

3) Inter-chain Security:

Taking OP Stack as an example, its goal is to provide a unified modular development stack, allowing seamless communication between superchains. The modular architecture enables any developer to utilize the framework to develop their own blockchain, but it also means that anyone can develop and request messages. OP Stack allows developers to easily abstract different components of the blockchain and insert different modules to modify it.

In simpler terms, if you want to replace your fraud proof with a validity proof or want to use another data availability layer, OP Stack allows for such implementations. However, this raises a question: when diffusion turns into fragmentation, and when OP Stack modules no longer form a cohesive system but treat OP as a foundational chain tool, how should security between different chains be managed?

4) Cross-chain Coordination:

As Polkadot founder Gavin Wood stated, shared chains/bridges as communication are essentially fragmented. Although chains can communicate with each other, it is essentially a single chain + bridge model, while Polkadot conveys communication between parallel chains through a relay chain. In the context of Layer 2 Stacks, OP, ZK, and Polygon all utilize shared cross-chain bridges.

So how can seamless communication and interaction between chains be achieved? The current communication framework of Layer 2 Stacks, while having some drawbacks, may also present opportunities for the development of some cross-chain protocols or even public chains. Here, we list several possibilities:

• Public chains lacking growth drivers: For example, Celo, Pantom, whose market caps are only 1/10 of current EVM L2s and have low ecosystem activity. If their ecosystems can be integrated into the Stack, relying on the underlying super financial chain ETH and rich parallel superchains, whether for ecosystem cooperation or interaction needs between Dapps, it would undoubtedly bring new growth. Moreover, some public chains are already taking steps to deploy:
• Celo initiated a vote in July this year to transform from the original EVM L1 to an OP Stack L2 proposal, which has passed;
• Pontem Network plans to develop a new Move VM L2 using OP Stack.
• Highly cohesive, low externally coupled DApps: For example, derivatives exchanges, GameFi, Socialfi, etc., which have complex and diverse internal transaction types and high frequency, while having less dependence on external assets or projects. For these applications, which do not have high cross-chain needs but require high internal transaction processing efficiency, Stack may be their best development venue.
• Cross-chain protocols: For instance, the recently popular Owlto Finance, a DeFi protocol for cross-chain interaction with L2 Rollups, currently supports cross-chain interactions for all ETH Layer 2 chains; additionally, there is Socket Protocol (known for its Bungee), which is dedicated to developing cross-chain protocol Stacks. If it can be deployed on OP Stack, it will undoubtedly play a crucial role in asset and information communication between superchains.

2. Ecological Incentives

In addition to attracting developers and users' support through technology, Layer 2 can also rapidly build ecosystems through the most direct incentive methods. Taking the current Optimism & Polygon as examples, let's see what methods Layer 2 might adopt to build ecosystems.

• OP Grants: As a continuous developer incentive program from Optimism, it funds developers to guide them in building Dapps and tools on Optimism. It has already undergone multiple rounds, investing over $30M.
• RetroPGF (Retroactive Public Goods Funding):
• In March 2023, RetroPGF Round 2 provided 10 million $OP to incentivize ecological projects, mainly targeting Tool, Infrastructure, and Education categories, with a total of 195 projects/developers receiving rewards.
• In June 2023, RetroPGF Round 3 provided 30 million $OP to incentivize contributors to OP Stack, Collective Governance, Developer Ecosystem, End User Experience & Adoption, etc.
• OP Warriors Season: Users can earn NFT rewards by participating in community activities (ecological projects).
• Bridging Summer: On August 3, 2023, OP officially funded the Socket cross-chain protocol with 400,000 $OP. Any project participating in Bridging Summer will receive a certain amount of $OP for cross-chain activities. For example, if you cross-chain from Polygon to OP with a value of $100U and need to pay a fee of $2.5, you will also receive $2.25 worth of $OP, which can be claimed monthly.

It can be seen that Optimism has been continuously launching various activities to enrich the ecosystem and attract more users. Moreover, OP already has a relatively mature incentive mechanism. In the early Grants, many project parties disappeared after receiving sponsorship and did not fulfill their commitments to develop within the OP ecosystem. OP has learned from these experiences and lessons, gradually improving the rules in recent Grants to ensure "optimal utilization."

The governance mechanism of OP is becoming increasingly refined, and the incentive projects are becoming more diverse, which can be applied to future Stack development, simply replacing the original Dapps with superchain L2.

