The Road to Layer 2 Expansion of Ethereum

Original title: "Depth｜Iteration and Competition—Ethereum's Layer 2 Expansion Road"

Original source: Guosheng Blockchain Research Institute

Abstract

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"There are many traffic jams, and expansion is imminent" - Layer 2 expansion has always been one of the clear development trends in the blockchain industry. With the active ecology of Ethereum and network congestion, Layer 2 The track has become the focus of the market again. This article will systematically introduce the principle and development process of the Layer 2 expansion mechanism, and look forward to the future ecological evolution and investment opportunities.

Layer 2 The essence of capacity expansion—put part of the calculation tasks on the blockchain off the chain, and send the calculation results back to the chain , so as to realize the improvement of the computing power of the blockchain. In contrast, Layer 1 expansion is to improve the blockchain protocol to achieve expansion. The Layer 2 expansion does not change the blockchain protocol itself, and the expansion is realized through the interaction between the smart contract on the chain and the off-chain. The core link is the data interaction between Layer 1 and Layer 2, and how to ensure the security of assets on Layer 2.

Ethereum's "sweet annoyance" - the explosion of demand has brought about network congestion and soaring costs. Layer 2 is not only a technical problem but also a means to balance the interests of multiple parties. Whenever the Ethereum ecology prospers, the increase of users brings more transaction requests, the increase of complex contracts and complex calls reduces the actual transaction capacity of a single block, and the rise of ETH price increases the transaction fee denominated in legal currency. The network will further increase the gas price. This kind of institutional cyclical development will cause bubbles and head effects on Ethereum projects, which will reduce the innovation ability of Ethereum platform applications as a whole. The expansion of Ethereum is both expected and the trend of the times. Only by alleviating this kind of institutional congestion and high transaction fees can the healthy development of the Ethereum ecosystem be realized.

Throughout the development of Layer 2 expansion technology, the current technical route mainly includes side chain expansion, state channel expansion, Plasma and Rollup: The core of side chain expansion is Use another independent blockchain to undertake current transactions, thereby improving computing efficiency and reducing handling fees. The state channel was proposed around 2014. Its core is to conduct a series of transactions off the chain through hash locking, and only put the transaction results on the chain. It is especially suitable for solving the pain point of high fees for small and high-frequency payments. Around 2017, the expansion route of Plasma was proposed. In order to solve the threat of side chain security to assets in the side chain expansion, the design principle of Plasma is to ensure that users can propose it immediately even if the side chain fails. own assets. The concept of Rollup was proposed in 2018, which highly compresses transaction information and packages it on the chain, so that assets can be proposed even if the off-chain data is completely unavailable. There is no clear distinction between these technical routes, but a kind of evolutionary development that integrates with each other, showing the spontaneous growth of the blockchain ecology.

Investment suggestion: We believe that the current Layer 2 capacity expansion is on the eve of the outbreak, and the Layer 2 solution, which is the first to go online and is compatible with the general platform of EVM, will have a great start Advantages, user experience will be the decisive factor. Layer 2 expansion will greatly reduce handling fees and improve transaction efficiency, and the Defi market is likely to undergo a reshuffle as a result. Layer 2 expansion will reduce the operating cost on the chain, promote the innovation of blockchain projects, and may realize deeper innovative applications of blockchain in fields such as games, finance, virtual world, and metaverse.

Risk warning: The blockchain business model is not as good as expected; the regulatory policy is uncertain.

1. What is Layer 2?

Blockchain expansion is to increase the transaction processing speed of the blockchain, so that more transactions can be processed in the same time, which can be compared to traffic jams , It is necessary to build new viaducts and tunnels to improve traffic efficiency. Layer 2 expansion is a general term for off-chain expansion schemes, which refers to putting part of the calculation process on the blockchain off-chain, and sending the calculation results back to the blockchain, so as to improve the computing power of the blockchain.

In contrast, Layer 1 expansion is to improve the blockchain protocol to achieve expansion. The Layer 2 expansion does not change the blockchain protocol itself, and the expansion is achieved through the interaction of smart contracts on the chain and data off the chain.

Why does Ethereum expand?

