I’m baaaaaack! After a much needed break for 2022 planning and the holidays, I’m back digging into the rabbit hole so you don’t have to. Lets get to it!
Web3 has ~layers~, just like an onion. I’m not talking about the different implications of how Web3 might change finance, our online experience, or anything else. I’m referring to how the potential of these foundational cryptos are actually structured and built on a blockchain.
Taking a step back, it’s important to recognize that blockchains are not just for cryptocurrencies (except for maybe the Bitcoin blockchain, but that’s a different story). Blockchains store, encode, decode, and transmit data. Data can be currencies, but it can also be other things (e.g. tokens, apps). The reason that blockchains are growing in popularity from a data perspective is that they push us towards decentralization - or reliance on an intermediary, in theory should lower costs, they add cryptographic security, and the ledger makes transactions among us transparent.
When it comes to mass adoption of Web3 and blockchains, currently there are a lot of roadblocks that make the premise difficult. The user experience is terrible for non-technical or extremely curious folks, transacting is usually expensive, the engineering work required is super complex, and scalability has been difficult. Aaron Levie, CEO of Box, had a great reply thread on some of the challenges below.
The issue of scalability has been what’s plagued the largest and most popular blockchain, Ethereum, over the last year. In the case of Ethereum and all other web-based infrastructure, throughput rate is critical to user adoption. Throughput is measured by transactions per second. When throughput is high, things move quickly. Low, and you’re staring at a loading screen. The Bitcoin network can process only seven transactions per second and Ethereum can do 15-45. For comparison, Visa can do up to 24,000. As I wrote in Scale for Sale, the price you need to pay per transaction on the Ethereum blockchain is high because of the lack of validators who can confirm the transaction. Higher transaction prices push users away. Ethereum (like Bitcoin, Solana, etc.) is not only the most popular blockchain, but it’s what’s called a Layer 1 blockchain, a foundational layer. It has to be maintain high throughput to be successful, otherwise users will go to another chain. Ethereum runs processes, the programming language, and the rules that facilitate the blockchain’s functionality as a Layer 1. Everything in Web3 will be built chains like Ethereum. While the more people using it should lead to network effects and a better experience, its actually led to slower throughput.
There are a few potential solutions to the issue of scale. The first is the Ethereum foundation’s push for Ethereum 2.0, a new set of updates to the blockchain that will make Ethereum “more scalable, secure, and sustainable”. The second is what are called sidechains. Sidechains are very similar to Layer 1 solutions, except they’re “meant to handle Ethereum’s excess capacity, rather than compete with Ethereum” per Coinbase. Some can be application specific and others are generalists, but both are complementary. Importantly, both require their own native tokens. Lastly, there are rollups, also known as Layer 2 (L2) solutions, which are their own systems that actually rely on Ethereum for security and transparency. Unlike their sidechain counterparts, Layer 2 solutions don’t require their own token and are considered, by some, a part of the Ethereum.
Sidechains and Layer 2 solutions have recently caught my attention in the Web3 world because of frustrations around gas fees. While the general UX is still *fine*, the low fees associated with transacting make utilizing the option seriously compelling. One of the most well known options is Polygon, and this description from Coinbase sums up Polygon and L2’s perfectly.
Picture Polygon as being like an express train on a subway — it travels along the same route as the regular train, but it makes fewer stops and thus moves much faster. (In this analogy the main Ethereum blockchain is the local train.)
While you see the person who took the express train at the same stop as you, it would be harder to know if they were on the same subway line (e.g. the 4/5 and 6). They could have just walked downstairs, come from another subway, or even headed in a different direction. In the case of Ethereum, the solution to the issue of correctness, trust, and validity through is managed by both optimistic rollups and zero-knowledge (ZK) rollups.
Optimistic rollups are called such because they offer transactors the benefit of the doubt. The rollup operators post whatever data they want from the transaction and within a certain timespan, that data is publicly visible (all blockchains are). Those viewing (validators) can call out any potential fraud they see. If fraud is evident, the notifier is rewarded and the transactor is punished (usually by fine). While the time transitioning from rollup to Ethereum can be long with these transactions, there are lots of very smart people actively working to reduce the delay.
Zero-knowledge rollups do the opposite and prove validity upfront as they send the transactions from the L2 to Ethereum. They do this via validity proofs, which require heavy computational power, but in turn remove any need for the transaction auditing timespan. They are extremely complicated, which has limited their adoption compared to optimistic rollups. However, long-term focused developers peg ZK as the more likely to stay option between the two. They also have some overlap with what the Ethereum foundation is working on for Ethereum 2.0.
At the moment, there’s no correct answer for which solution is best or if there even needs to be another solution after Ethereum at all. I don’t think that the rollout of Ethereum 2.0 will eliminate the need for sidechains or L2 solutions. Especially knowing the complexities in the ecosystem overall plus the Ethereum teams’ past mishaps with deadlines. I think if anything, it will just make the entire ecosystem more efficient and open new doors for decentralized apps to flourish. Ethereum could serve as a new version of the dollar, with other tokens pegged to it and efficient capital flow across different networks. Things just need to go right. But if not, there’s always Solana!