In addition, Polygon's approach of promoting ecosystem development through business collaborations is also noteworthy:

• National: Collaborating with India to issue "caste" certificates on Polygon to prevent vulnerable groups from fraudulent claims on government benefits; partnering with Singapore to facilitate cross-trading of digital yen and Singapore dollars using Polygon and Aave.
• Finance: Collaborating with payment giant MasterCard to launch the MasterCard Artist Accelerator to help music artists learn how to expand their brands through NFT minting and building online communities; WorldPay (a payment giant), a subsidiary of FIS Group, has added support for Polygon USDC.
• Technology: Collaborating with software giants like Adobe and PS developers to integrate NFTs into their social platform Behance; Google’s big data analytics service BigQuery has added support for Polygon blockchain data; Samsung has issued NFTs that can be worn on the metaverse platform Decentraland through Polygon.
• Social: Meta's Facebook and Instagram plan to develop an NFT marketplace based on Polygon and integrate it into both platforms, allowing users to create and sell their own NFTs; Reddit launched the NFT series "Collectible Avatars" on Polygon.
• Lifestyle: Starbucks launched the loyalty program "Odyssey" through the Polygon network; became one of the six companies selected for the "2022 Disney Accelerator Program"; collaborated with Coca-Cola artists to launch 136 NFTs to commemorate the brand's 136-year history.
• Gaming, music, entertainment, fashion and beauty, sports, automotive, celebrities…

This business approach can also be applied to its Polygon 2.0 plan, adapting its superchain network to fit with enterprises, inviting traditional business institutions to deploy, and bridging the blockchain with the business world. These collaborations can bring more high-quality projects to Polygon 2.0, promoting its ecosystem development and forming a positive cycle.

Overall, the collaboration between Polygon and traditional Web2 industry giants, in terms of influence and breadth of cooperation, is likely to become the preferred blockchain network for Web2 users and global enterprises in the next decade. If these resources can be effectively utilized, it is very likely to be potential project parties for the future Polygon 2.0 superchain network.

3. Token Empowerment

With Rollup as the main technology, how should ZK and OP design their economic models to enhance the value empowerment of their tokens when launching Stack solutions? Compared to L2 Stacks, the token empowerment of CP faces fewer obstacles.

For instance, in Cosmos, although each chain had its own ecosystem and tokens in the initial version, $ATOM found it hard to find its place. However, at the Cosmos 2.0 conference, the team decided to use $ATOM as the Gas fee standard for the Hub, allowing custom chains to share security with the Hub. In Polkadot, the current $DOT supports network governance, treasury, and slot auctions. In the upcoming 2.0 version, the original auction will be transformed into a Coretime market.

This is also the biggest difference from CP, as both ZK and OP are L2s of Ethereum, and their inherent value is to solve the scaling problem of L1. All transactions need to be verified by smart contracts deployed on L1, and only confirmed assets count as real money, which users will trust L2, hence Gas fees are all in ETH.

In other words, L2 is like a wedding dress for L1, not only helping L1 achieve scalability but also enhancing the credit and value of L1 tokens with every transaction processed, and L2 can never truly separate from L1. This is why, under the vision of superchains, how to achieve token distribution for L2 is particularly important.

Although there are currently no detailed solutions, the aforementioned EVM L2s have not yet explained how their native tokens will gain momentum from the superchain network. However, the following points can be considered when designing economic models:

• Governance of L2 Networks (referencing Polkadot):

Although using ETH as the underlying token of the ecosystem is unavoidable, for network governance, the acceptance of L2's native tokens is relatively high.

• To participate in the Stack ecosystem, superchains must hold a certain amount of native tokens;
• Token holders can participate in network governance, voting, parameter adjustments, and other governance activities to enhance the empowerment of the tokens.
• Establishing a governance center/treasury: As the governance body of the ecosystem, it can maintain L2's autonomy while conducting unified value management;

This way, both developers and users can fully participate in the ecosystem, enhancing their sense of identity and involvement. For L2, it also increases the use cases for the tokens, more efficiently mobilizing network participants.

• Superchain Fee Distribution (referencing Cosmos):

When Layer 2 constructs cross-chain networks, it can learn from Cosmos's approach of using native tokens to participate in cross-chain fee distribution. Although running smart contracts on Layer 2 still requires using ETH to pay Gas fees, for cross-chain interoperability fees generated between superchains, it can be considered to use L2's native tokens for payment.

For example, in Cosmos, $ATOM is used to pay IBC cross-chain transaction fees, and it also rewards cross-chain validators participating in verification with tokens. Thus, analogously in L2 Stacks, when assets are transferred across superchains, a certain cross-chain transaction fee can be set, which must be paid using the native token; a portion of the cross-chain revenue can also be distributed to token stakers; additionally, the development and verification of some cross-chain functional modules can also be incentivized through their tokens.

This maintains the core role of ETH in the Ethereum ecosystem while allowing the $OP token to play a governance and value transfer role in the cross-chain network. If designed properly, it can form a positive incentive mechanism, promoting the development of the Optimism cross-chain network.

