The ecosystem of layer-2 (L2) scale solutions is flourishing. Can crypto achieve scalability without sacrificing decentralization?
The congestion and high transaction fees in established blockchains such as Ethereum (ETH) and Bitcoin (BTC) have created a need for additional solutions to meet the increased demand. The L2 sidechains such as Arbitrum (ARB), Optimism (OP), and Polygon (MATIC) emerged as an attempt to improve transaction capabilities while ensuring smooth and orderly operations.
In short, layer 2 solutions are additional protocols or frameworks built on top of existing blockchains to improve scalability and transaction throughput. They come in different forms such as rollups, state channels, and side chains.
They alleviate the computational burden on the main chain by offloading it to a secondary layer, while ideally ensuring security and decentralization.
Optimistic rollups, such as Arbitrum and Optimism, take a trust-but-verify attitude and treat transactions as valid unless a challenge proves otherwise.
Zero-knowledge combinations, such as zkSync, perform calculations outside the main chain and then provide proof that everything is correct.
These solutions achieve scale by processing thousands of off-chain transactions and then bundling them into one transaction on the main chain. This action effectively directs the transaction load to their parallel network, reducing congestion on the main network.
Yet prominent figures, including Ethereum co-creator Vitalik Buterin, have recently raised concerns about centralization and censorship in L2 solutions.
Pseudonymous blockchain researcher Andy recently turned to
𝗥𝗼𝗹𝗹𝘂𝗽𝘀 𝗮𝘀 𝘄𝗲 𝗿 𝗿𝗲 𝗴𝗶𝗻𝗲…
In the quest to scale Ethereum with rollups, decentralization has been put on the back burner in exchange for instant feedback loops,… pic.twitter.com/ap4DwMVZLF
— Andy 🦇 🔊 (@ayyyeandy) October 10, 2023
In their opinion, the current L2 stack differs significantly from the backers’ idealized version.
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The growing mystery
As the demand for blockchain scalability increases, many layer 2 solutions have emerged, offering varied approaches to address the scalability, security, and speed trilemma.
According to data from layer 2 watchdog L2Beat, there are currently 37 active layer 2 projects with the extended user, transaction activity, and total value locked (TVL). There are 36 more on the way, and 11 projects have been archived.
Analysts estimate that there could be more than 100 and even as many as a thousand L2s by the end of the year to address Ethereum’s scalability issues.
But as the ecosystem expands, concerns arise about increasing centralization within these solutions. It’s a paradox: trying to decentralize, but unintentionally embracing centralization.
This concern goes beyond philosophy; it can challenge what makes blockchain robust, transparent, and resistant to censorship.
The L2 solutions offer scalability and potentially compromise the core principles of decentralization. Is this sacrifice necessary, or can we find a balance that maintains this delicate balance?
Navigating the sequencer dilemma
An important part of these L2 networks is the sequencer, which bundles user transactions and sends them to Ethereum.
Sequencers verify, organize, and compress transactions into a packet that can be transported to the layer 1 chain. For this service, they receive a small portion of the fees collected from users.
The technology plays an important role in the functioning of L2s, making them faster, cheaper and easier to use.
Critics argue that today’s sequencers are mostly managed by centralized entities, which represent potential points of failure and vectors for transaction censorship. There are also suggestions that the profitable nature of running sequencers may inadvertently discourage decentralization.
Speaking to crypto.news, Kelsey McGuire, Chief Growth Officer at EVM-based smart contract platform Shardeum, opined that the centralization of some layer 2 platforms could lead to an increased reliance on dedicated validators and sequencers, causing a scenario arises in which a handful of participants exert disproportionate influence on the network.
Such a scenario could even cause division in the crypto community between those willing to sacrifice a level of decentralization and those who see themselves as decentralization purists.
According to her, sequencers could make transactional orders, raising concerns about front-running or censorship. McGuire suggested that relying solely on such sequencers could lead to an industry in which only a few entities have significant influence, undermining decentralization across the board.
