Will Ethereum Layer 2 be the next failed Bitcoin Lightning Network?

Layer 2 will not fail like the lightning network, but it is far worse than ETH2.0, and it is also bad news for miners

Ethereum finally broke through a new high on the evening of April 2, but on the other hand, the public chain of the exchange has recently been in the limelight. Its high APY has attracted many miners, and BNB, as a "shovel", also reached a new high on April 2. , the total market value of BNB once broke through 50 billion US dollars, second only to ETH.

Although the price of the currency is easy to rise in the bull market, when the flow is siphoned, the ETH/BTC exchange rate will inevitably weaken again. In addition, Polkadot and other cross-chain ecosystems are also getting stronger. Will Ethereum really decline this time? The gas fee of ETH 1.0 has always been high, but in the short term, it is impossible to hope for 2.0. In this case, the Layer 2 solution advocated by V God has become a life-saving straw in the congestion ecology of Ethereum.

Gitcoin Grants Has Raised $1.2M in Ethereum for Ukraine: Golden Finance reports that from March 9 to March 24, entities participating in Gitcoin-owned fundraising collective GR13 can contribute matching funds to help Ukraine.

Gitcoin co-founder Scott Moore said this is part of our donation to more real-world causes. As of Thursday evening, the grants had raised $1.2 million in aid to Ukraine. (cryptonewsbtc) [2022/3/18 14:04:21]

But there are also different voices. For example, ViaBTC CEO Yang Haipo believes that the stories of Layer 1 and Layer 2 of Ethereum have already happened on the Bitcoin main chain and Lightning Network, and the latter eventually failed. The same story will happen on Ethereum On the market, we don't need Layer 2, but a powerful Layer 1.

Data: The top 10 non-exchange whales in Ethereum have reached a 5-year high, and the top 10 whales in the exchange have reached a new low: Santiment data shows that the top ten non-exchange whales in Ethereum are increasing their positions. 21.3 million ETH, a 5-year high. Meanwhile, the ETH holdings of whales on the top 10 exchanges recently fell to 4.66 million, the lowest level since ETH launched in 2015. [2021/7/26 1:15:00]

Although his views are personal, because Yang has always been a supporter of BCH large blocks, we also have to think about the possibility that Ethereum Layer 2 will really repeat the mistakes of the Lightning Network?

Similar to the current problems faced by Ethereum, Bitcoin also suffers from network congestion, and Lightning Network is Bitcoin’s Layer 2 expansion solution. network. Although the Lightning Network has been live for 3 years, data shows that it is still in the early stages of development.

Ethereum founder Vitalik advocates widespread adoption of social recovery wallets for cryptocurrencies: On January 11th, Ethereum founder Vitalik Buterin published a blog post advocating that the cryptocurrency industry should adopt a social recovery wallet (social recovery wallets), a new type of smart contract Wallets can better enhance the security protection of cryptocurrencies. There are two main parts to how social recovery wallets work, first, there is only one signing key that can be used to approve transactions; second, there are at least 3 (or more) guardians, most of whom can cooperate to change the signing key of the account. If a user loses their signing key, social recovery kicks in. Users can contact guardians directly and ask them to sign a special transaction to change the signature public key registered in the wallet contract to a new signature. Currently, the two main wallets that have implemented social recovery functionality are Argent Wallet and Loopring Wallet. However, both wallets have two major issues, namely reliance on relayers to resolve transactions, and high transaction fees, which can be solved by moving the ecosystem to a layer 2 protocol, such as ZKrollups. [2021/1/11 15:51:02]

As of February 28, 2021, the number of Lightning Network nodes is 9,284, the number of channels is 35,437, and the carrying capacity of BTC is 1,100. In recent years, all data have been slowly increasing.

Data: The number of Ethereum held by miners has increased by 15,000 in the past two weeks: According to Santiment monitoring data, in the past two weeks, the balance of Ethereum held by Ethereum miners has increased by 15,000. Meanwhile, the number of addresses holding between 100,000 and 1 million ETH has surged nearly 5 percent since the beginning of the month. (Crypto Potato)[2020/6/22]

(Lightning network node growth trend. Source: Bitcoin Visuals)

There are two main factors restricting the development of Lightning Network: 1. Establishing and closing channels is more suitable for high-frequency trading scenarios, otherwise the handling fee is not cheaper than initiating a single transaction on the main chain; 2. Routing due to different channel pledge amounts Bottlenecks may cause transfer failures.

In addition, the factors affecting the development of Lightning Network, in addition to technical defects, are also related to Bitcoin's greater emphasis on its payment attributes and value storage attributes. The difference is that the form of Ethereum is more like a "supercomputer", which carries many DApps. Its usage scenarios are more frequent, and its ecological scale far exceeds that of any other public chain. Driven by practicality, Ethereum The mainstream Layer 2 solution of Fangfang will inevitably have enough users, so it is difficult to repeat the mistakes of the Lightning Network.

Now, the situation of the Layer 2 track has been initially clear. ZK Rollup and Optimistic Rollup are currently the most popular solutions. The former adopts zero-knowledge proof and has higher security. The latter supports general smart contracts and is more convenient for developers. Friendly, and in the latest AMA held by Bihu, V God said, "ZK Rollup has a longer-term future." The current representative ZK Rollup is mainly dominated by Matter Labs, Loopring and iden3 (Hermez Network).

If Layer 2 can rise rapidly and the top DeFi projects can migrate smoothly, then to a certain extent, it can alleviate the continuous overflow of user demand on Ethereum due to high Gas fees. A typical example is TRC-20 USDT: Although The centralization of the TRON main chain is quite controversial, but the data disclosed by Tether shows that TRC-20 USDT worth US$15 billion has been authorized to issue on the TRON, accounting for 42% of the total USDT issuance. USDT on Ethereum accounted for 56%, and the gap between the two is not large. This is due to the high-frequency transfer scenario of USDT, which makes the user demand overflow and tends to use the cheaper public chain.

Going back to the issue that the token holders care about, if Layer 2 projects issue tokens one after another, users may use the tokens + ETH of the Layer 2 scheme at the same time. Many people worry that the reduction in the use frequency of Layer 1 and the reduction in Gas fees may cause Significantly reduce the value of ETH. In this regard, V God’s opinion is that if the project on Layer 2 has a scale effect, the increase in the frequency of network usage will be enough to offset the reduced gas fee on Layer 1, without affecting the value of ETH’s handling fee, and even beneficial .

However, no matter how the advantages of Layer 2 are emphasized, its essence is still a trade-off. It is the transfer of the internal support "power" of the Ethereum network, and the Layer 2 project will also undertake part of the economic interests and traffic that originally belonged to Layer 1. It is a "win-win" if the economic mechanism is well connected, and if the connection fails, it can be regarded as an "endogenous bifurcation". If Layer 1 naturally possesses the various advantages described in ETH 2.0, it would not have to fall into this entanglement, and the value of ETH can be better captured.

In addition, Ethereum miners also have to face such a problem: during the period when star projects are migrating to Layer 2 and the scale of users is expanding and limited, there will be a phenomenon of periodic decline in fee income, which is superimposed on the controversial situation some time ago. With EIP-1559, the potential earnings of PoW miners may be significantly reduced.

Wu said the author | miaohash

Editor of this issue | Colin Wu

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