Here at DeversiFi we build and operate cutting edge blockchain-enabled financial infrastructure

DeversiFi

StarkNet is a solution that utilizes to scale Ethereum. It alleviates Ethereum’s network congestion by increasing the throughput and reducing the transaction fee. Availing the zero-knowledge proof technology, it also enhances data security and privacy. Layer2 zkSTARKs With StarkNet, developers can build, deploy, and run high-performing smart contracts in a decentralized environment without worrying about pricey transaction fees and the security of smart contracts. These features make it especially suitable for building dApps that require high performance and low transaction fees like those in DeFi, NFT, or GameFi. The StarkNet ecosystem also opens a lot of new possibilities for developers. Leveraging the flexibility and advanced features of the Cairo language, and taking advantage of StarkNet’s high throughput and customizability, developers can build innovative, high-performance, customized dApps on StarkNet. There are also many choices of zkEVM projects in the ecosystem, enabling developers to deploy and run smart contracts in safer and more efficient environments. All of these have contributed to the StarkNet ecosystem’s significant growth lately with a notable increase in its total value locked. In this article, we’ll look at the advantageous features of StarkNet, share the innovative projects in the ecosystem, and explore the challenges and future prospects the ecosystem may face. StarkNet’s Advantageous Features has many unique advantages offered by using zkSTARKs, the native programming language Cairo and the Cairo Virtual Machine (VM). Its custom development environment enables higher performance, better security, and richer features. Developers can write secure and reliable smart contracts in Cairo and enjoy the high throughput realized by StarkNet via its STARKs-based validation mechanism. Although there is a learning curve for developers, the effort will be well compensated. StarkNet StarkNet employs its own custom programming language Cairo and implements the Cairo VM. This approach is very different from other layer2 solutions which leverage the existing components of Ethereum. While most other solutions focus their effort on Ethereum-oriented optimizations, StarkWare concentrates on polishing its own stack for its ecosystem. Although it sacrifices the network effect of being fully compatible with Ethereum, it’s hard to refute that this choice is reasonable, especially considering it has achieved a network effect around Cairo and the escape velocity needed to expand. In its future development, these technological features and innovations will provide ongoing value. With the increasing importance of data security and privacy, the robust privacy-preserving capability that StarNet offers will be able to attract more users and applications to the network. At the same time, StarkNet’s scalability and decentralized nature make it an effective solution for addressing high throughput and security requirements. As the blockchain ecosystem develops and the demand grows, StarkNet’s superior technological features in terms of throughput, security, and privacy protection will provide significant value to its business, enabling it to win out in the competition. Various Projects in the Ecosystem At the core of StarkNet’s dApp ecosystem is its capability for building zero-knowledge-proof based highly performant, low-fee, privacy-preserving decentralized applications. While StarkNet enables various use cases, its advantages of high throughput, low fee, and privacy protection make it especially suitable for areas such as decentralized exchanges (DEXes) and NFT marketplaces. Below are some projects in the ecosystem that we believe are worth paying attention to. DeFi: JediSwap is a permissionless and composable AMM built on Starknet by the Mesh Finance community. The project has launched on Starknet mainnet, with a current Total Value Locked (TVL) of approximately $5 million. They also received a grant of 150,000 STARK tokens from StarkWare. JediSwap is very innovative, enabling lightning-fast, near-gasless exchange of assets in a trustless manner. It has already gained some market influence and is a contribution to the StarkNet ecosystem in DeFi. Morphine is an innovative DeFi lending and borrowing protocol with two primary use cases: passive lending and active borrowing. Passive lending allows users to provide liquidity and earn yields through junior and senior tranches, catering to different risk appetites. Active borrowing, on the other hand, enables users to deploy sub-accounts, in which they can borrow up to 15 times their collaterals, have access to LSD, LP, ERC4626, and set automation. Globally, Morphine is highly innovative, offering versatile strategies and functionalities for both lenders and borrowers. Its flexibility and degree of automation should be attractive to DeFi users. Therefore, we believe it has the potential to succeed. Orbiter Finance is a decentralized cross-rollup bridge for transferring the Ethereum native assets. The Orbiter Bridge infrastructure allows for fast and cost-effective transfers of Ethereum-based assets across various rollups like StarkNet, zkSync, etc. The team is also developing zkProver, a middle layer that utilizes zero-knowledge technology to aggregate transactions and increase the TPS and volume of cross-rollup transactions. The project will be able to contribute to StarkNet’s development by enhancing interoperability and scalability. DeversiFi is a decentralized exchange aiming to achieve faster and more secure trading through StarkNet while maintaining connectivity to Ethereum. NFT/Gaming/Metaverse: Realms (Bibliotheca DAO) started out as a Loot project and has evolved into a large-scale multiplayer blockchain game on StarkNet. The project scored 15 out of 18 by the Starknet Foundation and will receive a total of 150,000 $STRK from the Early Adopter Grant. RYG.Labs is an NFT creative agency focusing on building interactive dynamic NFTs and providing NFT marketing solutions. It will serve as a launchpad for artists entering the NFT field and promote the development of the NFT market on StarkNet. The Ninth is a metaverse game on StarkNet offering diverse gameplay such as land purchases and upgrades as well as staking. It balances the fun and integration of tech in gaming, using StarkNet ZK Rollup to secure the overall experience. It will contribute to the ecosystem in Metaverse and gaming. Other Innovative Web3 Projects: Argent X is the first wallet for StarkNet built by Argent. Utilizing native account abstraction on StarkNet, Argent X gives users peace of mind with multisig security and no seed phrase and achieves lower transaction fees and faster confirmation times. Braavos is a friendly smart contract-based self-custodial wallet built on StarkNet. It’s