The L2 Evolution
The L2 ecosystem has made significant progress in enhancing the scalability, efficiency, and availability of the industry.
Recently, various L2 players have emerged, and market competition is becoming increasingly fierce.
Almost all chains claim to be cost-effective and efficient, and they are all trending towards modularization, increasing scalability, and building L3.
What kind of L2 do we need? What are the characteristics of various players in the current L2 track, and what actions are they taking? What new trends will emerge in the future for L2?
Binance Research Institute previously released a research report titled "The L2 Evolution," providing detailed answers and outlooks to the above questions. The report focuses on analyzing the complexity of different L2 approaches, evaluating their current positions in the market, and delving deeper into the potential new directions in the current L2 market landscape.
Given the length of the report, DeepChain has interpreted and organized the report to help everyone gain a concentrated, rapid, and systematic understanding of the situations of various players in the L2 market and make predictions about future opportunities.
Key Summary
L2 has evolved new trends, including Superchain, L3, and Hyperchain. These advancements are being adopted by various L2s and are expected to become the cornerstone of the next generation of Ethereum expansion, simplifying the development process, enhancing security, and establishing greater interoperability within the ecosystem.
Optimism's OP stack is moving towards the superchain, with high interoperability. The Bedrock upgrade represents the initial step towards realizing their vision.
Arbitrum is also at the forefront of Ethereum expansion, developing an L3 network through Arbitrum Orbit to provide a permissionless framework for deploying custom chains on the Arbitrum L2.
zkSync has proposed Hyperchain, a set of customizable trustless linked blockchains, achieving super scalability, improved composability, and enhanced security.
StarkWare is developing a multi-layer solution, exploring L3 for custom expansion and leveraging L2 for general expansion.
Polygon 2.0 aims to create the "value layer of the internet" by unifying its L2 solution suite, including Polygon PoS, Supernets, and zkEVM.
Market Background
Scalability is the core challenge facing Ethereum, making it difficult for Ethereum itself to reach the scale equivalent to the internet.
Current L2 solutions also have limitations and cannot be the best choice for applications. They either sacrifice scalability or increase the risk of dependency on specific ecosystems.
Cross-chain interoperability remains a pain point. Existing cross-chain bridges are fragile and often susceptible to attacks.
The next stage of L2 development is to simplify the deployment process of Rollups and lower the threshold for developers. The goal is to achieve "one-click" deployment of Rollup chains, as simple as creating a webpage.
Each Rollup chain currently needs to build its own infrastructure, leading to resource waste and high fragmentation. New Rollup models can achieve infrastructure sharing and interoperability, reducing resource redundancy.
New cases such as OP Chains, Arbitrum Orbit, and hyperchains on zkSync, etc.
Key Players: Optimism and OP Stack
Optimism is the team behind OP Mainnet, an EVM-compatible optimistic rollup that went live in December 2021, and is one of the leading Ethereum L2 solutions. As of June, the total locked value of OP Mainnet exceeded $2.2 billion, accounting for the second largest market value among all Ethereum L2 solutions, with a total market share of over 23%.
In October 2022, Optimism launched OP Stack, described as a "highly scalable, highly interoperable modular open-source blueprint for various blockchains." This marks the evolution of Optimism's design and vision in the Ethereum scalability world, not just running their optimistic rollup solution.
OP Stack introduces the concept of "Hyperchain," referring to a highly integrated and unified L2 blockchain network built on OP Stack.
Optimism's latest development in this new phase is the migration of their flagship L2 rollup to Bedrock, the first official version of OP Stack, bringing many operational and user improvements to their product.
OP Stack Details
- OP Stack is a standardized, shared, and open-source development stack that powers OP Mainnet. It consists of various software components that make up the Optimism L2 rollup and can be used to create a collection of L2 blockchains for network sharing, interoperability, and coordination.
Essentially, OP Stack aims to simplify the creation of L2 blockchains and can be seen as a "supermarket for building L2."
- Key components include:
Data Availability Layer: Defines where the original inputs of the OP Stack chain are published. Most OP Stack modules use the Ethereum data availability layer, which is also used by the OP Mainnet rollup.
