2023 has ushered in two important upgrades in the history of Ethereum. The first is the Shanghai upgrade completed on April 13. After the Shanghai upgrade, the beacon chain staking withdrawal function was opened, allowing Ethereum to officially switch from the PoW mechanism to the PoS mechanism. This upgrade has become an important milestone in the Ethereum upgrade roadmap. Now, Ethereum is about to usher in the Cancun upgrade, which aims to add more data storage to reduce costs and increase efficiency for L2. It is expected to increase the speed of L2 by 10 to 100 times on the existing basis while reducing costs. According to the latest Ethereum core developer meeting, the Cancun upgrade is expected to be launched at the end of this year.
How will the Cancun upgrade speed up Ethereum's expansion, and what new development opportunities will it bring to Layer2? R3PO believes that through the Cancun upgrade, Layer2 will be better integrated into the Ethereum ecosystem, providing users with a faster and lower-cost transaction experience. Both Optimistic Rollup and ZK Rollup will benefit from this upgrade and jointly promote the development of the Ethereum ecosystem.
1. Deterministic Future - Layer2
In Ethereum co-founder Vitalik’s latest article “The Three Transitions”, he proposed three major technical transitions that Ethereum needs to go through: transition to L2 expansion, everyone turns to Rollup; transition to wallet security, everyone uses smart contract wallets; transition to privacy, ensuring that privacy-preserving fund transfers are feasible.
The article explains the importance of L2 and Rollup. Vitalik pointed out that without the development of L2, Ethereum will fail due to high transaction costs. Compared with the world-renowned transaction system VISA, which can process tens of thousands of transactions per second, Ethereum, which can only process 15 transactions per second, is difficult to meet normal transaction needs. The cost threshold of $3.75 per transaction also discourages a large number of ordinary users.
Ethereum supports a large number of transactions every day. As the ecosystem continues to develop, due to the limitation of block space, the network has become increasingly congested in order to compete for limited resources. Problems such as high fees and low speed of Ethereum's Layer 1 main network have gradually emerged, and there is an urgent need to reduce costs and speed up.
How to speed up the expansion of Ethereum has always been a problem that Ethereum developers pay special attention to. According to the Ethereum roadmap released by Vitalik Buterin, after the Shanghai upgrade solves the problem of the consensus mechanism, the focus will be on solving the expansion problem, with the goal of increasing the number of transactions processed per second on the Ethereum network to more than 100,000.
There are currently two expansion plans for Ethereum: Layer2 and Sharding. Layer2 is an off-chain solution for expanding the underlying blockchain (Layer1). The principle is to execute requests on the blockchain off-chain, execute and calculate actual transactions off-chain, and then verify the final validity of the transactions through a very small number of transactions on Ethereum. The current mainstream Layer2 solution is Rollup. The principle of Rollup is to package more than a hundred transactions executed and calculated on the chain into a transaction summary, and send the summary data to Ethereum. It only needs to save the summary data without performing complete calculations and storage on the Ethereum chain, so as to achieve the purpose of expansion. In this way, the security of Ethereum can be guaranteed while also achieving expansion.
二、Optimistic Rollup VS ZK Rollup
Rollup is mainly divided into two types: Optimistic Rollup and ZK Rollup (zero-knowledge proof Rollup).
Optimistic Rollup uses a fraud proof mechanism. The system enforces the reliability of transaction data by default, and the waiting period can be entered without validity verification. During the waiting period, if any node raises an objection and provides evidence to prove that the transaction is malicious, the transaction will be canceled. If there is no objection, the transaction will be confirmed and written into the block after the waiting period. Through the fraud proof transaction scheme, large-scale verification deployment is omitted, thereby saving computing resources and ensuring the accuracy of transactions. Currently well-known solutions include: Arbitrum, Optimism.
ZK Rollup uses a zero-knowledge validity proof mechanism. It generates a zero-knowledge proof to prove that all transactions are valid, and uploads the final state changes after all transactions are executed to Ethereum. ZK Rollup does not need to upload all the compressed transaction details like Optimism Rollup, but only needs to upload a zero-knowledge proof and the final state change data. ZK Rollup mainly includes ZKsync, Starkware, Scroll, etc.
