Endgame Thoughts of the Ether Universe: When L2 to L3 Becomes a Present Progressive

Does Ethereum Universe represent the final form of the blockchain?

Written by: Roy, Lyv, Aki Network Research

Just a month or two ago, several major zkEVM updates came out one after another, and more and more discussions began to ponder: whether zkEVM already represents the future direction of Ethereum, or whether it is already the limit state of Ethereum ?

However, the development of Ethereum's technical route always implies interesting business logic, and is often accompanied by compromises and regrets. After Aki Network Research conducted an in-depth study on the driving force of Ethereum's current L1-L2-L3 structure, we found that it may be necessary to re-examine the previous issues. In fact, the question we face may be broader: Does the Ethereum universe represent the final form of the blockchain?

1. Why Layer 2？

Ten years after the Bitcoin network was born, our blockchain world still hasn't solved the capacity problem.

The TPS of the Ethereum mainnet is now only a small double digit, which is not only a few orders of magnitude behind the target of the ETH upgrade route of 100,000 TPS, but compared with the processing speed of tens of thousands per second of the mainstream Visa/MasterCard payment network in traditional finance Also far from it. At such a processing speed, Web3 represented by the blockchain is still moving forward with a heavy load.

Obviously, the first problem is that as more and more people use the Ethereum network, when the TPS is very limited, the network will become more and more congested, and the average transaction confirmation time for each person will increase. And the second problem is that since the underlying transaction confirmation of Ethereum is a bidding mechanism, there will only be two situations for gas fee: more and more expensive, and suddenly very expensive.

A network must be at least easy to use, that is, it can quickly and cheaply complete the basic information exchange functions, and then the discussion on the meaning of the existence of this network and its future development will be meaningful. In order to solve the blockchain capacity problem, the industry now has solutions in two directions: one is the various Layer 2 related solutions that we will talk about today, and the other is the Danksharding sharding that we will talk about in the future.

After the expansion, the Ethereum gas fee will be cheaper, and more importantly, after the gas fee is cheaper, many things that were not feasible before will become feasible. This is what we are more interested in.

2. What Layer 2 should look like

This problem is not only a technical problem, but also a political and economic problem, so here we clearly define:

• It is at least one blockchain. This means that it can issue native tokens, can have a complete community, and then can retain users who are loyal to this L2, and then create a basis for its own Layer 3 existence.
• It inherits the security of the Ethereum network from L1.
• It exists to expand the Ethereum network.

Putting B and C together, we can see that the reason why Layer 2 is theoretically safe and reliable is technically because it inherits the security of Ethereum itself. Layer 2 publishes data to the Ethereum mainnet to achieve the final settlement. This is also the most important point different from the previous generation of various expansion solutions represented by Plasma, that is, Data Availability can be completed on the mainnet.

From an economic point of view, Ethereum "encloses" its economic value, and one of the anchors of Layer 2 tokens is to work for Ethereum in name. Layer 2 itself is not a unique ecological form of Ethereum. For example, Sei Network, as L1 of Cosmos ecology, is currently fully developing Layer 2 C of SVM. For the time being, this idea and demand are not obvious for other L1 blockchains.

3. What is Layer 2 on Ethereum like now?

3.1 The current most popular L2 expansion solution rollups

Many people have used Rollups, and its technical routes are divided into Optimistic Rollup and ZK Rollup. In the previous route, there are many familiar chains such as Arbitrum/Optimism, etc. You should have interacted with various famous projects under their banner.

Although OP Rollups has reduced the per-transaction fee to 5-10% of the mainnet through the execution layer off-chain, the poor user experience during the Arbitrum airdrop shows that we still have a long way to go. After all, when hundreds of thousands of people interact with L2 within a few hours, the gas fee for each L2 transaction can be increased by 5-10 times, which almost completely offsets the 10-fold savings brought by EIP-4844 to L2 transactions fee potential. A silky user experience under such intense network pressure is the most basic requirement for Web3 to usher in the next billion users.