Sequencer Layer: Determines how transactions on the OP Stack chain are collected and published to the data availability layer. Currently, the sequencer module of OP Stack is a single sequencer setup. Proposed modifications will include multiple sequencers to enhance the platform's decentralization.
Derivation Layer: Defines how to process raw data from the data availability layer to form inputs sent to the execution layer. It is closely related to the data availability layer, as it must understand how to parse raw data from there.
Execution Layer: Defines the state in the OP Stack chain and how the state changes upon receiving inputs from the derivation layer. The execution layer module currently used in OP Stack is a slightly modified version of the EVM.
Settlement Layer: Traditionally handles the retrieval of assets from the blockchain, first proving the state of the target blockchain, and then processing the retrieval based on that state. More broadly, for OP Stack, the settlement layer allows third-party blockchains to be aware of and establish a view of the OP Stack chain's state.
Governance Layer: Refers to the general set of tools and processes used for managing upgrades, design decisions, and system configurations. Compared to other layers, this is a more abstract layer that can include various mechanisms.
- Benefits of OP Stack:
Scalability: OP Stack's code is designed for other builders who would want to use and build on it. Therefore, their code is open-source and often modular.
Simplicity: They strive to make their code as simple as possible and tend to reuse battle-tested existing code.
Understandability: Existing Ethereum developers can relatively easily build on OP Stack.
Client Diversity: Multiple client implementations can be achieved across OP Stack.
Benefits of Bedrock Upgrade
- Lower Costs: Bedrock has implemented optimized data compression strategies to minimize data costs. The average cost per transaction has now been reduced by over 77%. This also makes Optimism's L2 rollup the cheapest Ethereum L2.
Improved User Experience: Especially for users less familiar or experienced with L2 rollups, this is an enhancement to the user experience.
Improved Proof Modularity: Bedrock abstracts the proof system from OP Stack (referring to the settlement layer in Figure 2), allowing the OP Stack chain to use fraud proofs or validity proofs (i.e., ZK-proofs) for transaction verification. It is worth noting that there is already an RFP for establishing a ZK validity prover for OP Stack.
Improved Node Performance: Bedrock allows multiple transactions to be executed in a single rollup "block," as opposed to the previous "one transaction per block" model. At the current transaction volume, this will reduce state growth by approximately 15GB/year.
In summary, OP Stack helps break down the various components needed to build an L2 chain, and Bedrock is the first implementation of this software. Key term: modularity.
OP's Superchain Architecture
- After the Bedrock upgrade, Optimism's next step is to begin upgrading itself to a Superchain.
Superchain is envisioned as a decentralized L2 chain network (referred to as OP Chains) that shares security, communication layer, and an open-source technology stack (i.e., OP Stack).
These chains will be standardized and designed to be used as interchangeable resources. This standardization will enable developers to create applications targeting Superchain as a whole, not just the underlying chains where applications run.
Benefits of Superchain:
Reinforced and Secure Code Base: As the number of chains grows, each chain contributes to and shares a modular and standardized codebase that supports them, reinforcing the system.
Atomic Cross-Chain Composability: Seamless simultaneous transactions between different OP chains without the need for bridging or intermediaries.
Universal Ethereum Infrastructure: Allows existing Ethereum developers to seamlessly transition to building OP chains.
Projects Joining Op:
Optimism's L2 rollup chain, after the Bedrock upgrade, is the first member of Superchain.
Coinbase's Base L2 will be the second member, launching its mainnet this year.
Worldcoin has committed to building on OP Stack.
Conduit aims to make it easier for developers to launch their own OP Stack rollups and eventually become part of Superchain.
Aevo, a decentralized options exchange, recently partnered with Conduit and launched its rollup based on OP Stack, with Conduit operating the Aevo rollup sequencer.
BNB Chain also announced the opBNB testnet, their EVM-compatible L2 chain based on OP Stack.
In the NFT world, the decentralized NFT marketplace Zora recently launched the Zora Network, based on OP Stack's L2, aiming to make NFTs cheaper and more accessible. Their documentation indicates that the cost of minting on Zora can be less than $0.50, with transactions confirmed within seconds.