Pros and cons of Optimistic Rollup:
Advantage:
Compatibility: Optimistic Rollup is relatively easy to support general contracts and is compatible with the Ethereum Virtual Machine (EVM), making it easier for developers to develop and migrate applications.
Disadvantages:
Time delay for fraud proofs: When malicious transactions or disputes occur, the exit time of Optimistic Rollup is longer, usually one week, which may cause funds to be unable to flow freely for a period of time.
Network Stagnation: When the network encounters a dispute, the entire Optimistic Rollup network may stagnate, causing transactions to fail to proceed smoothly due to the need to wait for the objection to be processed and verified.
Pros and Cons of ZK Rollup
Advantage:
Privacy protection: ZK Rollup uses zero-knowledge proof technology to verify the validity of transactions while protecting user privacy. Transaction details are kept confidential, and only the correctness of the proof needs to be verified, providing a higher level of privacy protection.
Security: ZK Rollup’s verification process is based on mathematical proofs and has strong security guarantees. Through zero-knowledge proofs, the validity and consistency of transactions can be ensured without disclosing transaction details.
Disadvantages:
Computational cost: Generating and verifying zero-knowledge proofs requires a lot of computing resources. Therefore, the computational cost of ZK Rollup is relatively high, which may lead to longer processing time and higher computational overhead.
Limited smart contract functionality: Since ZK Rollup is designed to optimize transaction processing, it has limited support for complex smart contract functionality, and some complex contracts may not be directly implemented on ZK Rollup.
OP has the advantage of being easy to develop and launched early, and currently occupies more than 90% of the TVL in the market. ZK has a smaller market share, and needs faster construction progress and ecosystem construction to participate in the competition for user growth. As the Layer2 ecosystem matures, the Rollup fee can be greatly reduced after the Cancun upgrade. User growth and ecosystem construction may be the most critical winning factors in the competition between ZK and OP.
3. The Future of Layer 2: The Road Ahead Led by the Cancun Upgrade
In the previous article, we compared the pros and cons of two Layer2 solutions, Optimistic Rollup and ZK Rollup. With the upcoming Cancun upgrade of Ethereum, Layer2 will usher in new development opportunities. The Cancun upgrade is an important milestone for Ethereum, aimed at improving scalability and performance. Through the Cancun upgrade, Layer2 will be better integrated into the Ethereum ecosystem, providing users with a faster and lower-cost transaction experience. Whether it is Optimistic Rollup or ZK Rollup, they will benefit from the improvements brought about by the upgrade. After the Cancun upgrade, the speed of Ethereum Layer2 will increase by 10 to 100 times, and transaction costs will also be reduced. We have reason to expect that the widespread use of Layer2 in Ethereum will open up new possibilities for high-throughput, low-cost decentralized applications.
1. Main content
The Cancun upgrade includes five EIPs, which are designed to add more data storage and reduce fees. The upgrade is centered on EIP-4844, and also includes four improvement proposals: EIP-1153, EIP-4788, EIP-5656, and EIP-6780. There is no exact date for the upgrade yet, but it is expected to go live by the end of 2023.
EIP-4844: As the core of the Cancun upgrade, EIP-4844, also known as Proto-Danksharding, is a capacity expansion plan centered around Rollup. EIP-4844 is the first step on the road to Ethereum capacity expansion. Before the upgrade, Rollup data was permanently stored on Ethereum, and the storage fee was expensive. 90% of the transaction costs paid by users for Rollup were due to the storage cost. For this reason, EIP-4844 introduced a new transaction type - Blob Transaction. The data will be migrated to "Blob" for temporary storage for about 1 month, after which the data will be deleted. For long-term data storage, other service providers will store it according to actual needs. When Blob becomes part of the Ethereum protocol through Proto-Danksharding, it will be possible to add more Blobs to the Ethereum block. At this time, Ethereum's throughput will be greatly expanded again (>100 times), and transaction costs will also decrease.