designed to offer a seamless experience for Web2 users and is currently available on Android, iOS, Chrome, Firefox, and many other browsers. Carbonable is a StarkNet-based system to track carbon contributions. It has completed the seed funding round with the participation of multiple venture capital firms. Its innovative blockchain-based approach helps reduce carbon dioxide emissions and achieve carbon neutrality. It will create a real-world impact on environmental protection and sustainable development, which will in turn be beneficial to the StarkNet ecosystem. Dolven Labs is a DAO Based Ecosystem Catalyst and a hub for permissionless DeFi tools and innovative projects for the StarkNet ecosystem. The team is also the builder of projects like StarkNet Social and StarkGuardians. Dolven Labs plays a vital role in the StarkNet ecosystem, offering projects accelerator programs and a suite of permissionless tools to allow them to expand their boundaries and achieve their goals. Herodotus is building storage-proof cross-chain data access solutions. It will allow smart contracts deployed on Starknet to access current and historical Ethereum on-chain data in a trustless manner. Herodotus’ solution will be important for increasing interoperability between Ethereum and StarkNet. It will help expand StarkNet’s capabilities and enhance the data accessibility of the blockchain ecosystem as a whole. Overall, the success of the StarkNet ecosystem so far lies in its technological advantages, developer support, and ecosystem support for various use cases. For StarkNet to further grow, extensive community support is needed. If it can attract the attention and support of more developers, investors, and users, it will have a better prospect. Challenges and Future Prospects One of the top challenges and bottlenecks that the StarkNet ecosystem may face is competition. Many other layer2 scaling solutions in the market are striving to compete with StarNet and they are more advantageous in some respects than StarkNet. Therefore, continuous innovation and improvements are needed to attract more developers and users. A second potential issue is the network effect. As StarkNet is a relatively new technology, it requires a significant influx of developers and users to establish a strong network effect. Effective marketing and promotion efforts are thus necessary. Another challenge that StarkNet faces is ensuring the sustainability of its ecosystem. With the emergence of competitors and technological advancements, StarkNet needs to continuously innovate and provide attractive features to maintain user loyalty and attractiveness. Additionally, StarkNet needs to establish solid relationships with developers and partners to foster ecosystem development and growth. Other challenges StarNet might face include: Since Cairo is a new language, developers need to learn and adapt to this new programming language. This may pose an additional learning curve for many developers, limiting their ability to participate in the StarkNet ecosystem. In contrast, Ethereum’s EVM has a larger developer community, making it easier for developers to get started and rapidly build applications. Adoption may be limited by the use of the Cairo language. Although StarkNet demonstrates the advantages of high throughput and low transaction fees in some use cases, these advantages may not be relevant for all application scenarios. For certain applications, especially those that don’t require processing a large volume of transactions, these advantages may not be significant. Therefore, whether StarkNet will be able to witness widespread adoption across various sectors remains to be seen. High throughput and low transaction costs are advantageous only for specific use cases. We believe, StarkNet is technology-driven and has a clear positioning for its business model. The team prioritizes providing solutions that truly address user needs than merely chasing flashy new technologies. We are also seeing developers increasingly embracing Cairo and STARK, recognizing their potential as scalable solutions. For example, some projects are developing zkEVM on top of StarkNet, such as Warp and Kakarot, which is a showcase of the strengths of Cairo and StarkNet. Overall, we believe that StarkNet has greater potential in areas such as fully on-chain (FOC) games, contract wallets, cross-chain communication, and on-chain AI because its technical features and innovations bring critical advantages to these fields. , StarkNet’s high-performance and low-cost features make it an ideal choice. By bundling multiple L2 transactions into one transaction on Ethereum, StarkNet can distribute transaction costs among other transactions in the same batch, reducing costs. Furthermore, StarkNet increases network speed, provides high throughput, and minimizes communication requirements. These features will help ensure the efficiency of developing FOC games and a better user experience on FOC games. In the field of FOC games , StarkNet’s native account abstraction allows contract wallets to offer security similar to that of hardware wallets by allowing the encryption chips or modules on a mobile phone to directly sign transactions. Additionally, StarkNet’s highly programmable signature verification enables optimization at the wallet layer for enhanced performance and security through techniques like signature transcriptions. In the sector of contract wallets StarkNet’s decentralized nature and secure design make it a reliable solution for . By utilizing zero-knowledge proofs, StarkNet allows for the performance of verification and proof without revealing transaction details, ensuring data privacy and security. With StarkNet, the trustworthiness and security of cross-chain communication can be improved, thus facilitating more data exchange and interoperation among various chains. cross-chain communication , StarkNet’s technical features allow off-chain computation with on-chain verification of generated proofs. This enables compute-extensive applications such as AI and machine learning models to be put on-chain while enjoying the convenience of not exposing sensitive data and model details. Also, StarkNet’s zero-knowledge proof capabilities can be used to verify the correctness of AI computations, increasing user trust in the results. Overall, it will open new possibilities for on-chain AI use cases in areas such as gaming, oracles, automated trading, anti-sybil, KYC, and more. In the field of on-chain AI In summary, we believe, with continuous technological development and innovation, the StarkNet ecosystem has the potential to maintain its lead in competition. But it will need to stand up to challenges to maintain sustainability and grow the user base. Through continuous innovation and close collaboration with developers and users, StarkNet may continue to evolve and create new use cases for Ethereum.

