The Fallacy of Scalability - Why Layer 2 Cannot Save Cryptocurrency

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3 days ago

Source: Cointelegraph Original: "{title}"

Views from: Dan Hughes, Founder of Radix

Cryptocurrencies have relied on Layer 2 (L2) solutions for years as a "panacea" for scalability issues. But what if these solutions are precisely the source of the risks we face?

This obsession with L2 has not paved the way for mass adoption; instead, it has created a complex web of rollups, bridges, and fragmented liquidity that threatens the core principles of blockchain decentralization and security. The dream of achieving a seamless decentralized network is fading, replaced by a complicated system that replays the inefficiencies and centralization of the traditional financial world. Are we driving innovation, or merely reconstructing the past?

The Blockchain Trilemma

L2 was supposed to address the blockchain trilemma (i.e., decentralization, security, and scalability). However, while they may fill gaps on an individual level, as a whole, L2 solutions put cryptocurrencies at risk of losing all three.

The continuous growth of L2 has led to a highly fragmented ecosystem that is difficult to navigate and relies on complex rollups and bridging solutions. This has resulted in partial centralization of the ecosystem, with assets being pulled into fragmented liquidity islands, hindering security and suppressing the competitiveness of smaller projects.

These "solutions" introduce significant friction and bring unnecessary security risks. Although hacks related to bridging have become less common over the past two years, hackers always find new ways to balance the books—exploiting rollups, channels, and sidechains.

Many L2s rely on sorters or validators, which introduce additional cracks into the system, creating single points of failure, while island-like liquidity reduces the availability of smaller L2 validators, threatening the network's resilience.

These solutions also pose significant technical challenges for developers, especially for those looking to integrate with L2, requiring them to have a deep understanding of the mechanisms of each L2.

L2 proponents argue that these trade-offs are necessary and can be easily overcome, but there are more fundamental issues at play here than merely sacrificing security, scalability, or liquidity.

The ultimate goal of cryptocurrency is to establish a universal network where any asset or decentralized application can interact instantly with other assets or applications in a trustless, secure environment. However, the friction introduced by L2 undermines this instant interoperability, while the centralization of sorters and validators weakens the fundamental principles of decentralized systems. This is not just because it hinders the scalability of decentralized finance (DeFi), but because it leads us to scale something entirely different, reconstructing the existing fragmented, intermediary-laden inefficiencies of the traditional financial system.

If the goal of DeFi is to bring all financial activities on-chain, then we must do better than what we currently have.

Starting from Infrastructure

Cryptocurrency needs to start from the ground up. Blockchain networks must prioritize scalability and security rather than outsourcing these tasks to Layer 2.

Sharding offers a clear path forward, but the industry must set higher goals to build a long-term solution rather than merely a "stopgap" to address current scalability issues. This is not just about increasing the number of shards, but how we shard. The Beacon Chain merely adds a bottleneck, while dynamic sharding complicates matters, introducing significant overhead that limits scalability. Even intra-validator sharding, which seems to address these issues, becomes a "drumroll" seeking more validators and diminishing returns once the resource saturation of network nodes is reached, as these nodes must receive all transactions.

The obvious solution for scaling DeFi to the same capabilities as traditional finance is state sharding, which distributes the state of the blockchain across multiple different shards. Transactions involving different shard states would create a temporary consensus process.

Validators responsible for transaction states communicate, reach consensus (or not), and atomically update states across all relevant shards. This allows transactions to be processed in parallel across multiple shards and even within the same shard, ensuring that shards only care about transactions modifying their responsible states that do not have cross-dependencies, significantly increasing throughput without compromising decentralization or accessibility.

When these shards are integrated with atomic commitments, if any part of a transaction fails, all operations will cleanly abort without additional work to unwind pending state changes.

This is just one solution. DeFi will scale globally. The question is only when and how it will be achieved. That said, focusing on building the L1 foundation rather than relying on piecemeal solutions from Layer 2 will eliminate fragmentation, reduce complexity, and ensure that scalability and accessibility once again become the core of blockchain networks. Ultimately, developers must choose to prioritize the future—whether it is token economics or the original intent of Web3—decentralization, efficiency, and security.

Future-Oriented Scaling

L1 solutions are solutions for everyone. They ensure a foundational ecosystem for developers, traders, everyday users, and even billions of potential users. Without a robust and scalable architecture as a foundation, any strong push could lead to the collapse of this house of cards. Of course, certain specific use cases may be better suited for Layer 2 solutions. For example, high-frequency trading settlements are a perfect example, but exceptions do not prove the rule. From the perspective of the entire ecosystem, developers must focus on integrated native scalability solutions rather than merely layering on more complexity, balancing more fragile "solutions." Without sufficient attention to L1, only problems await in the future.

Views from: Dan Hughes, Founder of Radix

Related: Retail Investors to Dominate the Cryptocurrency Market

This article is for general informational purposes only and should not be considered legal or investment advice. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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