Ethereum implements Turing's complete calculation through EVM (Ethereum Virtual Machine). Developers can implement complex program logic through smart contracts on the chain. We Abstractly, Ethereum can be regarded as a decentralized computer.

Ethereum prevents the influence of malicious contracts (such as infinite loops) through the Gas fee mechanism, limits the capacity of a single block, and motivates participants to increase the use of the network efficiency. The gas fee mechanism is to charge users for operations on the chain, and the fees are calculated according to the operation type and complexity according to the rules. These fees are paid to the group of miners who maintain the network and run contract calculations, and the miners who dig the block get the total gas fee for the transactions in the block. The gas fee is determined by the type and complexity of the operation. Reading and writing information on the chain and calling external contracts will be more expensive than executing ordinary code. From a macro perspective, Ethereum intends to dynamically adjust the supply and demand of resources through the Gas mechanism to prevent malicious occupation of resources on the chain.

The gas price of the transaction is affected by the level of the Ethereum network. Generally speaking, miners will choose the package according to the gas price and the waiting time of the transaction instruction. For transactions, the transaction orders with high Gas prices and long waiting times are prioritized. Users can determine the Gas price according to the network conditions. The unit of the gas price is generally Gwei, 1Gwei = 0.000 000 001ETH, the gas fee to be paid by a single exchange = the gas required for the operation (determined by the rules) x the current gas price (determined by the network situation).

The gas fee mechanism brings natural use value to ETH, and also encourages users and developers to streamline their operations and smart contracts, and encourages miners to bring packaging trade. The capacity of a single block in Ethereum is also limited by the Gas fee (Bitcoin is based on the block size), and the Gas fee for all transactions contained in a single block cannot exceed the upper limit of Gas, thus limiting the capacity of a single block Size, the miners who have dug the block can fine-tune the gas limit to adapt to the network conditions.

With the explosion of the ecological application of Ethereum in the past six months, the transaction volume of the Ethereum network has risen sharply, and the price of ETH has also benefited from the ecological development and has risen rapidly. Various arbitrage bots have turned on automated arbitrage in DeFi applications. The network speed sensitivity of arbitrageurs is much greater than the network fee sensitivity. As long as the arbitrage space is larger than the fee, they are willing to pay super high gas fees in exchange for fast transaction processing, and the average gas fee of the network will also rise. When ordinary users participate in these applications, they become slow, the network is congested, the gas fee is high and the price of ETH is high, and an ordinary Defi contract call can even reach tens of hundreds of dollars. As the transaction fee rises, Ethereum will face a situation of weakening popularity and reduced project innovation.

We believe that the current Ethereum network congestion and high transaction fees are the mechanism problems of Ethereum Gas fees. There are more transaction requests, the increase of complex contracts and complex calls reduces the actual transaction capacity of a single block, the rise in the price of ETH increases the transaction fee denominated in legal currency, and the congested network will further increase the Gas price. Mechanism deterioration will lead to bubbles and head effects on Ethereum projects. Initial projects and projects with insufficient market promotion will be rejected by users due to high fees, which will reduce the innovation of Ethereum platform applications as a whole. ability.

The above-mentioned contradictions are "sweet troubles" for the public chain. Behind it is a tripartite game between miners, Token holders, and ecological project parties. Network stability, effective incentives, and application innovation need to be balanced. Improper handling will cause harm to the community, especially ETH has become a blockchain "model project" after. Similarly, this kind of problem is theoretically unavoidable for every blockchain network that adopts the gas fee mechanism of native tokens. Ethereum is the fastest growing and is the first to face this challenge.

Under the current circumstances, the expansion of Ethereum is both expected and the trend of the times. The sound development of ecology.

Basic framework of Layer 2 expansion

The core idea of Ethereum Layer 2 expansion is: On the basis of the main chain, a second-layer network is built to help Layer 1 share the network pressure to improve the overall efficiency. At present, there are four main types of Ethereum Layer 2 expansion technology architecture: state channel, side chain, Plasma and Rollup.

The key points of the Layer 2 expansion mechanism are the contract design of Layer 1, the protocol design of Layer 2, the design of cross-chain data interaction, especially the deposit and withdrawal of assets Time process design. From this, we have outlined the basic framework of the Layer 2 expansion mechanism, which is sufficient to describe most of the current Layer 2 expansion projects.