Other selected EIPs include:
EIP-1153: Improve block space by reducing the cost of storing data on-chain.
EIP-4788: Improve the design of cross-chain bridges and stake pools.
EIP-5656: Adds minor code changes related to the Ethereum Virtual Machine.
EIP-6780: Remove code that could terminate smart contracts.
2. Which opportunities are worth paying attention to?
(1) The grand narrative of Layer2
The background of Ethereum congestion also created the most grand narrative. The total TVL of the current L2 ecosystem has more than doubled since the beginning of the year, reaching about 8 billion US dollars.
As the first step in Ethereum's expansion, the Cancun upgrade will make Layer2 10x-100x faster and cheaper! The expansion and low fees of EIP-4844 will benefit various L2 ecosystems. The OP ecosystem will be more diversified, and the ZK ecosystem will be more available due to enhanced data availability, allowing independent layer 2s that are difficult to operate at high costs to grow rapidly. Benefiting from the reduction of on-chain fees, the L2 ecosystem will become richer and the number of users will increase.
Among the projects that have been launched, Arbitrum, OP, the newcomer ZKsync, and the veteran application dYdX are the leaders that occupy half of the current L2. The strong will always be strong, and the leading protocols in popular tracks have greater potential after the Cancun upgrade.
In addition to the projects that have already been launched, Scroll, Linea, Taiko, etc. that are about to be launched on the main network are also worth paying attention to.
In addition, L2's faster transaction speed and lower transaction fees will inevitably lead to a new round of L2 projects. On-chain futures and on-chain options are susceptible to the low TPS of Ethereum. The Cancun upgrade brings substantial improvements to such projects with high transaction speed requirements, such as GMX and GNX, and further expands the development space.
(2) Data availability layer DA track Since Blob data can only be stored for a short time, there are problems with the call of historical data. This will generate a demand for decentralized storage, and the Layer 2 expansion plan also needs to use the data availability layer. In addition, the Cancun upgrade will also benefit the L1 storage expansion network, such as Ethereum DA layer projects such as Eth storage, Arweave, and Filecoin.
3.Where is Layer2 heading?
In the foreseeable future, as the Cancun upgrade blows the horn of Ethereum expansion, expansion will provide higher throughput and lower transaction fees. This will enable Layer2 applications to process more transactions and provide users with faster and more immediate transaction confirmation. Whether it is payment and settlement in the financial field, or in games and NFTs, the high performance of Layer2 will provide users with a smoother and more efficient experience.
However, technological progress alone cannot attract users. In order to achieve the true prosperity of Layer2, innovative applications are essential. According to L2beat data, there are 29 Layer2s that have been launched and are waiting to be launched. Among them, Arbtirum One, Optimisim, zkSync Era, and dYdX account for 92.75% of the market share, and other L2s share the remaining 6.25% of the market share.
It is like spending a lot of time and energy to build a highway, but because there is no demand, there are very few cars driving on the highway. This is a common problem faced by most L2. Without high-quality applications, the value of L2 cannot be reflected. Arbitrum has gradually built a prosperous ecosystem due to the rise of DeFi applications such as GMX. Only by developing more convenient, innovative and practical applications to meet user needs can we truly attract user attention and participation. This requires developers and entrepreneurs to make bold attempts and innovations on Layer2, combining the advantages of Layer2 to create unique and attractive application scenarios. Only in this way can Layer2 truly integrate into the lives of users. Therefore, in addition to the development of technology in the future, user migration and application promotion are also key factors for the future success of Layer2.
Reference
1. https://vitalik.eth.limo/general/2023/06/09/three_transitions.html
2. https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698
https://www.datawallet.com/crypto/zk-rollups-vs-optimistic-rollups
3. https://www.coindesk.com/tech/2023/06/08/ethereum-developers-cement-final-lineup-of-changes-in-dencun-upgrade/
4. https://l2beat.com/scaling/tvl#upcoming
5. https://ethereum.org/zh/layer-2/
6. https://medium.com/bitcoin-news-today-gambling-news/ethereums-cancun-deneb-upgrade-everything-you-need-to-know-3e67439a036
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