Exploring the 2024 Opportunities in Layer 2's Technology

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Layer 2 solutions (L2s) have taken the world of blockchain technology by storm in recent months. These innovative systems are garnering attention and are the foundation for numerous projects. In this article, we delve into the realm of Layer 2 solutions, their significance, and the Ethereum Proposal EIP-4844, which promises to reshape the landscape.

I. Current State of Layer 2 Solutions

Popularity of Layer 2 Solutions

To understand the allure of Layer 2 solutions, it's essential to examine the current state of Ethereum's mainnet. Ethereum, the second-largest blockchain, has historically struggled with scalability. With an average processing capacity of only 12 transactions per second, Ethereum often witnesses soaring transaction costs during periods of network congestion, rendering it unfeasible for everyday crypto users. This scalability issue stems from the fact that every node within the network is obliged to store and verify all transactions, making Ethereum's architecture rather resource-intensive.

Layer 2 solutions emerged as a response to Ethereum's scalability challenge. These are essentially separate blockchains built on top of Ethereum, inheriting Ethereum's security guarantees. Each L2 solution comes with its own set of security features and trade-offs. The most prominent L2 scaling methods on Ethereum include rollups, such as Arbitrum, Optimism, and Base.

The Issue of Data Availability

The key innovation behind Layer 2 solutions is their ability to efficiently process transactions on the L1 Ethereum network. Ethereum transactions are data-dense, averaging 156 bytes, which can be quite expensive in terms of gas fees. Rollups address this challenge by processing multiple transactions on the L2 execution layer before consolidating them into a single, concise transaction sent to the L1 state verification layer. This bundling effectively reduces the gas cost for each transaction.

Rollups can be divided into two main categories: optimistic rollups and zero-knowledge rollups. Both rely on merkle trees, data structures that store the state of users' funds and transactions, enabling the L1 to verify the state without downloading the entire data. However, the two differ in how they ensure the validity of the data.

Optimistic rollups, as seen in Arbitrum and Optimism, employ fraud proofs to finalize the state. In this process, L2 nodes post a merkle root to the L1 smart contract, trusting the L2 node, but the state change isn't final for seven days. During this period, anyone can submit proof of fraudulent activity, reverting the update and penalizing the L2 node.

On the other hand, zero-knowledge rollups use zero-knowledge proofs to verify the L2's correctness. These proofs are posted alongside the merkle root to the L1 smart contract, ensuring that fraudulent updates are rejected, with the state change being settled instantly upon proof verification.

II. Ethereum Proposal EIP-4844

Reducing L1 Cost Overhead

The Ethereum Improvement Proposal (EIP) 4844 is poised to introduce a significant transformation to the Layer 2 ecosystem and, by extension, the broader Ethereum network. At its core, this proposal is designed to mitigate one of the central challenges plaguing Layer 2 solutions—the high cost of posting data and proofs for state changes on the Ethereum mainnet.

The key innovation in EIP-4844 lies in the introduction of a new transaction type. This transaction type allows for the acceptance of relatively small data blobs. These data blobs are carefully designed to strike a balance between maintaining essential data while minimizing storage overhead on the mainnet chain. In essence, this proposal aims to address the issue of exorbitant transaction costs incurred when migrating data and proofs from Layer 2 to Layer 1. By making these data transfers more efficient and economical, EIP-4844 is set to reduce the L1 cost overhead significantly.

The implications of this change are far-reaching. The L1 cost overhead has been a significant barrier to the widespread adoption of Layer 2 solutions. High transaction costs deter developers and users from migrating to Layer 2, limiting the full potential of these innovative scaling solutions. EIP-4844 has the potential to make Layer 2 solutions significantly more attractive by alleviating this cost burden.

Implications for Layer 2 Solutions

The reduced L1 cost overhead will have a profound impact on the Layer 2 landscape. It is expected to usher in a new era of growth and innovation within the Layer 2 ecosystem. Here are some of the key implications:

1. Increased Adoption: As the cost of data transfers between Layer 2 and Layer 1 decreases, more projects are likely to embrace Layer 2 solutions. Developers can migrate their applications more cost-effectively, and users can engage with decentralized platforms without the fear of high gas fees. This increased adoption could lead to a more robust and vibrant Layer 2 ecosystem.

2. Improved User Experience: With lower transaction costs, Layer 2 solutions can offer a smoother and more affordable user experience. Users will benefit from reduced fees and faster transaction processing, making decentralized applications more accessible and user-friendly.

3. Reduced Network Congestion: As more activity moves to Layer 2 networks, Ethereum's mainnet may experience reduced congestion. This can alleviate the gas fee spikes and slow transaction processing times that have occasionally plagued the mainnet, further enhancing the overall Ethereum ecosystem.