Why should we pay attention to Layer 2 expansion?

The blockchain expansion route focuses on how to achieve higher computing power under the condition of ensuring security. Layer1 expansion may essentially change network congestion. For example, the fragmentation expansion adopted by ETH2.0. However, the biggest disadvantage of Layer 1 expansion is the high cost of consensus. Simply increasing the block capacity will lead to a more centralized system, and there is a risk of hard forks (such as the fork of BCH from BTC). Layer 2 expansion is a lighter and fast expansion method. It can undertake the existing ecological applications of the main chain, and the resource cost required is much less than the expansion of the main chain. This is also the rapid development of the Layer 2 track. one of the reasons.

Looking at the development of Layer 2 expansion, the idea of side chain expansion and state channel expansion is earlier than the emergence of the Ethereum network, as early as Bitcoin It was proposed during the period that the core of sidechain expansion is to use another independent blockchain to undertake current transactions, thereby increasing computing efficiency and reducing handling fees. The state channel was proposed around 2014. Its core is to conduct a series of transactions off the chain through hash locking, and only put the transaction results on the chain. It is especially suitable for solving the pain point of high service fees for small and high-frequency payments. Around 2017, the expansion route of Plasma was proposed. In order to solve the threat of side chain security to assets in side chain expansion, the design principle of Plasma is to ensure that users can withdraw their own assets even if the sub-chain fails. The concept of Rollup was proposed in 2018, which highly compresses transaction information and packages it on the chain, so that assets can be proposed even if the off-chain data is completely unavailable.

Layer 2 expansion attempts to break through the existing computing bottleneck of Ethereum while ensuring decentralization and security. The "killer" Layer 2 expansion solution will likely change the current industry competition pattern, and may generate new applications and expand the industry's imagination. Therefore, we recommend paying attention to the development of Layer 2 expansion. This article also sorts out the implementation methods of Layer 2 in different routes.

2. How is the expansion of Ethereum Layer 2 realized? An overview of the technical route

The side chain expansion route is mature, but the ecology is active but controversial

The side chain is a blockchain network compatible with the main chain. It is a relative concept to the main chain. The essence of the expansion technology route of the Ethereum side chain is to create a blockchain network compatible with the Ethereum, and use the cross-chain mechanism to realize from the main chain. Transfer assets from chain to side chain, and deploy applications on the side chain to share the network congestion of the main chain.

The side chain is an independent blockchain with its own independent consensus mechanism. The security does not depend on the main chain, and often uses DPOS, POA, etc. Efficient consensus mechanism.

The key point of the side chain technical route is the design of the cross-chain mechanism. The basic principle of the cross-chain mechanism is to lock the assets on the main chain and issue related assets on the side chain. If you want to return to the main chain, you only need to destroy the assets on the side chain and unlock the relevant assets on the main chain. Because the blockchain itself cannot obtain information on other chains, then who transmits and confirms the information to determine the locking and issuance of assets has become a key issue. In order to solve this problem, a notary mechanism verified by a third-party subject can be adopted, or A relay mechanism for verification through the blockchain itself. The notary can use a single subject, or multiple subjects to verify and confirm the transaction with multiple signatures.

The biggest risk of side chain expansion lies in the safety of the side chain itself and the safety of the cross-chain process: Once the side chain fails, transfer to the side chain The assets of the chain are very likely to be lost. Once the notary and the running nodes of the side chain do evil, they can transfer the user's assets from the main chain (Plasma and Rollup technical routes are both designed to solve this problem and protect users from the threat of centralization and system failure).

Although the cross-chain mechanism has matured day by day, side chain expansion has become more and more convenient and efficient, but there is a big problem with this expansion route. controversy.

The exchange public chain, which has been hot since the end of 2020, can be regarded as a kind of side chain expansion of Ethereum, which has inherited the ecological spillover of Ethereum. It has achieved remarkable user growth rate and the number of assets on the chain. Taking Binance Smart Chain BSC as an example, it is compatible with Ethereum data and smart contracts, adopts similar blockchain data structures and protocols, and adopts a higher TPS DPos consensus mechanism. Ethereum assets and applications can be easily transferred to BSC, and developers also have mature development tools for application development on BSC. At the same time, the exchange has attracted a considerable number of users for BSC by virtue of its own ecology and user advantages. Because of the similarity with the Ethereum protocol, a large number of BSC projects that are benchmarked against Ethereum Defi are quickly launched, and some ecological applications on Ethereum have also migrated to BSC.