ZK Rollup has gained a lot of fame in the past two years, but relatively few things have been implemented. This is caused by EVM compatibility issues. For details, please refer to our previous publication "Zero-Knowledge Proof and zkEVM: Where did it come from and where does it go?" where? ". However, the good news is that this problem has been basically solved now, and ZK Rollup and the former are at least on the same starting line in terms of development difficulty. We can foresee that many developers are willing to deploy their own dapps on ZK L2.

On the user side, ZK Rollup is the L2 of the Ethereum mainnet, with a shorter withdrawal waiting time and a mathematically more secure background is very attractive. However, from the commercial point of view of ordinary users, the attractiveness of withdrawal time and security needs to be considered. As L2's native Web3 ecosystem continues to prosper, more and more new users may become "L2 native users", and they may even have no knowledge of L1's transactions and ecology (imagine a new L2-based StepN user). The demand for L2 to cross-chain back to L1 may become more and more marginalized and low-frequency in the future when the L2 ecology becomes more and more abundant.

3.2 Having finished talking about the theoretical stuff, where are we actually in L2?

OP Stack: In response to the competition of ZK Rollups armed with zkEVM, Optimism in the OP Rollups technical route launched OP Stack. Hope to make the cake bigger. We believe that the idea of OP Stack can be compared to the multi-chain shared security and decentralized ecology that the Cosmos ecology wants to achieve.

It is worth mentioning that OP Stack is a technology stack with a high degree of openness, but the degree of economic convergence is very low. It is even possible that a certain L2 developed based on it has only an extremely weak connection with the Ethereum ecology, and at the same time does not have a direct economic relationship with Optimism, and does not access the OP shared sequencer-of course it is possible that the OP shared sequencer is decentralized In the end, it can produce huge persuasive power in terms of economics and political correctness.

Various types of zkEVM, see: "Zero-knowledge proof and zkEVM: Where did it come from and where is it going?" "

Starknet launched a Type 4 expansion scheme, which differs from all schemes in B in that they are not EVM compatible. The advantage is that they are theoretically faster and cheaper than Type 2 solutions. For developer friendliness, the Starknet team has made the following improvements:

• Cairo 1.0: It is the Starknet team's most significant upgrade update since the release of Cairo in 2020, and Testnet has been launched. Cairo 1.0 is a high-level language that looks a lot like Rust, which means that Cairo 1.0 has got rid of the shackles of the original Cairo and greatly enhanced developer friendliness. But this also means that many developers have lost their ability to learn Cairo for more than two years. On the other hand, the new Cairo 1.0 is not yet fully completed, and it seems that it will take 3-6 months to be more complete.
• KAKAROT: This is an EVM solution based on Cairo 1.0 with combat power up to 9000 (developer's words), but it's just getting started.

4. After talking about Layer2, what is L3?

4.1 We must first answer, what problem is the L2 to L3 structure trying to solve?

Let's first look at the economic principle of Rollup: Rollup needs to pay a high fixed cost to submit a batch to the chain. If the overall flow of L2 is not large enough, the Rollup either chooses to wait longer to integrate a sufficiently high-value batch, or increases the transaction cost of each participant in the batch to cover the cost of packaging the batch. This situation is like carpooling. You either have to wait for everyone in the car, or the people in the car pay more for the driver to start the car earlier. Then the ideal state is that there are enough people to carpool, so as customers, the waiting time is less, the average cost is low, and the driver can also wait for the same time to earn more money.

In such a scenario, L2 actually solves such a problem: there are many ideas with insufficient traffic in the initial stage or low value of a single transaction. If they are directly deployed on the main network or establish an L2, it is not economically feasible; And choosing to become an L3 of an L2 can significantly reduce its own cost. This itself is an economic consideration. The underlying logic is very similar to whether a dApp chooses whether to deploy directly on Optimism or use the OP Stack to make a dedicated L2.

