If Layer 2 succeeds, what impact will it have on the Ethereum and public chain structure? (www.blockcast.cc)

Ethereum’s expansion is imminent

In the past period of time, DeFi has shown us the congestion of Ethereum, and the gas cost is unbelievable. This is just the appearance from the user experience level. Its deep meaning is that different DeFi protocols are competing for the block space of Ethereum, which is a zero-sum game.

When the block is full, the transaction of any one protocol rises, which means the transaction of other protocols declines. As newcomers increase, the competition becomes fiercer and fiercer, which finally leads to some mining transaction fees as high as hundreds of dollars. In the first few months of the hot DeFi, Ethereum’s transaction fees have surpassed Bitcoin to rank first in the crypto circle. Even if DeFi cools down today, its annual transaction fees are not far from Bitcoin.

(Encryption project annualized cost income ranking, SOURCE: tokenterminal)

In the hot market, the fight in the entire DeFi market will be very serious. Since the transaction throughput is fixed, the value of the DeFi market as a whole cannot continue to rise. Because it will limit the transaction volume of the overall DeFi project, thereby affecting its sustainability.

This naturally leads to throughput and speed issues. People have proposed solutions such as Layer 2, sharding, and cross-chain, among which Layer 2 is one of the most mentioned directions. To make an assumption, if Ethereum is a Big Mac in the future, Layer 2 based on Ethereum will be an important development trend.

What kind of evolutionary trend will appear in Layer 2? Will a hundred flowers bloom in Layer 2? Still thriving? If Layer 2 succeeds, what impact will it have on the Ethereum and public chain landscape?

Evolution of Layer 2

First, let’s take a look at the road to scalability of Ethereum in the eyes of V God:

In this development roadmap, Layer 2 is an important direction. From the records of Blue Fox Notes, there are many practical directions for Layer 2, including state channels, side chains, Plasma, Optimistic rollups, validium, ZKRollup, etc. You can refer to the previous articles “”, “” and “” of Blue Fox Notes.

All this looks very good. But there is a big problem here: Layer 2 itself is an island. If different projects adopt different Layer 2 solutions, how can they communicate with each other? This will break the composability on Layer 1. If DeFi’s Maker, Uniswap, Compound, Curve, Synthetix, etc. cannot be combined, how can aggregation protocols help people obtain higher benefits? How to promote DeFi innovation?

If there is no composability, DeFi will lose its original meaning. Even if it achieves extremely high transaction throughput and extremely low fees, it loses interoperability and its value is greatly reduced.

This situation means that, in the end, only a small number of Layer 2 are meaningful, which is similar to the network effect of a winner-takes-all public chain. Because projects using the same Layer 2 technology are easier to achieve interoperability. This means that most of today’s Layer 2 technology will only be short-lived, so when investing in this track, how to bet and when to withdraw needs to be considered.

If mainstream DeFi projects all use a certain layer 2 technology, this layer 2 technology may become the de facto layer 2 technology, and other layer 2 may gradually withdraw from the stage of history (the game type layer 2 may be an exception). This is similar to the principle of the public chain, composability and liquidity itself force other projects to make choices. If Maker, Uniswap, Curve, Synthetix, Aave, Compound and other projects all adopt a certain Layer 2 technology, then other projects will have to stand in line. Even at the beginning, these projects will not adopt the same layer2 solution, but over time, they will eventually follow the same path. In the adoption of Layer 2 technology, the choice of the liquid foundation DeFi Lego is decisive.

Although there are multiple Layer 2 technologies, each has different trade-offs, but the core point is still security. There are too many trade-offs in this regard, and it will eventually become a transitional Layer 2 technology, and may not even have a transitional opportunity.

Because no mainstream DeFi project will rashly adopt a certain Layer 2 technology, and then lock itself into an island. For the project, it only gains theoretical scalability, but it may lose liquidity and composability. , And then let yourself lose the advantage, this will outweigh the gain.

From the current point of view, the ZkRollup series technology has a higher probability of success, and it has achieved a relatively good trade-off in terms of safety and performance. Of course, the ZKRollup technology itself is only basic technical facilities and has its shortcomings. At the same time, it is not clear how to capture value. On its own, it remains to be seen how large investment opportunities exist.

But it is indeed good for the DeFi industry. Its advantage is that as more DeFi projects adopt the same layer 2 technology, you don’t have to worry too much about the islanding effect of layer 2, and you can gradually realize interoperability on Layer 2.

If DeFi on Layer 2 still achieves the composability and security of Layer 1, because its transaction throughput is hundreds of times today, and its transaction costs are also greatly reduced, then the possibility of large-scale adoption of the protocol will greatly increase. With the increase in the volume of protocol transactions, the increase in revenue, and the increase in users, both the actual value and the premium will greatly increase. This will lead the DeFi industry to a deeper and broader breakthrough. If you make a simple and crude analogy, under today’s throughput and speed, the current market value of DeFi can reach about 10-15 billion US dollars, and layer 2 can increase its scalability by 100 times in the future. Even if it is increased by 10 times, it can carry a DeFi market value of more than 100 billion US dollars, which will lay a solid foundation for the overall market value of DeFi in the future.

This is the development direction of open finance in the future.

Ethereum’s Layer 2 and public chain landscape

Assuming that Layer 2 of Ethereum can break through the islanding effect, DeFi projects will migrate to Layer 2 one after another, which will greatly alleviate the current congestion and cost dilemma, and there can be hundreds of times of room for improvement.

When this happens, there will be a certain amount of pressure on other public chains. When Ethereum’s congestion cannot be solved, other public chains can act as Ethereum’s side chains, helping Ethereum to relieve the pressure of congestion, and thus gain a position in the entire DeFi development process.

But if Layer 2 can successfully solve the problem, then the value of other public chains to Ethereum itself will decrease, although there will still be great value.

In addition, if Layer 2 is successfully implemented, this will cause Ethereum to siphon a larger amount of Bitcoin assets and further become a place to carry more assets.

With the increase of protocols based on Ethereum, ETH can capture greater value, which will lead to an increase in the overall market value of Ethereum, and the increase in overall market value will make Ethereum more secure. The more security of Ethereum can make it a public chain that carries a larger amount of assets. If Layer 2 and shards have sufficient scalability, the bitcoin circulating on Ethereum may reach 10%, 20%, or even more than 30% in the future. .

Once this situation is formed, a super public chain may be formed. Although other public chains are still valuable and will still exist, the super public chain will siphon the largest amount of assets and become the most concentrated place for DeFi activities. The king of public chains.

Of course, there is a prerequisite: that the solutions of Layer 2 and fragmentation can be smoothly advanced. In addition, other public chains still have the opportunity to become a public chain of tens of billions of dollars, but there will not be too many public chains above the trillion dollar level, and there may be one or two at most.