Compared with Ethereum, the exchange public chain greatly reduces the contract operation fee, which is more suitable for users with small assets or new blockchain applications This is also evidenced by the friendliness, rapid growth of users and on-chain transactions. For the industry, the rise of the exchange public chain has great controversy over the advantages and disadvantages of the decentralized ecology. It not only lowers the user threshold, brings ecological vitality, but also a threat of centralization. There is another controversial point in sidechain expansion. Does the sidechain used for expansion still belong to the ecology of Ethereum? Can the sidechain itself be regarded as the Layer 2 expansion solution of Ethereum? If the exchange public chain is regarded as a type of Ethereum Layer 2 expansion, from the perspective of development status and number of users, side chain expansion is indeed the most mature and active route for Layer 2 expansion.

State channels focus on micropayments, but poor user experience and usability

Status The channel is that both parties to the transaction lock assets on the chain to create a payment channel and conduct transactions off the chain. When the user withdraws assets from the main chain, he only needs to submit the results of multiple off-chain transactions to the main chain smart contract for verification.

The state channel dilutes the handling costs of multiple transactions, especially suitable for small-amount and multi-frequency transaction scenarios. This technology was proposed as early as the Bitcoin era, because the transaction fees on the chain have nothing to do with the transaction amount, which leads to a high proportion of transaction fees for small transactions.

Taking the state channel expansion project Thunderbolt Network as an example, the process is as follows:

1. Both participants need to lock assets in the smart contract. This step ensures that participants can transfer and receive assets between each other until the participant closes the payment channel;
2. The participant maintainer himself The account balance, the two parties conduct transactions by sending signed transaction proofs;
3. The transaction can continue until one of the parties decides to withdraw assets and close the channel, he can show the transaction proof to the smart contract at any time to close the channel , if the other party has a transaction with the exiting party, it also needs to show the transaction certificate at that time;
4. When both parties show the remaining transaction certificate, they can withdraw the deposit from the smart contract. When the other party fails to show the transaction proof in time, the system will determine that he has not received any transfer, and distribute according to the proof of one party. This mechanism ensures that anyone can get his funds back, even if the other party does not cooperate.

We can see that the advantages of the state channel are: the use of net settlement between the two parties reduces the cost of a single transaction; the transaction details of both parties are not on the chain to ensure the transaction privacy; the exit mechanism at the same time To the greatest extent, the financial security of the participants is guaranteed.

However, there are serious deficiencies in user experience: first, transactions can only be made with users who have opened channels or are in the payment network; Pay close attention to whether the counterparty of the transaction chooses to close the channel, so as to display the received transaction to protect its own rights and interests; third, the expansion mechanism of the state network is poor in scalability, and it is difficult to realize other operations outside the chain transaction.

Plasma guarantees asset security, and information unavailability is the biggest obstacle

Plasma can be regarded as A side chain technology that guarantees asset security. It uploads the off-chain status proof to the main chain. Even if there is a security problem under the chain, users can prove and propose assets. Plasma technology architecture currently has two mainstream mechanisms, Plasma MVP and PlasmaCash.

Plasma MVP uses UTXO and Merkle proof to enable users to withdraw assets without using a third party. Transactions under the chain are recorded on the Merkle tree in the form of UTXO, and the corresponding hash value is uploaded to the smart contract of the main network, so that users only need to provide Merkle proof to prove their own UTXO and withdraw funds.

When a user proposes an asset, it takes a period of challenge to prove fraud, and anyone else can challenge it by proving that the user has spent UTXO. Because the main chain can verify the evidence provided by the user through the smart contract, but there is no way to know the hidden information of the user (for example, some UTXO has been spent).

Plasma MVP's "group leaving problem": When most users want to leave Plasma, all state proofs must be submitted to Ethereum, And accept the "challenge" during the challenge period. Since Plasma has an unlimited number of users, but the processing capacity of Ethereum blocks is very limited, if all the valid states of the entire Plasma are submitted to Ethereum for processing, it will completely block Ethereum, resulting in the processing time of transactions being reduced. Greatly delayed or even indefinitely.