Only when the infrastructure is cheap enough can the ecological environment flourish. Conversely, this question itself also answers the status quo of the blockchain industry from a perspective, that is, the application ecology dominated by exchanges and Defi Lego, because only projects that directly involve money can rationalize the blockchain network. Operating costs.

4.2 The real logic of each company's L2 L3 grand plan

Let's go a little deeper, and it's not a simple carpool-start model either. Because of the magical tokenomics!

To give a simple example, now that the L2 centralized sequencer is working well, why must the roadmaps of each household be decentralized? Of course, the security factor is a natural political correctness, but in fact, what most people avoid is that it is only profitable because of decentralization.

Only when a decentralized structure is established, there will be token pledge mechanisms for validators and sequencers, verification fees for provers and verifiers, and then the native tokens of L2 will flow through the ecological development of L3. Whether it is Op Stack or Arb Orbit, and the later L3 concept of the zk series, etc., they all follow the relatively traditional business model of the blockchain industry and are not considered innovative ideas.

Traffic is money in Web3, which is actually simpler and more direct than Web2. The original purpose of L2 is to expand the capacity of L1, so they naturally inherit the traffic of L1. Then the problem comes, since it is the traffic provided by L1, most of them will return to L1 in the end. Because traffic is money, and what is given to you is the original assets of L1, so it will always return to L1 in the end. In the blockchain industry, this phenomenon is interpreted as "inheriting the orthodoxy of Ethereum." That is, only the assets that can be confirmed back to L1 in the end are the real "money".

The word "orthodoxy" sounds very feudal, and the hierarchical relationship of L1-L2-L3 actually has subtle similarities with the enfeoffment system. Liquidity is from L1 to L2, so it is difficult for L2 to exist independently of L1, and the interaction between L1-L2 is not simply reflected in the deposit/withdrawal from L1. The truth is that every transaction of L2 strengthens the credit and value of L1 native tokens, which can be called the seigniorage of L1. This also explains why all Ethereum L2s are using ETH as gas payment currency today.

But the logic of L2-L3 is a little different from that of L1-L2. The birth of L1-L2 is to expand the capacity of L1, and the purpose of L2-L3 is to drain traffic to L2. This is a very real problem, because the current flow of L2 is not large enough. Returning to the logic of carpooling, drivers cannot start efficiently. In the face of an already large ecology, such as Coinbase's Base, L2 such as Optimism, it is difficult to incorporate it into its own L3 development ecology. It can only use the cross-chain convenience brought by Op Stack (potential user drainage) and the ecology promised by Base. The development fund contributes to try to capture the huge value of the former.

4.3 Rollup-over-rollup or Validium is expected to dominate the L3 expansion solution

Before starting to talk about this topic, we need to clarify such a question: If ZK Rollup is so good, can it develop a multi-layer ZK-Rollup structure to L3 or above, and even achieve unlimited expansion?

Let me talk about the conclusion first: No, because even if the ZKP calculation proves that the complexity can be continuously reduced through the ZKP nesting doll, the compressibility of the data itself is limited.

We look at it from two perspectives: one is the process of computing proofs, and the other is data (availability).

Now in our Rollup scheme, no matter which route it is, the process of calculating the proof itself can rollup nesting dolls. In the ZKP scenario, Prover calculates and proves each block, and Verifier only needs to perform a little calculation to verify the correctness of Proof. In this scenario, it is theoretically feasible to make a ZKP that proves the "correctness of ZKP".

But when it comes to Data Availability (DA), it's a very different story.

Because the data must be uploaded to the main network, so that it can be verified and checked by users. Under this premise, Rollup dolls are meaningless. The basic principle of Rollup is to compress the transaction data that needs to be stored on the chain. The advantage of this is that the cost is reduced because the overall data becomes smaller. But such compression has a limit: the "bottom line" of compression is the establishment of Data Availability, that is, any user can theoretically reproduce the Rollup pair independently through the compressed data on the chain. Changes to the state of the main network to verify its correctness.

If we say that we have made a ZKP that proves the "correctness of ZKP", then from the perspective of DA, we need to upload the compressed content of each ZKP to the chain. So in this way, the workload has not been reduced, it is better to just do an overall ZKP.

