The following article is the final part of The Blocks report about Ethereum second layer solutions and it was compiled by the order of Paligan. Layer 2 solutions are provided to solve Ethereum’s scalability problem and other problems of this blockchain. In this report, an effort has been made to examine the challenges facing the general acceptance of layer 2 solutions and to have a perspective on their future. We at Blockchain Homeland have decided to cover The Blocks report in parts and in a series of articles titled The Blocks report on second layer solutions. Join us in the eighth and final part of The Blocks report, where we will cover the problems of public acceptance of these Ethereum scaling solutions and predict how to fix them.
Challenges facing second layer solutions
Although the second layer solutions achieved success within a short period of time and were able to solve the scalability problem, they face several challenges in the field of long-term public acceptance. Among the biggest challenges are 1) lower level user experience, 2) lack of composability and 3) competition with them from the first layer platform and side chains.
Second layer lower level user experience
Currently, layer 2 scaling solutions place more workloads on users than most alternative layer 1 platforms. Although many third-party protocols have emerged and reduced the amount of time it takes users to withdraw assets, the problem of the long time required to withdraw assets is still at the heart of the technology. Optimistic rollups And ZK’s roll-ups remain strong. The amount of time required for withdrawals on these platforms is longer than on layer 1 platforms, and in many cases, it is necessary for users to complete multiple transactions (for example, one transaction to start the withdrawal process from layer 2 and then another transaction to receiving the desired financial resources from the first layer, after the time period required for withdrawal has expired).
In addition, the user experience of many layer twos begins with the need to bridge the desired assets. Bridging or creating a blockchain bridge and transferring assets is a time-consuming process and requires an initial cost from the user so that the desired assets can be transferred to the second layer platform. Cryptocurrency exchanges such as Binance And FTX has recently released services in the field of direct withdrawal from layer 2 on their platform (ie, no need to bridge assets) and have reduced some of the problems and obstacles in this path. Despite all these interpretations, it is expected that with the introduction of a new layer, at least in the short and medium term, more effort will be required from users to transfer assets across the network.
Lack of combinability
The ability to combine allows all people active in the network to build different programs and platforms based on that network and around existing products and services. In the presence of composability, users can perform complex transactions among different programs and under the cover of a single security framework, a single chain, and various times in a block.
Due to the emergence of layer 2 cross-chain cooperation solutions, the execution of transactions among programs that are on the basis of different layer 2 and layer 1 platforms will become a challenging issue for users in the short and medium term. Even if the platform in question is compatible with the Ethereum Virtual Machine (EVM), building the foundation of comprehensive, combinable programs and toolsets is a time-consuming task. Although EVM-compatible ZK rollups are well under development, deploying these technologies in current production environments and transferring applications produced by developers to this platform requires considerable time.
The existence of convergence between one or several layer two protocols (which are building extensive and combinable ecosystems) becomes a comprehensive and important issue in the field of future development. For example, Uniswap, a pioneering decentralized exchange in terms of trading volume, has recently been implemented on four separate chains: Ethereum First Layer, Polygon PoS chain, Arbiterum, and Optimistic Ethereum. Although multiple implementations of such platforms bring many benefits to users, such as having access to more suitable options in terms of transaction fees in other networks, on the other hand, they lead to the fragmentation and segregation of existing liquidity. For some users, this may be considered a negative amount of income and working capital.
Competing with layer 1 networks and sidechains
Ethereum layer 1 transaction fees were increasing throughout 2021, but you should note that transaction fees in this protocol are cyclical in nature. During periods of time when we are faced with price action or negative price behavior, the amount of activity in this network may decrease to a great extent, and this leads to a significant decrease in the amount of transactions. Despite the fact that the periods of decline and rise in the per-transaction amount may be temporary in nature, but it leads to a decrease in the speed of the process of transferring users from the Ethereum layer 1 network to the layer 2 solutions related to this network.
Mainly, layer 2 networks are considered to save transaction costs compared to Ethereum. At the same time, due to the emergence of layer 1 alternative platforms, we are currently seeing a lot of fierce competition in the general purpose computing market.
Catalysts and drivers of public acceptance layer 2
Apart from all the challenges on the way to general adoption, there are several factors that make the short-term to medium-term adoption of layer 2 solutions a possibility. Among the most prominent of these factors are 1) new incentive programs and the launch of tokens and 2) the ongoing process of investment and advancement of technologies based on layer two used by the organizations developing these projects.
Incentive programs and token launch
The high transaction fee of Ethereum is considered to be one of the drivers of increasing the level of adoption of layer 2. However, during the emergence of second-layer tokens, development organizations are expected to introduce explicit incentive approaches to attract developers and users.
Many of the competing tier 1 networks (such as Avalanche, Near, Solana, etc.) have held massive fundraising events to support the app development process and start the growing ecosystem. The funds required for some of these programs have been provided by external investment companies, but the capital required by many of them has also been provided by allocating part of native tokens to the projects.
With the arrival of native layer 2 tokens, everything points to a dynamic process taking shape. It is expected that the second layer projects will have a specific plan to attract funds and attract the attention of developers and users in the coming months and years.
Increasing the amount of investment in layer 2 technology
During 2021, second-tier development organizations managed to attract more than 500 million dollars of capital during venture capital events, and from the beginning of 2022 until the time of writing the report, they have allocated approximately 850 million dollars of funding. Most likely, many of these projects have also increased the number of employees and are investing in the fundamental goals of the technology used in their protocol to accelerate the growth of the project ecosystem.
It is clear that these development organizations will not achieve their goals in the short term. Even if these projects do not receive the expected rapid adoption of the protocol technology, they still have a significant budget for modification and will continue to invest in their ecosystem in the coming months and years.
According to the following chart, you can see the performance trend of the launched tokens in the field of layer 2 protocols and scalability solutions.
In the final part of the series of articles of The Blocks report on layer 2 solutions, we examined the problems related to the general acceptance of layer 2 solutions. Given that layer 2 rollups ensure scalability and security to a large extent for users, they are expected to become more widely adopted in the near future and over the coming months and years. The competition to attract and retain developers and users is well underway and even increasing. Although Optimistic and ZK rollups are often at odds with each other, all events in this field indicate that networks have been modified over time by their developers. All evidence suggests that in the future, both of these roll-ups will be more widely accepted. What do you think about this set of reports and scalability solutions? Which layer 2 solution have you had the experience of using so far?