Iterative Improvement - The Daily Gwei #354

The layer 2 rollout is a marathon; not a sprint.

With the current layer 2 rollout on Ethereum we’re basically experiencing “generation 1” of what these technologies will evolve into. As you can see below, Arbitrum is already pushing a major update to their Arbitrum One network in the near future and Optimism is also pushing ahead with OVM 2.0 (live on mainnet on October 28th).

A lot of people seem to miss the fact that these layer 2’s are just the first iterations of what they are capable of - they see that Arbitrum One and Optimistic Ethereum (OE) still cost a few dollars to do transactions and think that’s the end state of what these technologies can do - I find this extremely bizarre. We all know that technology gets better over time (often exponentially so) - I mean, just 10 years ago you were still considered an early adopter if you had a smartphone - now everyone has them and a smartphone can basically replace an entire desktop computer. Additionally, the cost of a basic smartphone came down considerably over time just like the cost of transactions on layer 2’s will come down over time.

Further to the point above, and as I’ve explained before, layer 2’s work off of economies of scale which means as networks like Arbitrum One and Optimistic Ethereum remove the limits of their networks (and more people use them), costs to transact will decrease for all users as the layer 1 batch costs are amortized across these users. On top of this, there are plenty of ways that the layer 2 software can be optimized to reduce costs even further as well as increase execution speeds and give developers more tools to play with. Plus, as I’ll detail below, data sharding will reduce this costs even further.

In saying all of this, the layer 2 rollout has already grown so much in such a short period of time - from $750 million of TVL to $3.2 billion of TVL in just 6 weeks and some layer 2 apps, such as dYdX’s perpetuals exchange, are already rivaling centralized exchanges in trading volumes. And this is all happening with just the first generation of layer 2 technology which is very early (still in alpha or beta releases), aren’t supported buy most centralized exchanges yet, aren’t as cheap as they can be, and are still missing apps. This is why the layer 2 rollout is a marathon; not a sprint - though I’m sure we’ll see some token incentive programs from these layer 2’s eventually.

On top of all of this, when data sharding comes into play (late 2022/early 2023), layer 2’s are going to be able to finally unlock their full potential. They will no longer be limited by just the data capacity of 1 Ethereum chain - they will effectively have 64 times more capacity thanks to the 64 shards that are planned to be initially released. Though this isn’t the end state - it’s just the beginning - additional shards can be added to the Ethereum network over time as more validators are added to the network. But wait, does this mean that the more decentralized Ethereum becomes, the more scalability it can offer? Why yes, yes it does, and this means that Ethereum has solved the “scalability trilemma” - now you can probably tell why I’m so excited about the coming modular blockchain revolution.

The future of layer 2 on Ethereum is extremely bright and we’re basically at the starting line of the rollout process. The entire scalability ecosystem will evolve dramatically over the next years and I for one am more excited than ever to watch it all play out. And as I wrote about last week, we really are in the golden age of Ethereum on many different fronts - so be sure to stick around and get involved as Ethereum could really change your life!

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.