Key Player 2: Arbitrum Orbit
Since its launch in August 2021, Arbitrum is currently the largest and most significant L2 network, with a total locked value of over $5.9 billion, accounting for over 60% of the total market share.
Arbitrum Ecosystem Products:
Arbitrum One: The first and core mainnet Rollup of the Arbitrum ecosystem.
Arbitrum Nova: The second mainnet Rollup of Arbitrum, targeting projects that are cost-sensitive and have high transaction volume requirements.
Arbitrum Nitro: A technical software stack supporting Arbitrum L2, enabling Rollups to be faster, cheaper, and more compatible with EVM.
Arbitrum Orbit: A development framework for creating and deploying L3 on the Arbitrum mainnet.
What is Layer-3?
L3 networks, sometimes referred to as application chains, are dedicated networks built on top of L2, each hosting smart contracts supporting specific decentralized applications.
The simplest way to understand L3 is to think of them as Rollups for L2. They settle with L2, unlike settling on L1.
Arbitrum Orbit's Use Cases
Orbit is a permissionless development framework that allows anyone to deploy L3 chains on the Arbitrum L2 chain.
Through Orbit, Arbitrum intends to support protocols for the following use cases to launch their own L3 chains:
L3 Rollup: Launching L3 Rollup chains similar to Arbitrum One.
AnyTrust L3: Launching AnyTrust chains similar to Arbitrum Nova.
Customizable L3: Deploying custom L3 chains tailored to specific application requirements based on Arbitrum Nitro on the Arbitrum L2 chain. This includes privacy, permission, fee tokens, governance, and other components.
Summary: With this solution, Arbitrum aims to attract developers who seek more control and customization, allowing them to fork and freely adjust the Arbitrum source code according to their specific requirements, even branding their solutions as "custom chains."
Key Player 3: zkSync and Hyperscaling
zkSync Era, Matter Labs' zkEVM rollup version, has become one of the most widely used L2 and zkEVM solutions, with a TVL of over $625 million since its deployment on the mainnet.
Hyper scalability has become its ultimate ambition: managing an infinite number of transactions without compromising security or decentralization.
To meet the growing demands of Web3, zkSync has designed its ultimate solution around the concept of Hyperchain.
The zkSync architecture aims to integrate the Hyperchain network, all anchored on a basechain.
Hyperchain
Hyperchain, in zkSync's L3 vision, is envisioned as a broad ecosystem of trustless and customizable linked blockchains.
Implemented with a modular approach, it provides a Hyperchain software development kit (SDK) framework for developers, allowing them to choose various components for their blockchain or develop their own.
Benefits:
Security: Hyperchain will overcome typical vulnerabilities associated with non-native bridging, which often lead to hacks. In zkSync's L3, interactions between Hyperchains will be done through native bridges, further enhancing security.
Performance: By implementing the Hyperchain architecture and achieving hyper scalability, the performance of L3 is improved.
Cost: Data costs are significantly reduced due to the data availability solution.
Usability: zkSync foresees a substantial enhancement of the SDK, including the introduction of low-code and no-code solutions, making application development simpler.
Composability: The system's LLVM compiler supports Solidity and any other modern programming language, increasing accessibility for developers specializing in languages such as Rust, C++, and Swift.
Hyperscaling Theory
A hyper-scalable blockchain system involves multiple different ZK chains (or hyperchains) running in parallel, with block proofs aggregated and settled on L1. In theory, this could even be an infinite number of hyperchains, representing the entire system.
The entire process is related to StarkWare's introduction of a concept called fractional scaling for the first time. Fractional scaling is based on a multi-layer network concept, where application-specific L3 is recursively built on L2.
Hyperscaling further advances this by introducing super bridges, which are native bridges connecting each L3 application chain. This allows transfers between hyperchains to be as simple and cost-effective as any regular transfer, reflecting how hyperlinks allow seamless navigation from one webpage to another with just one click, eliminating the need for additional navigation through each layer.
Key Player 4: StarkWare and Fractional Scaling
StarkWare has proposed a multi-layer network concept, where L2 is used for general expansion, and L3 is used for custom expansion.
