- On Ethereum Layer-2 Technology, from John Wu, Polkadot scientist from xDeFiLabs, Polkadot community developer
At the end of 2019, several years after the concept introduced by Vitalik Buterin, several teams implemented their own version of zk-rollup, a zero-knowledge system for increasing the overall transaction throughput of Ethereum blockchain. With technologies of decentralized triangular arbitrage as its first product, a team from Silicon Valley named Loopring updated its roadmap to decentralized exchange empowered by their zk-rollup implementation, which can save 93% (in medium) gas fee for users trading on the “order book-styl”e loopring.io. Until July 2020, after the Cambrian explosion of decentralized finance protocols, and Sep 2020 Uniswap massive airdrop which pushes the gas price to 1000gwei, Ethereum core users found that throughput expansion of Ethereum is not a 2025 topic, but a problem in status quo.
Loopring team is just one team of many who smells this strong demand for throughput expansion. Raiden Network, a project working on Ethereum status channels, easily reminds people of Bitcoin’s Lightning network or HTLC solution, which is an existing topic in massive dispute in 2020 Stanford Blockchain Summit, where developers and cryptologists were still arguing issues about side-channel attacks.
3 months after Loopring DEX online, the LRC token suddenly surged about 10 times high, which means a very successful implementation may not attract investors at once. At the same time, ZK-Sync (from Matter Labs ) and Fuel labs introduced competing zk-rollup and optimistic-rollup solution as an alternative solution.
Optimistic Rollup, also known as “Minimal Viable Merged Consensus”, is established on an optimistic view which trust validator at first hand, unless a later proof of cheating is submitted — in this situation, transactions will be revoked. This design is aiming to get rid of a verbose period of trusted setup in zk-rollup.
In the recent roadmap released by Ethereum 2.0, Layer-2 technologies like zk-rollup and optimistic-rollup are in higher priority rather than the previously planned data sharding technologies. Some believe that if the prospect of Layer-2 continuously widens the gap between the poorly developed data sharding topics, the old plan may be thoroughly substituted by Layer-2 technologies.
In the status quo, Layer-2 technologies already showed its power on the topic of throughput expansion for Ethereum blockchain, but the true bottleneck is how to implement rollup on arbitrary logic from smart contracts. For side-chains, a decentralized bridge is the key missing module. For status channels and optimistic rollup solutions, the system is good in a dev environment, but in the product environment, working together with a public chain, disputes and accusations must be well handled. For zk-rollup, current engineering techniques may not meet the requirement of the widest range of smart contracts when implementing. If performance and adaptability are balanced in zk-rollup engineering, the user experience may exceed the Layer-1 Ethereum blockchain. One of the most ambitious approaches, ZK-sync from Matterlabs, is aiming to establish a primitive together and a compiler with zk-rollup implementation, in order to complement the original plain solidity DSL. It is not hard to imagine that if optimistic solutions cannot expand their adoption rate, proof-based solutions will finally be prevalent — Fewer assumptions, more audible.
2. Competence Analysis of Polkadot/Cosmos Ecosystem, from developers in xDeFiLabs
2.1 Why Developers Care About Cross-Chain Solutions Eagerly
Eric ( @eri0xlei ), CTO of xDeFiLabs, as a 4-year developer focusing on ETH/EOS/Polkadot ecosystems, admits that Polkadot is one of the most important paths for project migration from Ethereum, especially DeFi and NFT projects.
During designing xCap ( Capped-style European Option protocol) and the total architecture of xDeFi protocols, the whole team of xDeFiLabs frequently argued about oracle mechanism/robust and anti-manipulation price feeding algorithms — As we observed much time in 2020, the combination of Ethereum account model, smart contracts and flash-loan products form a new problem. Compromising approaches is feasible in simple scenarios, but in Polkadot, developers may make this simpler by omitting irrelevant modules when design certain products (i.e. information tracking multi-asset pools). On Polkadot parachains, DeFi and NFT renaissance will occur if technical architecture embraces EVM, and will benefit from Substrate tools which can shape chains into the form required by users.
For complicated contract like xHalfLife, the conclusion is similar: Contract callers’ experience will be impeded by the high gas fees, tricks like vanity addresses or gas tokens only alleviate problems, not solve them, unless Substrate is involved to enhance the execution efficiency of codes.
2.2 The Missing Part: Adaptability of Cross-chain
Another freelancer developer in xDeFiLabs, who had involved in Cosmos BC bounty, brought us the idea of “Paradigms will shift gradually rather than suddenly”. Currently, the most important work should be bridges between the Polkadot ecosystem and Ethereum, or the Cosmos ecosystem and Ethereum. For the running DeFi dapps on Ethereum, rollup technologies are far more attractive than cross-chain technologies, projects tend to stay on Ethereum and find optimization approaches rather than move to a new ecosystem, keeping asset liquidity on Ethereum, and other ecosystems tend to provide solutions for assets to cross from their own chain back to Ethereum. Binance Smart Chain is a good example to show EVM/Solidity development compatibility is more attractive than a formerly developed Binance Chain ( with BEP assets on it) using a modified cosmos SDK.
This developer describes his future works in detail that many cross-chain modules are to be optimized, i.e. a working Snowfork Ethereum cross-chain bridge, an implemented MMR dependent on GRANDPA consensus of Polkadot, together with a usable BLS implementation on Ethereum will be essential for cross-chain demand from Polkadot ecosystem. For Cosmos ecosystems, Peggy is reconstructed and to be tested in early 2021.