But this does not mean that the structure of "Rollup over Rollup" is technically unfeasible. To sum up, in the same layer or in the same dApp, the simple stacking of Rollup is meaningless.

In the L2-L3 scenario, L3 uploads the transaction batch to L2, and L2 packages several different L3 batches and L2 native transactions into a new batch and uploads it to L1: in this way, what L2 does is "several batches from different entities ZKP of ZKP. In this scenario, although the compression of the data itself has reached the limit allowed by DA, from an economic point of view, the economic value of several batches can be combined to exceed the lower limit of the gas fee required for uploading L1 packages (we are in The starting principle mentioned in Section 4.1) is a commercially reasonable behavior that can reduce the transaction cost of each participant with a high probability.

Because we think that the possible structure of Layer 3 is Rollup-over-rollup or validium:

A. Top-down structure: Vitalik's idea is that L2 is a widely applicable General Purpose Rollup, and what L3 needs to do is more customized services: either it has a special purpose, such as privacy computing; A special rollup created by the special data structure of some dApps; or a validium that is cheaper but requires weak trust assumptions.

B. Bottom-up structure: If we consider a more app-oriented narrative, assuming that a dApp as an Ethereum L3 wants to gain stronger autonomy after it becomes popular, then it can have many options:

• Cosmos app chain - directly into L1, almost completely independent;
• Op Superchain / zkSync Hyperchain - become a parallel L2, with a high probability of participating in the shared sequencer to start together, and also maintain the connection in the economic system;
• Maintain the state of L3, but issue coins, and go through the decentralized roadmap of L2 again;

The essence of route B is that after the dApp itself generates huge traffic, it needs to consider its own development interests more than the ecological value brought by the platform, especially if the dApp itself is a thriving leader in the platform. Here we can optimistically assume that with the further improvement of the infrastructure, non-financial dApps and dApps that create more real scenarios using Web3 and have real use value can completely follow this path.

4.4 What is the significance of L1 for the L2-L3 structure?

Speaking of this, if L3 realizes large-scale Web3 migration in the form of App Chain as in the vision, it will really generate economically meaningful traffic for L2. And this flow is the real original asset for L2, that is, the resource that was born here and grew up here, and its assets are provided by L2 with the so-called "orthodoxy".

Here is a philosophical question to ask, if there are enough assets that will never go back to L1, then why is L1 needed?

The first aspect is that L1 provides valuable traffic at the moment, which has been said a lot in the previous article. The second aspect is that L1 provides credit endorsement, and L2 puts the final settlement on L1, so users can tolerate L2's large degree of centralization for performance.

If a certain L2 declares to operate independently of L1 one day, it is not inconceivable that modular blockchains are becoming more and more popular today. Then, at that time, this L2 will have to become similar to the current Ethereum network, to bear the tests, challenges and costs of security, decentralization and other dimensions.

Therefore, from a technical and economic point of view, a "separation system" such as L1-L2-L3 is tightly connected and interlocking.

4.5 Now that the structure is over, what is the current situation at the application level?

When the new public chain starts to operate, the fastest running ones must be the local dog skinning projects that cheat money, because they do not have actual workload.

Most public chain project parties have no way to deal with this matter: After all, to open a snack street, stall owners need to settle in. Now you run as fast as a person, if you don’t greet them with a smile, it’s not appropriate if you don’t give them a platform. As a result, if you get a platform, they run away, and now the users are relying on you. This matter can only be said to be the pain of development. For a public chain project like Starknet, which is habitually running slowly, it may not be possible to experience such pains until the documentation of Cairo 1.0 is clearly written.

Talk about the good direction, what new applications can we expect in the L2-L3 architecture:

Smart wallet: As the technical debt of the underlying protocol before L1, it is mainly because it is expensive and troublesome to deploy and operate a smart contract in L1 as a wallet for individual users. After making improvements through ERC-4337, it is believed that AA at the L2 level will be implemented more smoothly, because the operating cost of L2 is greatly reduced.

