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Are L2s a part of Ethereum

A blockchain network that handles on-chain transactions, such as Ethereum, is considered a Layer 1 (L1) chain.

Ethereum is the second most popular blockchain network in terms of market share. It was conceptualized by Vitalik Buterin in 2013 and launched two years later. Ethereum became popular due to its self-executing smart contracts.

Smart contracts are computer programs that execute automatically if certain conditions are met. This competent technology paved the way for dApps, and from there, Ethereum took off. From DeFi protocols to the NFT mania to the significant growth of Decentralized Autonomous Organizations (DAOs), the wide-ranging innovations from dApp developers have indicated a field of endless possibilities when it comes to potential crypto use cases.

The network boasts the highest number of developers. In fact, 16% of all crypto developers are building on Ethereum.

Ethereum’s ecosystem has grown significantly in the last decade experiencing a surge in decentralized applications (dApps), decentralized finance (DeFi) protocols, and non-fungible tokens (NFTs) that can be accessed simply with an Ethereum wallet. In the case of Ethereum, its growth has highlighted significant scalability issues, including high transaction fees (gas fees), network congestion, and slow transaction times during periods of high network activity. Although core upgrades like the Merge are intended to speed up transactions, Ethereum still requires a scaling solution capable of handling large volumes of transactions.

Ethereum developers, like all blockchain developers, have faced the challenge known as the blockchain trilemma. Coined by Ethereum co-founder Vitalik Buterin, the blockchain trilemma states that a blockchain architecture needs to choose between decentralization, security, and scalability. Ethereum has prioritized decentralization and security, leading to scalability taking a backseat. Scalability refers to the limit of expansion and load capacity, defined in blockchain throughput, specifically in the number of transactions that can be performed per second.

However, compromising on scalability has resulted in slow and expensive transactions. Currently, Ethereum's transaction processing capability stands at a mere 15 transactions per second. To provide context, VISA processes around 1,700 transactions per second. Moreover, transaction finality, when a transaction is added to the blockchain and becomes irreversible, takes roughly 15 minutes on Ethereum. Furthermore, the network is often overwhelmed and congested during periods of high demand, leading to abrupt surges in gas fees.

Ethereum layer 2 networks are designed to address these issues and provide cheaper and faster transactions. They inherit Ethereum’s security and make the process more efficient by processing transactions from the parent chain.

A Layer 2 solution is a secondary blockchain network that reduces the load on the parent chain by handling part of its capabilities. They are designed with one primary goal: to offer a quicker and more cost-effective method for executing Ethereum transactions.

To illustrate, let's think of Ethereum as a busy kitchen in a popular restaurant. The chefs (Ethereum validators) are overwhelmed with orders, and each dish takes longer to prepare and costs more to make.

Now, imagine a preparation area (Layer 2) next to the kitchen. Here, sous chefs (Layer 2) handle the basic prep work such as chopping veggies and mixing sauces, allowing the main chefs to focus on the final touches. Once the prep work is done, the dishes are brought back to the main kitchen for final approval (Ethereum Layer 1) before being served to customers. This way, the kitchen runs much more efficiently, the meals come out faster, and the customers are happier, while the head chefs still maintain control to ensure the final quality.

Ethereum Layer 2 networks are created to solve these problems and provide faster and more affordable transactions. L2s are essential for making Ethereum more accessible and usable without sacrificing its decentralized principles. They leverage Ethereum's security and improve transaction efficiency by handling transactions from the main chain.

Are L2s a part of Ethereum

The analogy of L2s being like the sous chef in the busy kitchen of a big restaurant illustrates their role. Layer 2 (L2) solutions are a part of the Ethereum ecosystem, but they operate slightly differently from Ethereum's main blockchain (Layer 1 or L1). While L2 solutions are not "on" Ethereum in the same way that transactions are on the Ethereum mainnet, they are designed to work alongside Ethereum and are closely tied to it.

L2 solutions are innovative protocols that are layered on top of the Ethereum (L1) blockchain. These protocols leverage Ethereum's fundamental features, such as robust security and decentralization, to tackle the challenges of scalability. Layer 2s plays a crucial role in improving Ethereum’s ability to support decentralized applications (dApps), DeFi platforms, NFTs, and more. They are designed to complement and enhance the Ethereum network by offloading transaction load while still maintaining Ethereum’s security, decentralization, and trust.

