It’s the second day of Cryptomas, and the theme is, well, two: second day, second largest crypto by market cap, Layer-2s—this was destined to be about Ethereum.
So, let’s keep this two sentences long, and in the name of festive cheer, here’s DailyCoin’s read on Layer-2s place in helping Ethereum flip Bitcoin going forward.
An Ethereum Flip – the Premise
Bitcoin is the idea. Ethereum is the execution. That’s the mantra that Ethereum believers have been living by since the launch of the blockchain, and justifiably so.
Ethereum was launched in 2015 as the first blockchain to support smart contracts. It was seen as Bitcoin on steroids; a decentralized, permissionless virtual computer with its own currency that can power the world’s most important applications for years to come.
While Ethereum has made much progress in the seven years since its inception, playing a significant role in the rise of decentralized finance (DeFi) and NFTs, one consistent problem plaguing Ethereum across its history is gas fees. Even so, many continue to believe in “The Flippening”—a fateful day when Ethereum will overtake Bitcoin in terms of market capitalization.
But is this belief justified? The answer may lie in its Layer-2s—scaling solutions designed and built on top of the main Ethereum blockchain (Layer-1) to reduce transaction fees to nearly nothing.
With that in mind, let’s look at the progress of Layer-2 technology over the past year and what it would take for Ethereum to flip Bitcoin and claim the top spot.
L222 – Just Hype or Something Tangible?
2022, or “L222” as it was colloquially called, was the year Layer-2 technologies were supposed to take off and eliminate the high Ethereum gas fees once and for all.
While Layer-2 technology had a record-breaking year in technological advancement and adoption, its potential has yet to be explored.
A particular fad of the last year was optimistic rollups—a type of Layer-2 scaling solution that takes multiple off-chain transactions and bundles them up before sending them to the Ethereum mainnet for verification, thereby significantly reducing gas fees.
An optimistic rollup is so-called “optimistic” because it doesn’t provide proof of validity of the transaction batches, rather assuming that the off-chain transactions it bundles are valid.
Arbitrum and Optimism are prime examples and comprised the majority of Layer-2 transactions in 2022. However, it is important to note that some of this activity was related to airdrops, with Optimism introducing its governance token, OP, in May, while Arbitrum has yet to launch its own. Still, their growth has been impressive.
Sidechains, on the other hand, seemingly lost favor among developers. However, the most popular sidechain on Ethereum, Polygon, had an incredible year adoption-wise, signing partnership deals with major brands like Starbucks, Meta, and Mercedes.
On top of that, Polygon also made multiple acquisitions that positioned them to enter the zero-knowledge rollup race and become a true Layer-2 powerhouse. This shows that it understands that while sidechains are a decent way of reducing Ethereum gas fees now, the future is zero-knowledge proof-based blockchains.
Zero-Knowledge Proof Rollups
Ethereum Layer-2s using zero-knowledge proofs were a little behind optimistic rollups in adoption in 2022 but have been gaining traction as the year closes.
Rather than assume validity, zero-knowledge proofs cryptographically prove the validity of transactions on Ethereum using no information except for the proof. In most cases, zero-knowledge proofs are faster and offer more privacy than optimistic rollups.
Zero-Knowledge Layer-2 Adoption
Loopring, the first application-specific zero-knowledge rollup, was one of the first rollups to attract a major traditional brand. Video game retailer GameStop launched its NFT marketplace via the project a few months ago. While the marketplace received much attention at launch, trade volumes have dropped significantly.
Other zero-knowledge Layer-2s, like StarkWare and zkSync, have steadily been moving towards adoption. However, as with Arbitrum and Optimism, much of the activity the protocols have seen over the past year can be potentially linked to airdrop hunting as projects confirmed plans for native tokens.
All in all, Layer-2s have picked up significantly over the last year. November saw the highest gas fees spent to settle various Layer-2 protocols, at more than 100 billion.
While the evident demand indicates the potential role Layer-2s can play in achieving widespread Ethereum adoption, the most exciting Layer-2 innovation played out on the zkEVM front.
Ethereum in 2023: zkEVM, zkEVM, or zkEVM?
zkEVM stands for zero-knowledge Ethereum Virtual Machine, a virtual machine that generates zero-knowledge proofs to prove the validity of all operations performed by the machine. They are widely considered the holy grail of Ethereum scaling because they offer cheap transactions and cryptography-based privacy.
Currently, four types of zkEVMs are being built by different teams across Ethereum. Vitalik Buterin made an excellent post outlining these, believing them to be Ethereum’s best long-term scaling solution.
zkWars at Their Finest
Three years ago, zkEVM was just a theory entertained by a handful of developers, but perceptions have drastically changed in the intervening time.
Scroll, zkSync, Polygon, StarkWare, Consensys, and Taiko—these are the teams that have introduced zkEVM versions so far. Competition is heating up, with each project vying to be the first. Indeed, when Matter Labs, the development team behind zkSync, announced its zkEVM, dubbing it the “first zkEVM on mainnet,” competitors were quick to point out that it was only available for developers and that a full launch was still months away. True zkWars, if you will.
Race to the Top
Polygon launched its zkEVM testnet just days after the Matter Labs’ announcement, claiming to be the first “Ethereum-equivalent” zkEVM testnet. Again, competitors and outsiders flocked to Twitter to dispute Polygon’s claim, highlighting that there have been other testnets already.
While such behavior might seem petty, it does show one thing: the teams leading zkEVMs understand that they are the key to the wide-scale adoption of Ethereum. Competition breeds innovation, as they say. As for users, all the better—the sooner the network becomes accessible for mere pennies, the better the chances its global influence and adoption will spread.
Considering these developments, can Layer-2 technologies realistically propel Ethereum past Bitcoin to take the number one spot in the blockchain world?
The truth of the matter is that it’s uncertain. Optimistic rollups, sidechains, and zero-knowledge rollups offer improved scalability, but zkEVMs are yet to be ready for use. They are unlikely to have the immediate impact Ethereum would need to undertake a “Flippening.”
That said, if developers continue to develop zkEVMs at the speed they have for the last two years, the crypto industry might be in for some surprises in 2023.
On the Flipside
- Ethereum and its Layer-2 scaling solutions are always vulnerable to being overshadowed by external market forces such as unforeseen regulations, prolonged crypto bear markets, and global recession.
- zkEVMs are notoriously hard to build. The shallow pool of experienced talent in crypto and potentially lower funding levels could undermine the development speed.
Why You Should Care
Ethereum has been one of the market’s most used and trusted blockchains since its inception. Both users and investors would benefit greatly from a cheaper, more scalable Ethereum and the potential impact that would have on the market.
Read more of our holiday feature series:
12 Days of Cryptomas
Find the previous iteration in the series here:
Crypto Regulation: the Industry’s Number One Priority
What did DailyCoin bring for day three of Cryptomas? Find out below:
Is Europe Poised to Become a Crypto Enthusiast’s Dream?