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CryptoEconomic Research

Layer 2 and Scaling Solutions | April 2022 | Week 2

Digestible ecosystem news about layer 2s and scaling.
by Dominik SchmidApril 8, 2022
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Hello scaling aficionados,

We will broaden the scope in the future and cover more about bridges. Not that scaling isn’t a rabbit hole on its own, but there is no off-chain scaling without bridges. And at least at the moment, there are a lot of discussions around bridging concepts their security and funding. 

Two weeks ago the Ronin Network announced that around 624$m was stolen from their bridge. The funds were secured by 5 out of 9 validators of which 4 belonged to the same company. It is not the first N-out-of-M multisig bridge that was hacked and most likely not the last for this year. Most bridges are secured by some validator set and a multi-sig contract. Some of the projects even say quite openly that they run the validator nodes themselves. 

LayerZero – a bridging protocol – reached a 1 billion valuation two weeks ago. LayerZero is not a bridge itself but developers can build bridges using this protocol. The whitepaper claims for the protocol to be trustless. To me, the proof of this hypothesis is not done in the whitepaper and depends on the actual implementation of the protocol, see whitepaper.

Binance released the Binance Bridge 2.0 this week. It connects Ethereum and the BNB Chain (formerly Binance Smart Chain). The bridge can also be used from a Binance Account directly. They only say it is a trusted bridge, but I will have to dig deeper into how it actually works.

To me, that doesn’t mean bridging is inherently problematic. But considering that blockchains by their design are somewhat closed and therefore, consistent bridging is a complex problem especially if the products want also to provide sufficient liquidity and a good overall user experience. 

Let’s look at what happened in the ecosystem

  • Polynya categorizes rollups into four distinct categories. At the moment we have regular rollups that inherit L1 security but are centralized and upgradable. Immutable rollups can not be upgraded and must be redeployed every time. Enshrined rollups are a theoretical concept of changing L1 such that there is no need for smart contracts to realise the rollups. Here it is integrated into the L1 protocol itself. Sovereign rollups would build the other end of the spectrum not using L1 as a settlement layer. The last two concepts are theoretical so far and are not complying with the standard definition of a rollup.
  • Speaking of upgrades to rollups. Arbitrum released Nitro onto Ethereum’s Görli testnet. Arbitrum One will be smoothly migrated into Nitro. It will be cheaper and “Nitro at its core is a new prover and does Arbitrum classic interactive fraud proofs except now it’s over WASM code. Even better, in Nitro our current custom-built EVM emulator is replaced by Geth, the most popular and well-supported Ethereum client.”
  • Talking about new concepts, Polygon Avail is designed to be a data availability layer for rollups – or in that case validiums. Rollups can store the necessary data to reconstruct the state on Ethereum itself (which is expensive) or store it at some external data layer. The latter option is cheaper and there are concepts and implementations for optimistic and validity rollups that use external data storage. 
  • In case you wondered why there is so much fuzz about Terra (next to the fact it is the second-largest chain next to Ethereum), Andrew Breslin explained a lot about it here. Terra is a blockchain native for stablecoins and next to their algorithm to stabilize the price the Terra Foundation buys BTC and AVAX as a second stability layer.
  • Solana goes EVM with Neon. It is not live yet, but the alpha version is live on testnet. Maybe bridging to Solana gets safer, when the bridge connects two EVM chains rather than Ethereum and Solana directly. 
  • It’s getting cheaper and cheaper to use Layer2s. It will be interesting to see how generalized zkRollups will fit into this.
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Let’s look at the data

Comparing blockchains, especially rollups to monolithic chains, on the below indicators might be questionable. Every indicator can be discussed, whether it is useful to track unique addresses or TPS. We believe that all indicators together and especially looking at a 7d change can be used to build hypotheses about the current state of scaling.

  • Terra and dYdX see growth in the total number of daily transactions. 
  • Terra is still growing in its TVL despite the fact that the market cools down.
  • Binance Smart Chain and Polygon soon will have as many unique accounts as Ethereum. Next week we are going to show monthly active users to compare.
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