StarkWare's concept of fractional scaling may have inspired other L2 projects to explore Ethereum's expansion.
Slush is developing an SDK for building zkVM L3 on Starknet.
StarkWare has introduced Recursive STARKs, an enhanced capability for L2 expansion, allowing multiple transaction proofs to be bundled into one proof.
This technology relies on the Cairo programming language and SHARP, which supports aggregating transactions from multiple applications into one STARK proof.
StarkWare aims to optimize costs, latency, and computational resources to support the development of L3 solutions on the public Starknet network.
Key Player 5: Polygon 2.0
- Background:
Polygon's L2 solution processes approximately 2-3 million transactions per day and has 300-400k continuously active addresses.
Polygon has also introduced its own app-chain solution called Supernets, allowing developers to create custom app-chains.
- Core of Polygon 2.0:
Aimed at unifying Polygon's various platforms to provide a seamless interface for users.
As a collection of L2 chains powered by ZK technology, Polygon 2.0 uses a unique cross-chain coordination protocol.
The network can accommodate an infinite number of chains, ensuring secure and instant cross-chain interactions.
- Key Points:
Interoperability: Polygon 2.0 aims to achieve smooth movement and interaction across multiple blockchains through ZK proofs.
Security: By using zero-knowledge technology and existing PoS mechanisms, Polygon aims to enhance security and privacy.
Scalability: The Polygon team is building Polygon 2.0 to support "practically infinite number of chains."
- Latest Updates and Timeline:
The Polygon PoS sidechain is currently protected by its own set of validators rather than through ZK proofs. However, the vision for Polygon 2.0 is for each Polygon chain to be a ZK L2.
The user and developer experience will not change with this transition, and Polygon PoS will continue to operate as usual, with the added security of ZK proofs.
If the initial proposal receives support, the Polygon team expects to launch the zkEVM validium mainnet by the first quarter of 2024.
- Conclusion: Considering Polygon's performance on its PoS sidechain and the successful deployment of their zkEVM solution, this new vision holds significant promise and may bring interesting enhancements to the broader L2 ecosystem.
Comprehensive Comparison of L2 Markets
- The key characteristic is its dynamism and competitiveness, with each network bringing its unique perspective, despite commonalities, there are significant differences.
Key Features of Major Projects:
Optimism: Distinguishes itself through its Superchain paper. It provides a fully open-source framework, but this may lead to other rollups using OP Stack dispersing Optimism's liquidity and users.
zkSync: Overlaps to some extent with Optimism but differs in execution strategy from Optimism and Arbitrum.
Arbitrum: Provides a permissionless platform for creating L3 chains but still requires DAO approval to use Arbitrum's IP to develop L2s.
Starknet: Adopts a multi-layer structure, using fractional scaling for L3s.
Polygon: Chooses a more integrated model, combining its L2 products together.
These L2 visions, while different, all revolve around customization and application-specific chains.
The subtle differences between different L2s can be shown in the table below:
Ultimately, regardless of the differences in technical solutions, L2s also need to consider the following elements to determine how projects can accrue value within their respective ecosystems.
Software Customizability: The ease of replicating code and building on L2 will be a key distinguishing factor. Projects built on L2 are likely to seek specific modifications and may invest resources to fund these customizations. The best L2 software stack that can adapt to these scenarios will undoubtedly have a competitive advantage.
Transaction Fees and Sequencers: Sequencers, responsible for maintaining and operating costs, should be fairly compensated through transaction fees charged to users.
Role of Governance Tokens: As the trend shifts towards decentralization, the role of governance tokens for L2 becomes more important. Most rollups are likely to require token staking to be included in a shared sequencer network.
Final Thoughts
The L2 ecosystem has made significant progress in enhancing industry scalability, efficiency, and availability.
The industry is exploring the next stage of L2 evolution, leading to the emergence of various visions and approaches. Despite the many different viewpoints, the common goal is to achieve infinite scalability, hoping that the Web3 world can seamlessly expand like Web2.
Currently, this field is still in its early stages, and specific methods and practices have not been fully determined.
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