  • What are the biggest differences between the existing L2 cultures?

Layer 2 solutions offer different approaches to easing Ethereum's transaction volume. The two most prevalent methods are sidechains and blockchain rollups.

Sidechains are independent blockchains with their own tokens and rules that are designed to help the main network expand. They are connected to the main blockchain through a two-way bridge, enabling the transfer of assets to and from Ethereum. However, direct asset transfers between the two chains are not possible. Sidechains employ a two-way peg, where a smart contract locks up assets on the main chain and creates a copy of the tokens on the sidechain. The value of these new assets is tied to the assets on the original chain. To illustrate, Ethereum can be likened to the head chef who delegates some tasks to the sous chef (sidechain). The sous chef then uses these tasks to process transactions. Once the transactions are completed, the sidechain discards its copies and returns the original tokens to Ethereum.

Blockchain Rollups are layer 2 scaling solutions that aggregate multiple transactions and submit them to Ethereum as a single piece of data. Ethereum then adds this data to a block and verifies it. Using the previous analogy, the sous chef brings the ingredients (transactions) to their workstation, processes them, and condenses a large amount of work for the head chef into a simpler form. The sous chef then sends the prepared ingredients back to the head chef (Ethereum) instead of the entire workload. This approach reduces the time taken by the head chef to complete the final tasks. As a result, users pay lower gas fees because their transactions are grouped with others, occupying less space on the block.

There are two main types of rollups: Optimistic rollups (such as Optimism and Arbitrum) and zero-knowledge (zk) rollups (like zkSync and StarkNet). Optimistic rollups are focused on being compatible with Ethereum’s existing tools, making it easier for developers to transition decentralized applications (dApps). On the other hand, zk rollups produce a single cryptographic proof called a "validity proof" to confirm the validity of the bundled transactions.

What risks do I think the proliferation of L2s can bring?

The widespread adoption of Layer 2 (L2) solutions poses certain risks for the Ethereum ecosystem. One major concern is the potential for fragmentation, where liquidity, user bases, and applications are spread across different platforms as more L2s emerge. This could weaken the network effects that have made Ethereum so powerful. Additionally, interoperability between L2s may not always be seamless, leading to inefficiencies and challenges for developers building across multiple layers.

Another risk is the potential for diminished decentralization. Not all L2 solutions are equally decentralized, and some may rely on centralized operators for transaction validation, governance, or fraud detection. This could compromise the trustlessness of the Ethereum ecosystem and lead to users unwittingly relying on more centralized systems vulnerable to censorship or manipulation, contradicting Ethereum’s core principles.

Economic fragmentation is also a concern, as the proliferation of L2s could lead to economic fragmentation in the Ethereum ecosystem. Different L2s may have their own native tokens, incentives, and staking mechanisms, which could divert attention and value away from Ethereum itself. This could result in decreased demand for ETH and economic instability across the L2 landscape, potentially conflicting with the overall Ethereum ecosystem's financial incentives.

While the proliferation of L2s brings benefits to the Ethereum ecosystem, it also introduces risks such as fragmentation, security vulnerabilities, and governance challenges. Careful coordination, standardization, and strong interoperability are essential to ensure that the growth of L2s strengthens Ethereum’s ecosystem rather than dividing it.

Purpose-builLayer 2 (L2) solutions are designed to address specific needs within the Ethereum ecosystem. They are tailored for particular applications, industries, or user requirements. This specialization brings several important benefits.

What benefits could purpose-built L2s provide?

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Please take note of the following key points:

1. Specialized L2 solutions can be fine-tuned for specific industries, such as gaming or finance, where high-speed and low-latency transactions are of utmost importance. By honing in on specific transaction types, purpose-built L2s can minimize fees for users. For example, an L2 focused on micropayments can significantly reduce unnecessary overhead costs for larger transactions.

2. A gaming-oriented L2 could greatly enhance the user experience by providing game developers and users with specialized tools, such as rapid in-game asset transfers and low-fee microtransactions.

3. A DeFi-focused L2 could streamline yield farming, staking, and lending operations by tailoring its optimization for the specific needs of decentralized finance platforms.

4. Purpose-built L2s can leverage zero-knowledge (zk) proofs to bolster privacy and security for users, making them particularly suitable for applications where user data and transaction details must be kept confidential. A purpose-built L2 for high-value financial transactions might incorporate enhanced fraud detection and dispute mechanisms tailored to the needs of that sector.

