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Ethereum's Resilience: Still the Top Layer 1 Blockchain Despite Scalability Issue
Today, Ethereum Network stays relevant despite of many other Layer 1(L1) Blockchains establishing themselves on the Web3 ecosystem.
DefiLama data reveals that Ethereum remains the top smart contract Blockchain platform with the highest TVL (Total Value locked) amounting to 47,994 $ billion, powering the largest number of active protocols; 1171.
Scalability has always been an unsolved issue with Ethereum earlier, which other L1 Blockchains aimed to solve and become the alternative Blockchain for Web3 dapps and their users.
Those days, L1 Blockchains advertised themselves as ‘Ethereum killers’ as they aimed to have Ethereum Web3 protocols migrate to their Blockchain, bringing along with them their users as well.
Ethereum’s limitation was that during peak usage times, its Network was bound to get congested, and transaction fees peak to sky-high levels, frustrating users. Yet, it was one of the earliest well-established Smart-Contract Platforms that was decentralized and secure, even if not scalable.
Existing Ethereum Web3 protocols find scalability in L2 Blockchains while inheriting Ethereum's security
Since other L1 Blockchains, sprouted much later, Web3 protocols kept getting built on Ethereum. The challenge for L1 Blockchains was to be scalable without compromising on decentralization and security aspects, and such L1 Blockchains did not emerge in time to give Ethereum competition.
As a result of this Ethereum Ecosystem matured with quality web3 protocols like Uniswap, Aave, Curve, Compound, Balancer establishing themselves there, attracting large number of users and accumulating large amount of liquidity.
Today these Web3 protocols are the go-to dapp protocols for users, as they have proven to be trustworthy dapps that are adopted most by users and hold the most amount of liquidity.
Eventually, instead of an L1 Blockchain replacing Ethereum and taking off Ethereum's users and developers, Layer 2 Blockchains sprouted where existing Ethereum Applications could launch and have users use them.
So, excellent Web3 dapps like Curve, Aave, Uniswap were on L2 Blockchain platforms like Polygon, Optimium, Arbitrum. Ethereum users could always move their assets here and do their Web3 activities experiencing faster transaction times with lower gas fees.
All these L2 Blockchains are part of Ethereum, because ultimately all transactions that get executed in these L2 Platforms, find settlement in the Ethereum Network.
The logic here is that L2s make Ethereum scalable serving as an execution environment for transactions that find settlement in the Ethereum main chain. Therefore, they all inherit Ethereum’s security.
Faster Settlements on Ethereum L1 with zkRollUp Technology Enhancing Scalability
The Ethereum Blockchain has embraced more advanced Layer 2 solutions with Zero-knowledge rollups (ZK-RollUps) in recent years.
Ethereum scalability is already more pronounced than before with various L2 solutions and notable changes in Ethereum Blockchain as Ethereum transitioned from a Proof of Work(POW) Blockchain to a Proof of Stake (POS) Blockchain.
The norm now is for other L1 blockchains to connect with the Ethereum ecosystem by building their own zkEVM virtual machine. This will serve as an execution environment for transactions.
These machines have a mechanism to produce validity proofs in the form of ZK-proofs, which are handled by the machine’s Prover mechanism.
ZK-proofs provide cryptographic evidence that a transaction is valid without revealing the user’s inputted transactional information, on which the Prover performed computations.
These validity proofs along with embedded transaction data that provide state transition details, are bundled up in ZK-RollUps and sent to Ethereum for finality as Ethereum is the settlement layer.
After reaching finality in Ethereum, state transition updates will take place in both the Ethereum L1 and the L2 zkEVM blockchain.
L1 Blockchains Connect with Ethereum via Scalable Web3 dApps on L2 Networks
There are many EVM-based L2 Networks currently in existence, built to enable other L1 Blockchains to connect with Ethereum in a more scalable way.
Developers can deploy their Ethereum Web3 dapps here using Ethereum's tooling, programming language, and libraries, while users can access these dApps using their familiar Ethereum-compatible Metamask wallets.
Now, all L1 Blockchains can establish themselves in Ethereum by building their own zkEVM Virtual Machine.
The main purpose of these L2s is to process transactions that will find settlement in Ethereum more quickly. This happens since the Ethereum Blockchain is relieved from performing execution functions that are handled in another EVM-compatible chain, freeing up Ethereum's computational resources.
Further scalability of an L2 Web3 protocol depends on its data storage arrangements
However, L2s will still use Ethereum for data storage, although they can also store it off-chain. Using Ethereum as a data storage layer offers more security but will incur higher costs through fees for reading and writing data on Ethereum, and the scalability will be limited.