• Rent-Seeking Model (referencing Ethereum):

On August 25, Base launched an economic cooperation agreement with OP: Base will provide OP with two modes of revenue, either 2.5% of sequencer revenue or 15% of profits (whichever is higher); while OP will give Base 2.75% of $OP.

The release of this plan immediately sparked widespread discussion. Based on the issuance and price of $OP, it is estimated that the total value of tokens given to Base by OP is about $177 million, while also estimating the 15% profit based on Base chain's valuation, approximately $1.1 billion, equivalent to OP holding 15% of Base's shares. Moreover, even if the 2.5% sequencer fee is adopted, it can essentially be understood as OP collecting rent.

• In the past Ethereum network, as a ToB underlying chain, it outsourced other interactive actions to L2, and a portion of the fees generated on L2 was allocated to L2 as execution fees, while the remaining portion was given to L1 as security settlement, serving as a source of income for Ethereum. Therefore, OP and Base's actions can also be seen as pioneering an alternative rent-seeking model for L2.

While the possibility of using L2 native tokens as the Gas unit for superchains is low, ETH ultimately remains the consensus token. However, if L2 is viewed as a contractor for the Stack, responsible for network construction, attracting investment, and helping build the ecosystem, while superchains are to deliver a portion of the profits, such a profit model, given the resources backing super L2s like OP, is indeed very attractive.

• Mutual Empowerment with Project Parties:

Taking OP Stack as an example, currently opBNB, ZORA, Base, Mantle, Worldcoin, Debank have successively aligned with OP Stack, which has a significant impact on OP's price. However, due to timeline constraints, we cannot intuitively see the daily growth trend, so we temporarily select the price changes of $OP on the day Base announced its deployment:

It can be seen that on February 23, the price of $OP rose to $3.01. This was likely due to Base's release of a cooperative NFT on the OP mainnet around 10:30 PM, followed by a price surge to its peak around 11 PM, before subsequently falling back.

Since Binance announced the concept of opBNB, and with high-quality projects like Base Protocol, ZORA, Mantle, and Debank joining OP Stack, it is undeniable that these projects bring visibility and prestige to OP, attracting more project parties to take an interest in OP Stack.

Thus, when project parties decide to deploy on OP Stack, purchasing and holding $OP tokens is a very reasonable choice, not only to participate in the ecosystem but also as a form of value investment.

$OP will certainly find its place in the future superchain ecosystem, and holding $OP can grant project parties more rights in the future. Furthermore, since project parties and OP are essentially a community of interests, as more projects deploy on OP Stack, the value of $OP tokens will rise, directly benefiting the project parties. OP Stack will also actively support/promote project parties for ecosystem development, bringing positive exposure and growth. This win-win situation will encourage more projects to join, forming a positive cycle. In this regard, OP seems to have made a good start.

III. Conclusion

Thus, the series of articles on CP V.S. Layer 2 Stacks comes to an end, and the next step will be to summarize the entire series.

The competition between CP and Layer 2's superchain networks is fundamentally about better perfecting the blockchain infrastructure. For a blockchain team, implementing all network and consensus codes, including security, cryptography, etc., is extremely labor-intensive, not to mention the targeted optimization of their business logic.

If a complete open-source code framework appears, preparing the network, consensus, communication, and other elements for you, and you only need to deploy according to your business logic, it would greatly achieve specialization in network operations, and the supported interoperability would pave the way for the prosperity of the entire ecosystem.

However, it currently appears that CP's technology is more mature compared to Layer 2, but the L2 ecosystem community is more prosperous. If L2s want to further develop superchain networks based on this foundation, they should focus on how to address the technical risks of their own chains.

Additionally, there is an interesting phenomenon that the Ethereum Foundation's definition of L2 is very vague, and the Ethereum official website also states that there are currently no officially certified L2s. We can foresee the impact of Ethereum's attitude on L2. From the perspective of L1, it certainly hopes to outsource only "execution" to L2 while enjoying the "rent." The definition of L2 must align with its own interests.

If one day L2s' superchain networks abandon ETH and establish their own tokens to build portals, what actions will Ethereum take?

Regardless of whether it is a multi-chain ecosystem like CP (L0-L1) or the multi-chain ecosystem brought by Layer 2 Stacks (L2-L3), each has its unique advantages and applicable scenarios. Unless they gradually fade away due to operational issues, these different multi-chain solutions are more likely to survive and ultimately achieve a fully interconnected ecosystem of various public chains and multi-chain ecosystems through different connection methods. As for who can capture more market share in such a future of full chains, it will depend on how each project operates moving forward.

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