#Ethereum #Layer2 #Optimism #Arbitrum #zksync #starknet
What is Layer 2?
A Layer 2 refers to a secondary framework or protocol that is built on top of an existing blockchain, which refers to layer 1. Or in Ethereum’ official statement, ‘A layer 2 is a separate blockchain that extends Ethereum.’ The main goal of these layer 2 protocols is to solve scaling difficulties that are being faced by the major cryptocurrency networks, aiming to increase the transaction speed and efficiency.
Why is Layer 2 Necessary?
For instance, even with continuing development, Bitcoin and Ethereum are still unable to process thousands of transactions per second (TPS), which is certainly detrimental to long-term growth. With hundreds or even thousands of Dapps and users using the network at the same time, it can lead to network jams and higher gas fees. As a result, there is still lots of work to be done to increase their efficiency so that these networks can be effectively adopted and used on a wider scale.
Trending Layer 2 Protocols or Projects
Builders and developers have been working endlessly on different layer 2 solutions for different networks. This article will focus on some trending protocols or projects.
Optimism
At present, Ethereum’s high transaction fees and limited throughput of 15–20 transactions per second (TPS) severely limits its scalability. Based on roullup scaling solutions, Optimism allows 2000–4000 TPS and at a much lower gas fee.
Optimistic rollups work by executing transactions on a layer-2 rollup chain while a node, which is called a sequencer, rolls up and subsequently posts transaction state data to layer-1 network. With such a method, it’s able to compress the data posted to the Ethereum mainnet while also amortizing gas fees among transactions in each rollup batch. Rollups are currently the preferred layer 2 solution for scaling Ethereum. It’s believed that by using rollups, users can reduce gas fees by up to 100x compared to layer 1.
Since its launch in 2021, the total value locked(TVL) on the Optimism network has increased significantly, with a peak TVL at 1.15 billion dollars in August, 2022. Although the TVL has dropped due to many factors, optimism continues to attract more users to use their network for transactions.
The average transaction fee on Optimism network is about $0.16 as of the writing on Feburary 1st, with about 150,000 to 250,000 transcations per day over the last 7 days, which is about 20% of those on Ethereum network.
It’s also worth mentioning that Optimism is the only Layer 2 network with a circulating token — $OP. With 234,748,364 of the total 4,294,967,296 tokens that are in circulation, the current price of $2 makes Optimism with a market value of over $490 million. Top 5 contributors to Optimism’s TVL are Velodrome, Synthetix, Curve, AAVE and Uniswap, which total nearly $400 million TVL.
Arbitrum
Different from Optimism, which uses single-round fraud proofs executed on layer-1, Artibrum uses muli-round fraud proofs executed off-chain. The multi-round fraud proofing is considered the more advanced of the two, with its potential of being cheaper and more efficient than single-round proofing.
While Optimism is governed by the Optimism Foundation, Arbitrum is not DAO governed, with its protocol run solely by Offchain Labs. In order to better engage the community, an eight-week-long NFT event called Arbitrum Odyssey was launched in mid-2022, collaborating with many protocols and NFT artists Ratwell and Sugoi. Users were required to deposit ETH via any of the bridges or Dapps in order to claim a bonus NFT.
Although Arbitrum was launched a bit later than Optimism, its TVL has increased at a much faster scale. As of writing on Feburary 1st, 2023, Arbitrums TVL totals $1.23 billion, nearly more than 50% of Optimisms’ $700 million, and it continues to grow steadily. Currently GMX, Uniswap, Sushi Swap, Curve and Synapse are the main contributors to the total TVL on Arbitrum network, while GMX contributes over $400 million, which is more than the other four.
At the moment, Arbitrum has not yet issued their token.
zkSync
Builted by Matter Labs, zkSync utilizes ZK-rollups technology to scale the Ethereum network. zkSync 1.0 was launched in 2021, with the minimal functions of deposit, transfer and NFT, while zkSync 2.0 was launched in late 2022. Zk is short for Zero-Knowledge proof(ZKP), which is a method by which one party (the prover) can prove to another party (the verifier) that a given statement is true while avoiding disclosure of additional information beyond the fact the statement is true.
ZKP allows ZK-rollups to have a negligible fund withdrawal delay with a higher level of security. ZK-rollups have the advantage in theoretical transactions-per-second (TPS) cap, transaction finality time, and security. At the same time, zkSync has openly stated its intent to make their transactions private in the future.
However, zkSync falls behind in Ethereum Virtual Machine(EVM) compatibility, giving it a late start compared to Optimism and Arbitrum. The daily TVL of zkSync is barely about $55 million at the moment, which falls far behind Optimism and Arbitrum due to the lack of Dapps and ecosystems.
In November 2022, Matter Labs completed a Sereies C funding round of $200 million co-led by Blockchain Capital and Dragonfly, followed by famous VC a16z. This team behind zkSync has raised over $450 million in total, showing how the project is highly expected by the market. The founder of Ethereum, Vitalik Bulletin writes in his blog that in the short term, Optimistic rollups will likely take the lead in general-purpose EVM computation, but in the long term, ZK-rollups will win out in all use cases as the technology improves.
Matter Labs has announced it would share its tokenomics in November 2022 but its not yet released at the moment. On Feburary 1st, they announced the Fair Onborading Alpha, which allows all ecosystem projects to deploy on zkSync 2.0 before it is opened to external users. The Full Launch Alpha, which will be open up to external users, will be scheduled after the Fair Onborading Alpha is over, and the full launch is expected to come soon.
Starknet
StarkNet, a STARK proof rollup protocol released on the Ethereum Testnet in November 2021 by StarkWare Ltd, is a layer 2 scaling protocol for Ethereum network, which is also based on zk-rollups like zkSync. One major difference between zkSync and StarkNet is that they utilize different proofing protocols, called SNARKs (Succinct Non-Interactive ARgument of Knowledge) and STARKs (Scalable Transparent ARguments of Knowledge).
ZK-SNARKs, used by zkSync, must undergo a trusted setup phase where a small group of developers must be trusted not to manipulate code or divulge vulnerability information. This setup only needs to be completed once and isn’t a significant security risk, but undermines its decentralization.
ZK-STARKs, on the other hand, create trustless verifiable systems by using publicly verifiable randomness, removing the need for a trusted setup. STARKs are also designed to be quantum resilient, whereas SNARKs have the possibility of being cryptographically cracked by a quantum computer attack.
Built on ZK-STARKS, StarkNet gives all users and developers access to the schale and security benefits while fitting the purpose of scaling Ethereum. StarkNet Alpha was launched in 2021 and it is under consistent development. However, similar to zkSync, it still falls behind Optimism and Arbitrum at the moment due to the lack of community engagements, the lack of dapps and other factors. Many of the Dapps on StarkNet are original from those compatible with EVM on Optimism and Arbirum. As a result, its total TVL also falls behind.
In July 2022, StarkWare announced its tokenmoics. Its tokens are designed for governance, payment of fees, stakings and more, but it’s not yet circulating in the market.
Conclusion
With the rapid development of Ethereum, it is widely considered that 2023 could be the year of layer 2. Users, traders and investors have been consistently involved by either using Dapps, trading tokens or investing directly. Among all the projects, Optimism, Arbitrum, zkSync and StarkNet are the current leading four layer 2 scaling solutions on Ethereum network with different progression. As the market recovers and stabilizes and fund becomes more active, we will have the opportunity to see the further development of the Layer 2 network ecosystem.
*Risk Warning
This article represents only the views of the writer and does not constitute any investment suggestions.
