Ethereum became too expensive and slow. So that people would switch to networks that didn’t exact such a heavy burden on them. And it didn’t happen to begin with, but then it did. So Binance smart chain first and then Polygon has seen an explosion in alt DeFi activity.
Traditionally a period of Optimism and positive market sentiment, there is a growing sense that we are moving into what bankless called the great Layer 2, the gold rush.
A narrative that is set to be dominated by the arrival of rollups. Now, of course, we have Polygon in one corner, but then there’s Optimism in the other corner, and then all of a sudden, Arbitrum sneaks into the ring and lands a double chokeslam on both of them. But here’s the thing Polygon isn’t a layer 2. But it is but not confusing? I bet.
So it may feel like layer 2 are all shiny and new, but actually, we’ve had them around for some time now XDAI is a well-regarded side chain solution primarily designed for low-cost payments with its stable transaction costs. Matic was originally a plasma only implementation but has evolved into something else entirely with Polygon. Loopring’s ZK rollups made you impressed with its speed and low cost.
Technically, it is a side chain and not a layer 2. what’s the difference? And I can hear you ask. Well, layer 2 solutions are defined by being fully secured by the Ethereum main chain while side chains use their consensus mechanisms.
In Polygon’s case, it’s a Pos consensus where validators can state Matic tokens and run a full node.
Since then, Polygon launched in April, securing more than 11 billion dollars in total value logs in its protocol. It has made massive gains.
But the issue with its system isn’t getting funds back to Ethereum. So to use Polygon, you have to swap ETH for the protocols native Matic token over a chain bridge. The chain bridge uses a lock and mint mechanism, so you deposit ETH into the chain bridge and that each gets locked into a smart contract.
Once it’s locked, Polygon then meets mints you an equal amount of Matic tokens when going through the chain bridge the other way Matic to ETH. So Matic tokens are burned, all destroyed, and then the ETH is released from the smart contract. So they all work kind of the same way. Depending on which chain bridge you use, transactions could take several hours to a week. For instance, using the plasma bridge which inherits. Its security from the Ethereum main chain these swaps take seven days.
But users can also utilize the pos bridge, which is secured by the same set of validators that have staked Matic to verify transactions on the sidechain and as such, that swap will take roughly three hours.
Angry Polygon users complain about the slow return journey, not to mention concerns over the chain’s perceived centralization vulnerabilities. And that now brings us neatly to rollups and Vitalik Buterin. He is a fan of rollups and sees them as the logical scaling pressure relief valve for Ethereum.
As it makes it slow, steady progress towards a sharded POS design. That’s why there’s currently so much attention being paid to Rollups, so let’s dig into what they are
The big news here is that Arbitrum. has attracted a huge amount of attention over the past weeks after launching to mainnet on Friday, May the 28th. In what seemed like kind of a surprise move. And this was just as Optimism announced that they’d be delaying their mainnet launch until July.
Uniswap, the largest decentralized exchange on Ethereum, had already planned on launching Optimism. But because of the delay, the community then decided why to wait. As a result, Uniswap will now also be launching on Arbitrum.
Optimism was the first team to create optimistic Rollups, but like all good open source crypto tech, source code was quickly forked and iterated on by the Arbitrum team. Now it’s worth noting that way back in January, Kain Warwick of Synthetics have publicly hung his hat firmly on the optimism peg announcing snx stakings on layer 2, which seemed like a big deal at the time.
They’re not a fruit flavoured candy, but Ethereum smart contracts relay information from the mainnet to a layer 2 network to handle computations. Put it another way and highlight why they’re called rollups? The technology rolls up data and moves it off the main Ethereum chain. Sequences then receive that data. And has anyone else noticed just how awesome everything in crypto sounds. And then that sequence assigns and pushes a bundle of data which is just the minimum info needed with no proofs back to the main chain. And it does so optimistically, hoping that all the data is valid but make no guarantees.
I thought that was all this blockchain nonsense was about, .while the optimistic Rollups itself doesn’t validate the transactions built into the system is a challenging period whereby anyone can submit so-called fraud proofs. So basically, someone can say that data is invalid, and then the computations are checked, which can be verified through cryptography, and transactions can be rolled back if necessary to kick out the fraud. Whoever gets caught frauding gets slashed.
Sequences for one stake tokens in the network to do that job and execute transactions as expected, then they receive staking rewards for their work. But if they don’t execute the tokens appropriately, they’ve staked get taken. This process while it seems complex. And it is said to create a hundred times more throughput than the Ethereum Mainnet. All without the high gas fees that currently price many off of the main chain.
Another great thing about optimistic rollups is that the technology utilizes all the existing Ethereum tooling for developers with little to no modifications. And this means that each developer can quickly jump over to building applications that use optimistic rollups. So the onboarding is slight.
Then well, they’re the same leveraging the same basic philosophy. Still, if we were to dig deep down into the nitty-gritty, Arbitrum’s fraud proofs seek to find the particular point of disagreement over transaction history. In contrast, Optimism’s tech looks at fraud a bit more holistically. And this means that Arbitrum has a higher transaction capacity equating to higher performance.
Optimism and Arbitrum use smart contracts that reside inside Ethereum, and that means that they don’t actually use their native token like Polygon but instead use ETH as their currency. And in the case of Arbitrum, transactional costs are paid in our gas.
Optimistic rollup has disadvantages that challenge the period where people can call fraud both Optimism the company and Arbitrum allow one week for that challenging period, which means that transactions in a bundle under suspicion can be held in limbo for one week before they’re verified and released.
Now separated all this, while optimistic rollouts might make for a more decentralized process, the tech also works under the assumption that there is an honest majority of Ethereum validators. They are optimistic.
So the option of this is that we’re probably very likely to see another golden DeFi summer as these new avenues of operation open up. What kicked off the gold rush 12 months ago was the arrival of the Comp token on the compound, which then ignited what became known as farming. Once developers port over to one or any of these solutions, the thinking seems to be that those protocols will begin slinging tokens of their own as rewards to incentivize users to jump ship. Now, will Arbitrum and Optimism issue their token well? They don’t have one right now. And then neither did Uniswap until it did.
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