“L2s that care about decentralization should continue to focus on finding ways to ensure that all power and influence does not rest in the hands of just a few entities.”
Kelsey McGuire, Chief Growth Officer, Shardeum
A recent Binance report also highlighted the risks posed by current centralized sequencer systems, including the potential misuse of transaction order control and the potential for economic harm to users. For example, the entire L2 is affected if a centralized sequencer fails.
Some L2s also lack tamper-proof proof, although others, including the popular Optimism package, are currently developing such systems.
Fraud proofs are layer 1 algorithms that validate the accuracy of layer 2 transactions. Many aggregation networks “borrow” Ethereum security through these tamper proofs, allowing Ethereum validators to verify that an L2 network is functioning properly.
Some analysts have suggested that without tamper-proof proof, L2 networks are essentially asking users to trust their security measures instead of Ethereum’s.
I’ve long been raising alarm bells about the dangers of L2s marketed as such without tamper proof or any meaningful L1-derived security.
The answer I usually got was: “They are good people. We can trust that they will eventually build fraud proofs and not intervene in… https://t.co/rbLVIOCShP
— Steven Goldfeder (💙,🧡,🖊️,🦀) (@sgoldfed) November 22, 2023
Other L2s also lack what experts describe as an “escape hatch” for users to transfer their funds back to Ethereum if a sequencer fails. Without this, users run the risk of losing their money if something goes wrong.
Ethereum’s centralization problems extend beyond L2 centralization. The transition to the proof-of-stake (PoS) consensus mechanism created new centralization problems for the network.
Under PoS, network validators are chosen based on the amount of staked ETH they have. It has given rise to hyperscale staking platforms like Lido, which currently houses as much as 20% of Ethereum’s total locked value (TVL) in its liquid staking instrument, the LSD.
Lido also operates one in three Ethereum validators, leading many to question the excessive reliance on such centralized staking platforms, which ultimately contradicts the Ethereum community’s ethos of decentralization.
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The solutions that exist
Several solutions are proposed to address these centralization problems. Shared sequencers and direct decentralized sequencers are some of them.
Shared sequencers are networks that serve multiple L2s, promoting interoperability and composability. In contrast, direct decentralized sequencing allows each L2 to have its own set of sequencers, allowing for greater customization and control.
There are reports that Coinbase and other rollup platforms are planning to adopt decentralized sequencers, even as there are concerns that large-scale implementation of the technology could compromise speed and security.
L2 platforms such as Espresso and Radius are currently developing shared sequencing solutions, each with unique features in their respective architectures.
McGuire, who believes that sharing is caring, at least in terms of decentralization, thinks the shared sequencer route may be the best way forward in the L2 space. She believes that some of the challenges L2s face could have been negated if the solutions had been baked into the underlying L1s from the start.
In his post on the Ethereum Magicians forum, Vitalik Buterin introduced a layered framework, ranging from phase zero to phase two, to systematically evaluate the level of decentralization inherent in different L2 networks.
This framework recognizes the practical need for emerging L2s to temporarily use certain centralized mechanisms – similar to ‘training wheels’ – that will ensure a secure testing phase and a controlled public rollout before full decentralization is achieved.
Future horizons
As the crypto community grapples with the centralization problem, the future remains uncertain yet hopeful. Innovators are actively addressing these concerns and exploring new architectures that balance efficiency with decentralization.
The road ahead involves iterative solutions and learning from the successes and pitfalls of existing L2 frameworks.
The conversation is dynamic and evolves with the blockchain landscape. The challenge is clear: forge a path where scalability does not compromise the decentralized ethos.
The community could shape the future together and drive solutions that align with the core principles of blockchain technology.
In the grand story of blockchain scaling, the centralization subplot is a crucial chapter that will undoubtedly determine the fate of decentralized networks. The question remains: can we scale without endangering the soul of crypto?
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