The mechanism of Plasma Cash is very similar to Plasma MVP, the difference is that assets are recorded in the form of NFT on the sub-chain, and the specific process is as follows :

1. When users lock assets in the contract, they will receive an NFT representing all deposited assets on Plasma;

2. Plasma Cash uses a specific Merkle tree, and each NFT has a designated location. When a transfer occurs, the corresponding location records the transfer information, and the root of the Merkle tree Hash is uploaded to the main chain;

3. The transaction record before the NFT needs to be provided during the transaction;

4. When the user exits, the merkle proof of the previous two transactions needs to be submitted;

5. When the user withdraws the assets, there is a questioning period , anyone can challenge the user operation through transaction records.

Generally speaking, the advantage of the Plasma technology route is that it can guarantee the safety of users' assets in the event of a Layer 2 failure. The guarantee mechanism of centralized cryptography made the Plasma route once popular in the community.

However, the problems with the Plasma technology route lie in the following points: First, under this technical framework, the data structure of the sub-chain is limited, so that the versatility can be expanded It becomes very difficult; second, the Plasma mechanism has the problem of data unavailability, that is, the main chain has no way to obtain all off-chain data, and can only perform simple verification through the root hash, which also makes the exit mechanism more complicated and often takes a long time. Period (several days) for fraud proof, while users need to save their own data and always pay attention to changes in the sub-chain, which greatly affects the user experience.

The transaction data is compressed and uploaded to the chain, the universal platform is about to land, and the Rollup technology route has a promising prospect

The Rollup mechanism refers to highly compressing transactions and packaging them to upload to the main chain, and verifying the authenticity of the transaction package through zero-knowledge proof or fraud proof, which solves the data unavailability problem of Plasma. The Rollup mechanism realizes the layered mode in which the data is on the chain and the operation is off the chain, thus ensuring the security of assets to the greatest extent.

In order to achieve a high degree of transaction compression, the account asset data is maintained on the Rollup sub-chain, and each account has its own corresponding number. Therefore, only 4 bytes can realize the index of 223 accounts, which is enough to deal with most cases. Similarly, Rollup compresses all places that can be compressed without affecting readability (as shown in Figure 12), and the compressed transactions are less than one-tenth of the original. Through the compression of transactions, the Rollup mechanism can more efficiently utilize the existing Layer 1 network capacity, thereby achieving expansion, and ensuring the availability of data on the chain while expanding.

The core issue of the Rollup mechanism is to verify the authenticity of the transactions in the compressed transaction package. For this problem, solutions are mainly divided into two types: ZK Rollup based on zero-knowledge proof; Optimistic Rollup based on fraud proof. At present, both solutions are developing rapidly. Different teams have chosen different technical mechanisms, and projects on the Ethereum main chain have also made their own choices for Layer 2 migration.

ZK Rollup using zero-knowledge proof is to send the zero-knowledge proof corresponding to the transaction at the same time when sending the transaction package, and the smart contract verifies the transaction package through zero-knowledge proof authenticity. The overall process is as follows:

1. The user transfers in and locks assets, and the Layer 2 state tree adds account information and generates corresponding assets;

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2. In the Rollup network, users sign and send transactions;

3. The sorter collects transactions and compresses them into transactions package, and generate a zero-knowledge proof, and update the state tree according to the transaction package;

4. The sorter broadcasts the transaction package and the zero-knowledge proof to the main chain;< /p>

5. The smart contract verifies the authenticity of the transaction package through zero-knowledge proof, updates the value, and executes the corresponding transfer operation.

The biggest advantage of ZK Rollup is its high degree of decentralization and high verification efficiency. The zero-knowledge proof is generated at the same time as the status of the side chain is updated. The smart contract run by the miners can verify whether the new state in the transaction package is derived from the old state superposition transaction through the zero-knowledge proof, thus realizing the decentralization of Layer 2 data to Layer 1 At the same time, because Layer 1 can quickly identify the authenticity of the data from Rollup, it can quickly complete the withdrawal of assets.