**Chain games: **With the blessing of Validium, the support for sub-cent scenarios (the gas fee for a single transaction is less than one cent) makes it possible to play normal games that are really fun on Web3.

• Validium is a weak trust expansion solution, where "weak trust" is reflected in the fact that its prover node theoretically selectively provides data for user verification. This is a point where you can make concessions for efficiency and performance in the chain game scenario, because not every scene in the game has great economic value, such as the player's non-property operations (such as walking, talking, fighting) process).
• Such chain games can widely exist in various types of L2 or L3, mainly considering the deployment form from the gameplay and data structure of the game itself, similar to the economic perspective we mentioned earlier.

Finally, let's briefly talk about the recently popular Rollup-as-a-Service (RaaS): Web3's service itself can capture a lot of value, which is completely different from the web2 scenario. Imagine that you rent a server on AWS to open a portal, and you only need to pay rent to AWS every month.

However, the world of Web3 is different. Not only do you have to pay rent to AWS, but you also need to run it on a daily basis. Every time you update and upgrade the website, you will be charged a protection fee represented by MEV! Instead of feeding this value to the RaaS provider, it seems to be a more economical and logical choice for dApp to deploy an application chain itself and become a parallel L2, or a certain L3 hanging on L2.

5. L2-L3 is so good, what is the price?

5.1 Centralization

A. Review and KYC

The current status of various Rollups is that their sequencers are very centralized.

The bottom layer of the blockchain sends information in the form of private key signature content to ensure that the sequencer cannot forge a transaction, but the centralized sequencer still has huge power. For example, it can choose to refuse to package the transactions of a certain type of users, it can sort the transactions of all people according to its own interests, and decide whether to accept the external assets brought by the cross-chain protocol to participate in the transaction.

For example, in the L2 of Base, in addition to the common sandwich attacks in centralized sequencers, Coinbase may require users who can only pass Coinbase KYC to transfer funds to BASE. Base can also use the whitelist to refuse transactions that package non-KYC users' funds to enter L1, thereby blocking the possibility of non-KYC users withdrawing from BASE.

B. MEV

This is a problem that all blockchains need to solve. Because there are not enough people using L2, many L1 feasible mitigation or democratization MEV solutions are not feasible here, and many L1 grabbing MEV solutions that are no longer feasible are currently available. The L2 is still feasible. A centralized sequencer system will inevitably lead to such a result, and the decentralization of the sequencer itself requires highly qualified project parties to start leading the industry.

5.2 L2 is still not cheap enough

Even if we realize all the visions of L3 expansion solutions represented by Rollup-over-rollup or validium, we still cannot solve all the problems. The cost of a single interaction still cannot meet the sub-cent scenario; after the demand increases, the cost will still rise.

5.3 Client Diversity

Ethereum does not stipulate what kind of block generation and verification clients should be. The advantage of this is that if the clients are diverse enough, a bug in one client will not affect the overall security. And all kinds of L2 are still very early in the diversification of clients. After all, the decentralization roadmap of prover/sequencer is still in the conception stage.

5.4 Upgrade update

The main network needs to be upgraded and updated, and L2 must also be upgraded accordingly. Then it brings great challenges to the goals of governance and trustless.

6. End Game and End “Game”

So far in this article, the exploration and analysis of the L1-L2-L3 structure is basically in place. As stated at the beginning, the question we are really trying to answer is: Is the Ethereum universe the end of the blockchain?

6.1 The probability of the Ethereum universe is not the end of the blockchain industry

The short answer is no, we see Ethereum Universe as only a mid-term solution for Web3 finance-like needs.

First of all, we believe that the medium-term performance ceiling of the current L1-L2-L3 structure is still too low under the constraints of the blockchain impossible triangle, and it is difficult to support the high-frequency, low-economic-value interaction needs of large-scale users, such as Social and gaming at scale in Web2. In essence, human behavior itself follows a very strong head effect, that is, most of the economic value is concentrated in a very small number of actions.