5. A purpose-built L2 can also offer development tools that are optimized for the requirements of the application, simplifying and expediting the development process.

Purpose-built L2 solutions offer numerous benefits by catering to the unique needs of specific use cases, industries, or applications. These solutions can deliver optimized performance, enhanced security, improved user experiences, and customized economic models, thereby fostering efficiency and innovation in specialized domains. As the Ethereum ecosystem continues to evolve, purpose-built L2s are poised to play a pivotal role in meeting the diverse requirements of various sectors, facilitating effective scaling of Ethereum while upholding its core values of decentralization and security.

What fresh or even crazy ideas should L2s explore?

Certainly! Here's a revised version of the text:

L2 networks have the potential to be customized, allowing individuals to establish their own rules and priorities, including privacy preferences, gas fees, and transaction approval processes. These networks are designed to be lightweight, serving a small user base while still connecting to Ethereum for final settlement.

Instead of relying on human-driven governance, L2 networks could be governed by AI algorithms that optimize based on performance data, user activity, and external market conditions. This AI could assist in adjusting protocols, governance models, and transaction fees based on user behavior, traffic patterns, or real-world events.

L2 networks can also establish a gamified ecosystem where users have the opportunity to earn tokens, NFTs, or in-game assets by achieving various milestones such as transaction volume or staking for a specific duration. Additionally, these networks could include built-in leaderboards, fostering healthy competition among users to accomplish certain feats, like achieving the fastest transaction times or making the most economic contributions.

Exploring innovative ideas for L2 networks opens new horizons for innovation within the blockchain ecosystem. By experimenting with personalized networks, integrating AI, gamifying user participation, and addressing specific societal or industry challenges, L2 networks can expand far beyond simple scalability. These forward-thinking concepts have the potential to redefine how we perceive blockchain infrastructure, broadening its application across domains beyond financial transactions and into real-world utility and creativity.

What governance experiments could L2s perform?

The l2 system can get into this government experiments:

  1. Quadratic voting: This is a democratic voting system where more power will be given to smaller stakeholders and not just to high stakeholders. This will help balance the desires of both the majority and the passionate few.
  2. Liquid democracy: This is a flexible system that allows users to delegate their voting power to others and reclaim it at any time. This means that every citizen of the L2 can vote directly on matters or delegate their vote to someone they trust. This flexibility allows decision-making to adjust in real-time to the community's needs, which helps to foster a sense of belonging.
  • What apps should we see on different L2s?

Each L2's unique characteristics will likely give rise to different kinds of applications. For example, zk-Rollups might excel at DeFi applications that require high security and cryptographic integrity, while optimistic rollups could support gaming, NFTs, and social dApps where transaction speed and cost are key. Specialized L2s could host apps for real-time communication, decentralized social networks, and other high-frequency applications that demand low latency. In the future, we may see L2s host novel applications that are simply not feasible on Layer 1 due to cost or technical constraints.

Special Vitalik's Prompt:

What L2s can do to make their relationship between each other and with L1 more collaborative, and maximize positive sum games?

Layer 2 (L2) networks and Ethereum's Layer 1 (L1) blockchain hold immense potential for scaling blockchain technology while maintaining security. However, the full benefits can only be realized if L2s collaborate effectively with each other and with L1, promoting a positive-sum game where all participants gain. There are several specific actions L2s can take to foster this collaboration. First, connectivity is crucial. L2s can build secure cross-layer bridges that allow assets, NFTs, and data to flow freely between them and with Ethereum L1. Developing standardized APIs and interfaces will enable dApps to operate seamlessly across different L2s, preventing fragmentation and enhancing user experience.

Secondly, L2s can adopt shared security models. By pooling resources for shared validators or using common fraud and validity-proof systems, L2s can enhance security while reducing operational costs. This would reinforce trust in the ecosystem and ensure each layer benefits from the strength of Ethereum’s security model.

Thirdly, collaborative governance through cross-layer DAOs could facilitate joint decision-making for ecosystem-wide improvements. Such DAOs would enable L2s to coordinate on protocol upgrades, research funding, and shared infrastructure, creating an environment where decisions are made for the collective benefit of Ethereum and its L2s.