This is a pivotal year for Ethereum layer 2 (L2) solutions. What happens over the coming months will be critical in making decentralized finance (DeFi) work better, faster, and more reliably for a far greater number of users.
Last year saw L2 solutions roll out with great promise, increasing the number of decentralized apps across verticals such as exchanges, marketplaces, wallets, bridges, and more. Yet the growing user base and total value locked on Ethereum L2 were eclipsed by alternative layer 1 blockchains emerging to fill the market gaps that persisted such as Ethereum’s scalability issues. With multiple apps deployed across chains, we are now seeing increasing fragmentation that adds complexity for end-users and detracts from the ultimate goal of making DeFi accessible for all.
This year, L2 solutions will not only fulfil the promise of DeFi without compromise but take DeFi usage to even greater heights. The pieces of the puzzle – hitting critical development milestones, and L2’s increasing relevance in a multi-chain environment – are set to come together this year to make this a reality.
[Layer 1 (L1) is the base protocol (the Ethereum blockchain), while layer 2 (L2) is any protocol built on top of Ethereum.]
Fulfilling the promise of DeFi without compromise
Ethereum creator Vitalik Buterin has claimed that (L2s or) “rollups are in the short and medium-term, and possibly in the long term, the only trustless scaling solution for Ethereum”. We have seen this start to play out, with the total value locked (TVL) in layer 2 protocols such as StarkNet, Arbitrum, and Boba Network growing from USD 50 million to a high of USD 7 billion.
It’s clear there is a huge demand for blockspace, and alternative layer 1 chains have provided solutions for many of Ethereum’s downsides thus far, including fees and speed of transactions, which have significantly risen as more dapps were created and transactions congested the Ethereum network.
That said, we are in danger of losing the elements of decentralisation that are the foundation of this emerging industry.
While alt-L1s can presently optimize for higher throughput and lower transaction fees, development in the Ethereum ecosystem aims to achieve that while strengthening its building blocks of security and decentralization.
Zero-knowledge technology upgrades, a catalyst for growth
The future of decentralization is L2, and Zero-Knowledge (ZK)-based solutions are widely regarded as the optimal scaling technology due to their robust process of verification. ZK uses cryptographic proofs to validate the legitimacy of all transactions, compared to Optimistic rollups where users can submit “fraud proofs” in suspected fraudulent cases. The former requires validation to be accepted onto Ethereum, whereas the latter assumes legitimacy unless disputed. ZK also processes transactions faster as they do not have waiting periods for potential disputes.
ZK-led developments were an early catalyst for L2 growth, early to this was Starkware whose existing solution, StarkEx, is already used by top 10 L2 dapps including dydx, Immutable X, and DeversiFi. This shift matters because the current solution, StarkEx is a permissioned and customized scaling engine secured by Starkware and only available to clients. The new StarkNet that is already ready for the deployment of dapps, is a permissionless and decentralized ZK-rollup that allows anyone to deploy smart contracts and secure transactions.
This moves the wider Ethereum ecosystem forward in achieving its decentralisation ideals.