The blockchain cannot be just finance. Web3 itself is a concept created for the blockchain to really go out of the circle, so the industry cannot just play zero-sum games in a small circle. At present, it seems that the game is one of the few (if not the only) track that can go out of the circle, because it can create demand out of thin air, specify rules, and create user stickiness without strong real-world scene support.

In simple terms, Web3 games are currently divided into several categories:

• Serious games in the traditional sense, strip the economic system and put it on the chain. This ranges from casual chess and card to turn-based battle games, to higher latitude SLG, RTG, and even open world
• The game is made lighter, mainly X to Earn
• After game development, issue NFT first to see if IP can be produced first to provide funds for subsequent development
• Full-chain games, actual delivery such as Minecraft or Battle Royale with low configuration on the chain
• Make the Web3 characteristic gambling model into a form of gamification

How to persuade traditional game manufacturers to risk various economic and legal risks and costs, abandon existing distribution channels and profit methods, and operate a brand new system is a major bottleneck in the development of Web3 games. However, Web3 games developed by small teams are facing the challenges of strong homogeneous competition and Web3 user growth.

The other four schemes seem to need a strong economic driving force to maintain healthy operation. As mentioned earlier, most of the traffic (or liquidity) borrowed from L1 drainage must be repaid. The Ponzi model leaves no real users behind. If everyone is here for money, don't talk about ideals, let alone make the game fun.

So to take a step back, if you don’t directly aim at making money, can you just settle down and play games? We think this line of thinking may be one of the correct answers.

However, as mentioned above, the current L1-L2-L3, the hierarchical structure of the monarch, the minister, the father, the son, and the son under the Ethereum brings economically driven traffic, which is essentially to harvest the highest APY/ROI in the system within a certain period of time , This is a different form of the same economic driving force as the plate rotation, NFTFi, Chinese concept, meme craze, etc. that appeared in this small bull market.

At the same time, this structure cannot technically support Dapps such as games with high-frequency and low-value interactions. In other words, it may not be the best solution to distribute games on the L2s that are currently popular in the market. This is the biggest paradox that this idea needs to overcome - a place with too much liquidity itself is a double-edged sword for the durability of the game.

In terms of creating the needs of web3 finance and solving the problems of web3 finance, if we have done a good job, then there is still a long way to go in terms of games. It's not that there are no good games, but that there is no suitable soil for these games to grow.

6.2 If the answer to finance is Ethereum L123, what is the answer to games?

The Gamefi track is in a period of confusion, and the lessons learned from the past are all wrong answers. However, from the perspective of exclusion, the economic enfeoffment system of Ethereum is not suitable for the birth of games that can be played. We can pin our hopes on a more loose economy, lower requirements for the availability of some data, and tolerance for centralization. higher level structure. Examples include Cosmos, Binance Greenfield, and Starknet's zkVM.

Some people think that due to the advancement and innovation of L2/zkEVM/L3, the public chains of the non-Ethereum system will lose their value. We think on the contrary, their greatest value is that they are not Ethereum. The characteristic of the blockchain world is the tendency of self-disintegration, because the capital flow is extremely free, the technology is open and the barriers are limited.

Ethereum maintains the centripetal force of the system with the economic segregation system, but this expansion is not unlimited. Conversely, the Ethereum system may not like low-value usage scenarios. It intentionally or unintentionally keeps the threshold at the level where financial activities are viable and other formats are struggling, so the price of its native currency cannot be low.

In short, the Ethereum universe may be able to capture most of these behaviors with high economic value in Web3, but it may be overkill for random behaviors with low economic value. Some people may think: "Not all actions need to be on the chain, and the cost of on-chain is too high." But in fact, this sentence may be more expressed as: "Not all actions need to be on the Ethereum ecosystem, Ethereum It has its own tasks and missions.” This means that the ecology outside of Ethereum, or the remote areas of the Ethereum universe, are entirely possible to grow unexpected stamens.