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CryptoEconomic Research

Layer 2 Scaling Solutions | January 2022 | Week 4

The future will be cross-layered.
by Dominik SchmidJanuary 28, 2022
Layer 2 JAN2022 Week 4

This week, we keep it short. We were honestly surprised after researching some bridge protocols in depth. There are bridges out there holding more than 1b$ and the dev team runs the relay chain themselves, next to their ability to update the smart contracts. Most bridges – which should build the basis for a multi-chain Ethereum world- seem highly trusted. With those amounts on stake and so few people guarding it, I wonder why not more has happened already. Just, at the time I was writing this, a hacker stole 80m$ from a bridge … here

What happened in the ecosystem?

  • Bankless interviews the famous anonymous L2 prophet Polyna; see here. He talks about the most significant danger he sees currently in the L2 space – multi-sig upgradeability. Some people can upgrade the smart contracts and, in theory, steal all the funds – regardless of any fancy mathematical validity or fraud proofs.
  • Messari published the “State of Avalanche Q4” report with many diagrams and exciting insights.
  • Bartek analysed Arbitrum’s nine h outage earlier this month. This is a good read about how Arbitrum works under the hood; see here.
  • Arbitrum lowered their fees with an update, but the daily transactions increased by 30%, see here. -> that tweet didn’t age well; as of now, they are again 2x more expensive than Optimism. L222, let’s got
  • There seems to be a trading league on dYdX, and they are about to release hedgehog NFTs. dYdX is, by daily transactions, undoubtedly the biggest L2. However, a look under the hood shows that StarkEx, the technology behind dYdX and Starkware’s first scaling solution, is a Validium. That means the data is not committed to Ethereum, only the validity proofs, making the solution way cheaper due to less on-chain data. Their competitors from Matter labs show here how that can lead to frozen funds in theory.
  • Solana had another outage last weekend. There seem to be too many duplicated transactions. Unfortunately, my technical understanding of Solana is limited to getting a read on that, but there seem to be many network outages.

Look at the data

  • TVL is shrinking across all solutions, which only reflects the general downturn of crypto prices at the moment
  • Daily transactions on the other hand increase for most solutions, especially the rollups.
  • Optimism manages to stay cheaper for transactions than Arbitrum, despite the fact that Arbitrum announced a significant decrease in fees. However, both solutions seems still to be too expensive to attract the majority of users.
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