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The Endgame of Layer 2s, Explained

Lincoln Murr

Summary: Ethereum is transitioning towards becoming a modular ecosystem, relying on Layer 2 rollups as the primary place for user interaction and transaction execution. Since this is a relatively new pivot, infrastructure for this next generation of the internet is still being built and poses many issues like liquidity fragmentation and bridging. However, the future is ...

Ethereum is transitioning towards becoming a modular ecosystem, relying on Layer 2 rollups as the primary place for user interaction and transaction execution. Since this is a relatively new pivot, infrastructure for this next generation of the internet is still being built and poses many issues like liquidity fragmentation and bridging. However, the future is clear, and the endgame of Layer 2 promises to bring secure, cheap, and fast transactions to the world.

When Ethereum was released in the early 2010s, its goal was to be the world compute layer capable of handling global transaction processing and contract execution. As it grew, it became evident that Ethereum's original form as a single blockchain executing transactions sequentially would not have nearly enough throughput to achieve mass adoption without extremely high transaction fees and relatively slow execution. After considering multiple approaches, Ethereum chose to move forward with a rollup-centric roadmap – using Ethereum as the settlement layer with Layer 2 rollups that build upon it for transaction execution and custom code implementation. 

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Though this vision is well underway, with L2s like Optimism, Base, and Arbitrum handling tens of billions of dollars of transaction volume and slowly becoming the dominant place for Ethereum transactions, it has come at the cost of several obstacles that are still being tackled. 

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One obvious hurdle that can make or break an L2 is how it handles bootstrapping its chain with apps and value. Every L2 has had to create its ecosystem from scratch, incentivizing developers and liquidity to migrate to its platform. This completely mitigates Ethereum's first-mover advantage, allowing alternative L1s to compete for liquidity and other precious network-oriented resources that ultimately decide whether or not a chain is usable. Some L2s have resorted to offering strong token incentives to developers and users, while others have been able to use their name brand or organic growth to bring interest to their platform.

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With each L2 having its own ecosystem and liquidity, a second issue arises – fragmentation. Instead of an Ethereum user being able to go to one chain and use all of the applications they want with billions of dollars in liquidity, they are forced to bridge to numerous different L2s, a relatively risky and confusing process that ruins the user experience. On the other hand, Solana has one simple ecosystem with billions of dollars and thousands of apps that require no bridging to other Solana-based chains; hence, it has been a favorite among retail users.

Though Ethereum’s L2 landscape certainly has its problems, there are solutions in place that would make the user experience seamless and efficient yet again. Each major rollup – Arbitrum, Optimism, zkSync, and others – hopes to build a network of L2s and L3s seamlessly interoperating by sharing the same tech stack. Optimism’s Superchain initiative has thus far been the most successful in getting L2s like Base, Mode, and Zora to develop using the OP Stack and agree to join a coalition using the same bridging, decentralized governance, and communication layer. Though these networks of L2s are still being built out, they are a promising solution to creating better hubs, but they do not solve the problem of interoperating between incompatible solutions like Optimism and Arbitrum.

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Another developing narrative that is a necessary, but not sufficient, condition for achieving greater L2 interoperability is shared sequencers. Every L2 has a sequencer, which can be considered the air traffic control unit responsible for ordering L2 transactions and publishing them to the Ethereum L1. Currently, each L2’s foundation or other trusted entity is responsible for running its individual sequencer, which is relatively centralized. If L2s could share the same sequencer, it would become possible to create complex cross-rollup transactions that could atomically start an exchange on Optimism and end it on zkSync. This is because the sequencer could effectively order transactions for multiple rollups simultaneously, ensuring the important blockchain properties of transaction safety and liveness. One company building a decentralized shared sequencer is Espresso, which hopes that its solution could allow anyone to run a sequencer node and contribute to this process, much like how Ethereum validators today are responsible for building and proposing mainnet blocks. Another solution would involve a system like EigenLayer allowing Ethereum validators to propose blocks on both L1s and L2s, using a concept known as based confirmations. 

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Though the current state of L2s is in its awkward growth period, the endgame promises full decentralization, interoperable rollups, and unified liquidity across multiple layers. We are still a few years away from this vision coming to life, but in the meantime, we see incremental changes abstracting away the complexities of blockchain-based systems that make them approachable and understandable for the average person. Though the debate between modular and monolithic architectures is yet to be resolved, Ethereum’s rollup-centric roadmap and the emphasis on transaction throughput, at the short-term cost of ecosystem growth and fragmentation, is a promising approach to building a global settlement layer.

By Lincoln Murr

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