Aug 3, 2021
Ethereum Layer 2 Solutions
At the time of writing, 145K transactions are pending to be included in the Ethereum network. The surge in adoption of the Ethereum network, together with ETH price appreciation, has boosted the dollar costs of gas fees, resulting in an unfriendly experience for retail users. Layer 2 solutions aim to increase the network throughput by building ‘on top’ of Ethereum, without affecting the decentralization or security characteristics of the underlying blockchain.
Each solution has its own considerations and tradeoffs to consider, including throughput, transaction cost, security, scalability, functionality, amongst other things. However, no single Layer 2 solution fulfills all needs.
Nonetheless, it has become a community consensus that optimistic rollups and ZK-rollups will likely emerge as winners of the Layer 2 competition. Optimistic rollup projects, such as Arbitrum and Optimism, have already enabled support for the EVM (Ethereum Virtual Machine). ZKSync, a ZK-rollup project, is planned to launch its new EVM-compatible version in Q4 this year.
Below we summarize the early efforts of trying to scale Ethereum before diving into rollups , their current adoption status and constraints, and lastly a case study of Arbitrum.
Major Layer 2 Solutions
As mentioned above, Layer 2 solutions were introduced to solve Ethereum’s inherent problems, particularly limited TPS and high gas cost. Therefore, these two aspects are key considerations when comparing different Layer 2 solutions. In addition, security and smart contract compatibility are also crucial to their successes.
We can summarize the various Layer 2 solutions into 5 broad categories:
- Payment Channels
- Sidechains
- Plasma
- Optimistic Rollups
- ZK-Rollups
The first three are early experiments of Ethereum scaling solutions, laying the foundation for further explorations of Layer 2. Optimistic Rollup and ZK-Rollup not only borrow the ideas from earlier projects, but also make appropriate adjustments to better adapt to Ethereum users’ needs.
Payment Channels, Sidechains and Plasma
Optimistic Rollups
Transactions are first processed on the Layer 2 network, and bundled into a single block before being confirmed on the Layer 1 network. With this setup, the intensive computation burden is offloaded from the Ethereum mainnet. Since rollups publish state updates on the main chain periodically, transaction data is available on the Ethereum mainnet for validators to verify anytime.
Optimistic rollups assume all validators are honest by default (hence the name optimistic). To ensure security, there is a challenge period lasting for at least one week after users withdraw their funds from the Rollup layer to the main chain. Users or validators can challenge transactions in this period if they find a suspected fraud. Validators who are found violating processing rules are penalized and slashed. Under this system, validators are tasked to settle a dispute when a challenge is raised, so they can focus their resources on the suspected fraud, enhancing security and lowering validation cost.
Advantages
- Low gas cost
- Higher throughput
- Smart contract compatibility
- Security: transaction security is guaranteed by the Layer 1 network because transaction data is recorded on the Ethereum mainnet.
Disadvantages
- Long withdrawal time: a challenge period can sometimes last for weeks.
Major Projects
- Optimism: the first Optimistic Rollup project.
- Arbitrum: the first live EVM-compatible Optimistic Rollup project.
ZK-Rollups
ZK-Rollups leverages zero-knowledge proof to offload computation burden from the base layer chain. Operators generate A SNARK (Succinct Non-Interactive Argument of Knowledge) proof for every state transition and submit them on the main chain.
While Optimistic Rollups assume validators are honest, ZK-Rollups do not require such an assumption as it leverages mathematical proof. ZK-Rollup solutions bundle and compress transactions to create a zero-knowledge proof that authenticates validity and shows the latest state. ZK-Rollups does not rely on validators or any parties to identify fraud and safeguard users’ funds. Instead, mathematical proof guarantees its validity , making ZK-Rollups a solution with a higher level of security than Optimistic Rollup.
Advantages
- Security: transaction security is guaranteed by the unforgeable ZK-SNARK.
- Low gas cost
- Higher throughput
- Short withdrawal time: no challenge period is required.
Disadvantages
- Smart contract compatibility: still under development. ZKSync 2.0 is planned to be launched in Q4 2021 with EVM support.
Major Projects
Layer 2 Current Adoption Status
Layer 2 Constraint: Liquidity Fragmentation
Layer 2 is indispensable for scaling the Ethereum network. However, Layer 2 solutions also have their inherent challenges, namely fragmented liquidity.
Current Layer 2 solutions are in silos: Polygon launched the Matic sidechain and used $MATIC as the native token to pay for the gas fee. Optimistic Rollups and ZK-Rollups projects use $ETH as the native token, but users cannot move assets between different Layer 2 networks smoothly. Due to the lack of L2-to-L2 bridges, users need to withdraw their funds to Layer 1 first, wait for the challenge period, if any, before depositing funds to another Layer 2 network. It will be difficult for users to navigate across different Layer 2 ecosystems. For example, it is inconvenient for users to transfer assets between Uniswap on Arbitrum, Curve on ZKSync, and Aave on Polygon, which greatly undermines composability between defi-legos on Ethereum.
Case Study: Arbitrum
Arbitrum is an Optimistic Rollup built to scale Ethereum by OffchainLabs.
“Arbitrum, among other differentiating tech breakthroughs, is the only rollup that supports porting Ethereum contracts at the bytecode level (without making any code modifications)”
How does Arbitrum Work?
Arbitrum scales Ethereum by passing information between smart contracts on the Ethereum mainnet and the Arbitrum network. Though transaction processing is completed on the Arbitrum layer, the final results are recorded on Ethereum.
There are two main types of actors：
Validators are responsible for confirming the validity of blocks. To be qualified, validators need to post a stake in $ETH. The staked funds will be confiscated if validators violate the rules. A challenge window will open up (about one week) after a validator executes the computation and posts an assertion on the Arbitrum network. During the challenge period, Dispute Assertions (DA) are created for validators to check and settle the dispute.
Aggregators collect the transactions and put them into Layer 1 blocks, incentivized with fees paid from Arbitrum users, similar to Ethereum’s gas fees.
Comparison: Arbitrum vs. Optimism
Both Leveraging Optimistic Rollups, Arbitrum and Optimism share similar technology and protocol designs. The key difference between Arbitrum and Optimism lies in the fraud proof process. When a transaction is challenged, Optimism runs the whole transaction in question on the Ethereum network to verify its validity. Arbitrum, on the other hand, requires challengers to identify the exact problematic step off-chain (as shown below) before submitting to the main chain for final judgement. Arbitrum’s mechanism allows cheaper fraud proof but prolongs the withdrawal period.
Arbitrum Ecosystem
Recently developments in the Layer 2 space have been focused around Arbitrum and Optimism. After the launch of the mainnet beta, Arbitrum has onboarded many projects, including some of the foundational DeFi applications like Uniswap and Chainlink. It has also worked with Reddit to scale Community Points on Ethereum.
Optimism launched its Alpha Layer 2 solution for Uniswap via the Optimistic Ethereum mainnet in mid-July. Since then, Optimism has been integrating various projects into its ecosystem, such as Uniswap, Synthetix and MakerDao.
The Layer 2 landscape will likely not be zero sum, and we’ll see multiple solutions co-exist to accelerate mass adoption.
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