The scalability of L2 depends on its data storage layer design as well. If an L2 stores transaction data off-chain, the Blockchain becomes more scalable but this compromises security.
However, every Blockchain can have a decentralized validator setup to secure data on its own network, similar to Polygon POS.
L2s have made it possible to build EVM-based scalable Web3 protocols that are secure
Now, it's become possible to build sovereign, scalable, secure Web3 protocols on L2s with all their transactions finding settlement on L1 Ethereum.
A sovereign Web3 protocol operates as a separate blockchain application and has the autonomy to have its own token and Web3 Governance processes.
This is the era of modular Blockchain Web3 applications.
Further advancements are required to reduce the latency of these EVM-based L2 Web3 dapps
This is how far L2s Web3 protocols have developed, they can function with lower latency than before. This is suitable for building Web3 protocols serving financial purposes, services functions, prediction markets and many other commercial functions but is still not practical for building applications that require very low latency as what's required for gaming and video streaming protocols.
This is because transactions take time to get finalized in Ethereum from the L2 Blockchain yet still compared to earlier latency is reduced.
Disconnected L2s Fragment Liquidity and Impede Capital Efficiency in the Ethereum Ecosystem
Now there are many L2 Blockchains that each house rich Web3 protocols for lending, liquidity management, yield management, derivatives, options, NFT market Web3 protocols, prediction markets, RWA and more.
Users enjoy using them reaping the benefits of faster transaction times and lower fees but these L2 Blockchains operate like separate Blockchains within the Ethereum ecosystem so users are not able to seamlessly connect with Web3 protocols in other L2 Networks.
All these L2 ecosystems are disconnected from each other although they have an established mechanism to connect with Ethereum.
Therefore, if a user of a L2 Web3 protocol wants to transfer their funds to another Web3 protocol on a different L2 network, they must first withdraw their funds to Ethereum and then transfer them to the Web3 app on the other Layer 2 network. Ethereum serves as a base.
All this is a cumbersome experience. Due to this disconnection, users are not able to utitilize the liquidity and functionality of Web3 Protocols in other L2 Networks, bringing about liquidity fragmentation and capital inefficiency.
Ethereum's Ecosystem Needs to be United with L2s Able to Connect and Transact with Each Other
When users can connect with Web3 protocols in other L2 Networks, the liquidity of Web3 protocols gets universally accessible for usage, automatically establishing capital efficiency.
Users get access to liquidity spread across the different ecosystems, and use them resulting in capital efficiency. Besides liquidity users also will be able to use prevalent functionalities of various Web3 Protocols across the L2 Ecosystem, resulting in enhanced capital efficiency and usage of the Web3 ecosystem.
Polygon's Agg Layer: Enabling Seamless Connectivity and Interoperability Between L2 Blockchains
Currently, developments are underway to enable seamless connectivity between these L2 Blockchains.
One of the most anticipated developments is Polygon's Agg Layer. This would enable Web3 Blockchains inside Polygon, to become an aggregated group of Blockchains.
These L2 Blockchain Protocols will be able to securely transact with each other directly and with low latency even before finding settlement in Ethereum.
All this is possible because these Web3 Protocols will be powered by zkEVM Blockchains, and produce validity proofs.
So, transaction validity proofs from two Web3 Protocols that want to transact with each other will be verified by the Agg Layer to ensure consistency in their State root. If the State root drawn from these transaction validity proofs are consistent with each other and therefore correct, Agg Layer will combine the two transaction validity proofs together to be sent to Ethereum for faster settlement.
The transaction between these two different Web Protocols is approved when AggLayer confirms it, even before the combined transaction validity proofs goes to Ethereum for finality.
AggLayer will not approve validity proofs that show inconsistency in State due to an invalid transaction.
Polygon's Aggregated Group of Blockchains, has an infrastructure that enables them to access each other's shared liquidity while Agg Layer verifies the consistency of their State.
This makes it possible for Web3 protocols that are L2s in the Polygon Ecosystem to securely transact with each other with composability and low latency even before they find settlement in Ethereum.
Conclusion
With all these developments it looks poised for EVM-based L2 Web Protocols to further evolve becoming interoperable with each other.
This would mean a user of a dapp in one L2 zkEVM Network can interact with dapps existing in other zkEVM Networks inside Polygon enabling them to do transactions like transferring funds, swapping assets, buying assets with dapps existing in other zkEVM Networks inside Polygon.
This unifies L2s inside Ethereum Ecosystem while these sovereign Web3 protocols acquire more scalability and become interoperable with each other with transactions between these L2s being composable.
Thank you for reading!
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