4. Incentives for Developers: The lower cost of operation on Layer 2 solutions may incentivize more developers to build on these platforms. With a reduced financial barrier to entry, Layer 2 could become a fertile ground for innovation, fostering the development of diverse and novel applications.

5. Broader Use Cases: The cost reduction brought about by EIP-4844 may open the door to Layer 2 solutions for a broader range of use cases. From DeFi and NFTs to gaming and supply chain management, Layer 2 could find applications in various sectors.

III. Popular Layer 2 Solutions

Arbitrum

Key Features: Arbitrum is an L2 solution designed to enhance the capabilities of Ethereum smart contracts. It aims to improve speed, scalability, and privacy, addressing issues like poor efficiency and high execution costs. Arbitrum uses optimistic rollups, offloading computational and storage burdens from Ethereum's mainnet.

Prominent Protocols: One of the most notable protocols on Arbitrum is GMX, a perpetual trading platform.

Optimism

Key Features: Optimism is a Layer 2 blockchain on top of Ethereum that benefits from Ethereum's security and scalability through optimistic rollups. It's home to 97 protocols, with significant projects like Synthetix, Uniswap, and Velodrome.

Prominent Protocols: Notable projects include Synthetix (SNX), a derivatives exchange, Uniswap (UNI), a decentralized exchange, and Velodrome (VELO), an automated market maker.

Matic (Polygon)

Key Features: Polygon, formerly known as Matic Network, is backed by Binance and Coinbase, offering a solution for mass adoption of cryptocurrencies by resolving scalability issues. It boasts impressive transaction processing speeds and native tokens (MATIC) used for payment services within the Polygon ecosystem.

Prominent Protocols: Key protocols on Polygon include Quickswap and PearlFi.

Base

Key Features: Base, an Ethereum Layer 2 solution, offers security, stability, and scalability for decentralized applications. It allows the deployment of any EVM codebase and seamless onramping of users and assets from Ethereum Layer 1 and other interoperable chains.

Prominent Protocols: Base hosts significant DeFi protocols, including Aerodrome and Friend.tech.

IV. Future Outlook

Potential Impact of EIP-4844

The implementation of Ethereum Proposal EIP-4844, set to launch later this year, has the potential to revolutionize the Layer 2 landscape. By introducing a new transaction type that accommodates smaller data blobs, EIP-4844 tackles one of the most pressing issues that Layer 2 solutions face: the high cost of posting batches and proofs for state change verification on the Ethereum mainnet.

EIP-4844's primary focus is to significantly reduce the L1 cost overhead, thereby reducing the expense associated with migrating data from Layer 2 to Layer 1. This change holds the promise of making Layer 2 solutions even more attractive to users. By lowering the barriers to entry, it is expected to incentivize more projects to embrace Layer 2, leading to an increased volume of activity.

The reduction in L1 cost overhead will likely trigger a surge in adoption, attracting both developers and users to Layer 2 solutions. As the transaction costs on Layer 2 networks drop, more applications and projects may transition to Layer 2, relieving the congestion and high gas fees experienced on Ethereum's mainnet. This, in turn, could lead to a more efficient and accessible decentralized ecosystem, bringing blockchain technology closer to mass adoption.

Speculations on L2 Governance Token Prices

In the lead-up to the launch of EIP-4844, it would not be surprising to witness a surge in the prices of Layer 2 governance tokens. The anticipated reduction in L1 cost overhead is likely to lure more volume to Layer 2 chains, resulting in higher usage and increased demand for their governance tokens.

These tokens play a crucial role in the governance of Layer 2 networks and are often used to make decisions regarding network upgrades, fee structures, and other critical aspects. With the expectation of increased usage and demand, these governance tokens could become more valuable, potentially rewarding early investors and those who actively participate in the governance process.

It's important to note that investing in cryptocurrency is inherently speculative and comes with risks. While the potential for increased token values is exciting, it's vital for investors to conduct thorough research, stay informed about the developments in the Layer 2 space, and exercise caution. The crypto market is known for its volatility, and the prices of tokens can fluctuate significantly. Thus, making informed investment decisions and staying updated with the evolving landscape is paramount for those considering participating in this dynamic sector.

Conclusion

Layer 2 solutions have emerged as a promising answer to Ethereum's scalability issues. With the impending implementation of EIP-4844, the future looks brighter for Layer 2 solutions, making them a critical element of the evolving blockchain ecosystem. It is crucial to stay informed, perform thorough research, and exercise caution as these technologies continue to reshape the world of blockchain and decentralized finance.

About Orochi Network

Orochi Network is a cutting-edge zkOS (An operating system based on zero-knowledge proof) designed to tackle the challenges of computation limitation, data correctness, and data availability in the Web3 industry. With the well-rounded solutions for Web3 Applications, Orochi Network omits the current performance-related barriers and makes ways for more comprehensive dApps hence, becoming the backbone of Web3's infrastructure landscape.