The disadvantage of ZK Rollup is that the process of generating zero-knowledge proof is complicated and difficult. A common platform with applications.

The Optimistic Rollup (OP Rollup) technical route chooses to believe in the authenticity of the transaction package submitted by the operator and imposes penalties on fraudulent behavior. The operator needs to pledge a certain amount of assets, and the smart contract will receive the transaction package sent only if the condition of asset pledge is met. Anyone can issue a fraudulent certificate for the authenticity of the transaction package. Once the fraudulent behavior is judged, it will lose All pledged assets. The system achieves a security balance through economic incentives for sorters and challengers.

When the challenger finds an error in the transaction package by recalculating the state value, he can send a fraudulent proof to the smart contract. The fraud proof includes all necessary information, including the account status before the transaction, the Merkleproof corresponding to the transaction, etc. Smart contracts can use fraudulent proofs to verify the authenticity of transaction packages by replaying transactions to achieve fraudulent transaction detection.

The verification efficiency in this mode is reduced, but its advantage is that it is easier to implement a common platform, which is compatible with EVM smart contracts, making developers work The amount is greatly reduced, which greatly reduces the difficulty of project migration, provides an inherent advantage for the OP Rollup project to occupy the Layer 2 blue ocean, and can also solve the urgent needs of the Ethereum network as quickly as possible.

The disadvantage of the OP Rollup mechanism is that the fraud proof mechanism makes the deposit and transfer of assets need to wait for a long challenge period, because once the assets stored in the contract After leaving the Rollup contract, it is impossible to roll back the transaction and recover the assets. Compared with ZK Rollup, Optimistic Rollup has lower verification efficiency and lower transaction compression rate, so its capacity expansion is also worse.

The Ethereum Layer 2 expansion route is sorted out, and the mechanism is inherited instead of overnight

From side chain expansion to Rollup mechanism, it is not difficult to find that these technical routes are not distinct, but a kind of evolutionary development that integrates with each other. The fraudulent proof in the latest Optimistic Rollup mechanism has a similar mechanism in the state channel expansion. And by anchoring the main chain to protect the asset security of the side chain, it has also been passed from the initial Plasma solution to the Rollup technology route. The cross-chain mechanism is used in most technical routes.

3. The future prospect of Ethereum Layer 2 expansion

Current Ethereum Network Layer 2 expansion technology is in a period of rapid development, and solutions are flourishing. Each solution has its own advantages, and has also won the support of related projects and communities that match its own characteristics.

In the short term, we believe that we will see a highly competitive and split Layer 2 network group, and the Ethereum mainnet may become a channel for large transactions and arbitrage transactions , and various Layer 2 networks will bring users low-cost and efficient transaction execution. In the short term, different Layer 2 protocols may not be able to connect temporarily due to mechanism and technical issues, and will form a relatively independent small ecology, with high interaction costs between them (multiple transactions with the main network). At this stage, the Layer 2 solution, which is the first universal platform compatible with EVM, will have a great first-mover advantage, and user experience will become the decisive factor. Layer 2 expansion will greatly reduce handling fees and improve transaction efficiency, and the Defi market may therefore usher in a reshuffle.

In the medium term, Layer 2 protocols will try to achieve data connectivity, and different solutions will spontaneously form different Layer 2 alliances. We believe that ZK Rollup has better security and user experience than OP Rollup, and will occupy most of the Layer 2 market share by virtue of the superiority of the protocol. In the long run, we believe that the Ethereum community will eventually compete for the final winner of Layer 2, occupy most of the market, and achieve expansion under the premise of ensuring decentralization and information security. A unified Layer 2 protocol will also reduce the cost of using the network, which is conducive to the development of the ecology. Layer 2 expansion is not an intermediate compromise but a long-term solution. After the successful launch of Ethereum 2.0, the Layer 2 expansion mechanism can still coexist with fragmentation expansion to improve network throughput.

Layer 2 expansion is inseparable from cryptocurrency wallets, blockchain browsers, and market websites to support and follow up corresponding projects to provide a better user experience. Layer 2 expansion will reduce operating costs on the chain and promote innovation in blockchain projects, thus giving birth to deeper blockchain applications in games, DeFi, virtual worlds and other fields.

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