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CryptoEconomic Research

Layer 2 and Scaling Solutions | February 2022 | Week 3

Digestible ecosystem news. This week gets a bit nerdy as we talk about darksharding.
by Dominik SchmidFebruary 18, 2022
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Hello friend,

If anything happens this week then in Denver, I guess. If you are there, enjoy!
This week we have seen a tremendous spike in daily transactions of dYdX – the layer 2 handled well over 1 million daily transactions. That is impressive because normally we only see those numbers on alternative layer 1s which sacrifice either security or decentralization to achieve that. In the future, we hope to see those numbers on generalized layer 2s as well. 

There was also a nice talk about Danksharding by the Ethereum Foundation. This concept is definitively worth it to research deeper. Especially, the concept of the Proposer-Builder-Separation seems to add to a potential paradigm shift in the Ethereum space. We introduce more and more specialized roles and actors, in sequencers in rollups, builders in Danksharding, and introduce protocols to prevent those actors from cheating. This might or might not be called centralized, but at least the initial vision of blockchains was about not having special actors.

Screenshot 2022 02 15 at 11 17 30
Source: https://dydx.exchange/

Let’s look at what happened in the ecosystem:

  • Dude, what’s the Danksharding situation? was called a talk given by the Ethereum researcher Dankrad Feist this week. It explains in quite some detail what Danksharding will be and why are so many folks are talking about it. Basically, it changes the sharding design of Ethereum 2.0 using three new components, PBS, crlist and a 2D commitments. The Proposer-Builder-Separation (PBS) introduces a new role, the block-builder. There will only be a few block-builders and to ensure that they cannot censor, there is the crlist protocol to keep the protocol trustless. The 2D commitment encoding allows for efficient data availability checks. All those components together allow L1 and rollup data within the same block which makes interoperability across rollups easier.
  • Optimism lowered the fees. That sounds weird because fees in a rollup should be a dynamic marketplace and can not be single-handedly lowered. But, there is a catch, Optimism charges overhead fees from its users. That is because the sequencer charges a fee in the moment the user wants to transact – t. But only after a while all transactions get bundled into a batch and committed to layer 1, for which the sequencer itself needs to pay a fee. At t however, the sequencer doesn’t know the exact fee it has to pay later to layer 1. In theory, one could try to build a marketplace hedging those fees and allow rollups to be even cheaper.
  • Rango, a bridge aggregator is now on Arbitrum as well. Happy bridging!
  • The Rainbow Wallet raised 18m$. The wallet is super easy to use and works on Arbitrum and Optimism already. 

Let’s take a look at the data: 

  • dYdX had last week over 1m daily transactions. It is the first layer 2 solution that achieved such a high number, which so far was only reached by alternative layer 1s. It even can compete in costs with alternative layer 1s having $0.04 per transaction, see here – even though this cost is not the trading fee for the end-user. However, daily transactions seem to be a volatile number, and as of yesterday, the number is significantly lower.
  • dYdX, Loopring and Metis all seem to have an equal number of unique accounts (an indicator of users). But there is a significant difference in how “active” those users are when looking at the number of transactions. All three solutions are use-case specific by design.
  • Optimism is on its road to sub-dollar fees. I think there will be a race between Arbitrum and Optimism to lower the fees.
  • Terra can increase its TVL even though all the rest is losing it. 
  • Fantom and Avalanche C Chain seem almost identical by the numbers, but Fantom is still way cheaper than the C Chain.
Screenshot 2022 02 18 at 11 02 43

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