In summary, usable cross-chain technology on multiple ecosystems may not happen too soon in several months, and DeFi projects on Ethereum are happy with assets of other ecosystem crossing back to Ethereum. Native killer app on Polkadot or Cosmos may occur at some time later than 2021 Q1, but there is no clear answer about which project will stand out.
2.3 Layer-2 and Cross-chain: Friends or Enemies?
As a Polkadot community contributor, John commented additionally: A common fallacy is Layer-2 is demanded by Ethereum only. Cosmos ecosystems and Polkadot ecosystems still need Layer-2 technologies, but they are not fully explored like Ethereum, so relevant problems are not exposed to developers and users. In fact, Polkadot parachains still has performance bottlenecks which could be greatly alleviated by rollup-like technologies, but not now. Layer-2 technologies could still strengthen the competence of Polkadot projects.
3. Why ETH2.0 will finally be centralized? Opinions From xDeFiLabs
Turbulence (@t_turbulence), an economist from xDeFiLabs, who is also a 4-year Ethereum miner and data analyst, stated that he is not familiar with Polkadot/Substrate/Cosmos topics, but in his point of view, ETH 2.0 will be a failure. Back in April 2020, he tried to run the Beacon Chain node on his Raspberry Pi 4B/8G, which is as smooth as the Ethereum 1.0 node. Talking about engineering, he admits that ETH 2.0 is far more stable than many other public chains in 2020, but he strongly questioned the slashing mechanism and the outdated staking mechanism.
Talking about staking, Turbulence discussed the fact that this is an old fairytale that provides zero help to EOS and Atom ecosystems. In stock markets, staking equals continuous stock splits: Stock splits reward people according to their capital, not to their contribution, shares of each investor is inflated at the same rate. This action enhances the supply of shares, but provide no extra demand (unless some shares are repurchased or some dividends are distributed to shareholders without increasing the number of total shares) In stocks markets，stock splits usually provide better liquidity due to the smallest unit of trading ( integer times 10 shares ), i.e. TSLA is at $100 sometime before splitting, but after a 1:4 splitting it rushes to $500 at most, a 20x market cap increasing, with its GigaFactory-3 in Shanghai fully operational during COVID-19 pandemic. DOT experiences a 1:100 splitting, $100–200 before splitting, and now at $5 per coin which means a 1:100 splitting does not mean a 100 times ecosystem expansion. For ETH2.0 with a 15% inflation rate, without true demand increasing, BETH’s price will be under great pressure.
Talking about slashing, Turbulence discussed rewarding is better than punishing. Out of the Internet, out of electricity, and wars will make homemade ETH2.0 nodes unexpectedly offline, this will make ETH 2.0 a highly centralized network, essentially different from ETH mining using graphic cards. A debatable design, tokenomics of Filecoin mining is more decentralized than ETH 2.0 since Filecoin consumes massive power when computing PoST as well as massive bandwidth when storing files. ETH2.0, claiming it “get rid of power wasting”, makes their node running on very low-cost, centralized cloud services like Azure or AWS, which suffers from out of service every year. Think about a 4xE7 server running 100+ ETH2.0 nodes under. risk. One machine offline, all nodes offline. This design means ETH2.0 mandatorily pushed their users to pay 32 ETH in advance to build up the network, and take risks on their own, or have to choose a centralized service, which is unimaginable in the PoW world. The final state of ETH 2.0, Turbulence stated, may likely repeat the involution of EOS ecosystems: Much bribery, very centralized, (Wow.) and no one cares about the competency of the total ecosystem, suffering from Matthew Effect: A vote on 3% inflation rate is got vetoed, voters hoped to remain 1% inflation rate, which means they don’t want more new users as competing groups, they only want a monopoly. This involution path makes EOS insulated from DeFi — the most important topic in 2020. The whole ecosystem and developers remain unconcerned. ( Most of the developers prefer ETH, some choose Cosmos/DOT, some move to Tron or smaller ecosystems )
So no one can persuade Turbulence that ETH2.0’s path to success is assured. Since ETH1.0 s the only way for financing ETH2.0, (like ICO mania in 2017), ETH2.0 may push ETH1.0 coin to a higher price much more effective than DeFi locking or EIP-1559. While at the same time, numerous ETH 2.0 NSPs (node service providers) may compete with each other through direct rebates/discounts, or through slashing insurances.
4. What If ETH 2.0 Is A Great Success? Where are ETH and other ecosystems going to?
The statement of Turbulence above may be proven to be false, which is saying that ETH 2.0 will be a great success as a PoS public chain.
ETH1.0 （PoW public chain）, with multiple sub-ecosystem on it, will become the most important shard, supporting financial dapps and asset arbitraging. DEXes, lending services, arbitraging behaviors, and Nicehash-like DeFi vaults are highly coupled. Decoupling will be difficult even given data sharding available. Unless some financial services forms cartel to compete in an oligopoly pattern — But can you call an oligopoly Ethereum “permissionless and Trustless”? Ethereum 1.0 will support those transactions of the highest value, which are served by PoW miners under simple decentralized rules, and ordinary token transfers may be squeezed out to other data shards. Many public chains provide token transferring services, the true value of Ethereum 1.0 is about its programmable features. So ETH2.0 system only alleviates the problems of ETH1.0, not solve them. ETH2.0 is “yet another project”.
Layer-2 technologies, Polkadot Parachain ecosystems, Cosmos IBC, and ETH2.0 are all potential answers for the future of ETH 1.0 ecosystem evolution. In long term, there are still many whats, whys, and hows to be answered.