Is the StarkNet Ecosystem Overvalued?

¿Está sobrevalorado el ecosistema StarkNet?

L'écosystème StarkNet est-il surévalué ?

क्या स्टार्कनेट इकोसिस्टम का मूल्य अधिक है?

StarkNet エコシステムは過大評価されていますか?

O ecossistema StarkNet está supervalorizado?

Hệ sinh thái StarkNet có được định giá quá cao không?

StarkNet 生态系统是否被高估？

Rollups Are All the Rage 

Los paquetes acumulativos están de moda

Les rollups font fureur

रोलअप सभी गुस्से में हैं

ロールアップは大流行

Rollups estão na moda

Rollups là tất cả các cơn thịnh nộ

Rollups 风靡一时

Decentralized Finance—DeFi—is one of blockchain technology's novel financial use cases. It is a developed financial ecosystem that offers conventional financial services without a governing/central authority or intermediaries. Virtually all financial services provided by the traditional system of banking—which reflects Centralized Finance—are available on DeFi with a perk of secured seamless transactions without downtime. Decentralized exchanges—DEXes—are platforms that allow the trading or exchanging of cryptocurrencies without the interference of a third party. The features and solutions of DeFi exist on DEXes which can be accessed via Dapps—Decentralized applications. There two primary forms of DEX are: The Order book-based DEXes are DEXes that allow users to buy and sell orders at their preferred or chosen prices. It can be On-chain or off-chain order book, but the latter because trades stay off-chain until they are paired and executed. Notable DEXes like dYdX, Serum, and DeversiFi use this model. Order Book-based DEXes These are DEXes that use the Automated Market Makers—AMMs—algorithm to determine the token's price. Such DEXes are built to execute orders automatically using the smart contract; this is known as P2C—peer-to-contract—protocol. This P2C protocol enables users to transact directly with the smart contract, which already has its predefined asset prices. Liquidity Pool-based DEXes But where did the smart contract get its liquidity from? Who is funding these DEXes? Think no further; the answer to all these is Liquidity Pool. What is Liquidity Pool? Just as it sounds, a liquidity pool is a pooled or contributed liquidity—asset. It represents a collection or combination of gathered crypto assets deposited by investors—Liquidity providers—and locked in a smart contract to be available for exchange purposes as liquidity. The liquidity pool is the heart of DEXes that uses the AMM protocol to execute trading. Just like the body is useless without the heart that pumps blood, DEXes is also useless without the pool because it fuels the functionality of the exchanges. But what exactly is the AMM? Automated Market Makers—AMMS—allows decentralized exchange users to directly with the smart contract. It allows users to create a market by them initiating a P2C exchange. Dealing with the contract means users carry out exchanges of crypto tokens with the pegged price of the smart contract. The AMM uses a mathematical formula embedded in its smart contract to determine prices for assets. The general formula used is: Where: x = amount of token A y = amount of token B k = constant product of the pool Normally, a pair of assets is usually contributed to a pool; the particular pair provided by LPs is used to facilitate exchange. For example, a liquidity pool of ETH/USDT will only facilitate ETH/USDT exchanges. The AMMs have two generations, namely: First Generation: Constant Function Market Makers (CFMM), which comprises Constant Product Market Maker(CPMM), Constant Sum Market Maker (CSMM), and Constant Mean Market Maker (CMM) Second Generation: This comprises Hybrid Automated Market Maker (HAMM), Dynamic Automated Market Maker (DAMM), Proactive Market Maker (PMM), and Virtual Automated Market Maker (VAMM). Each of the above-mentioned market makers is peculiar to several DEXes platforms, and they have their limitations, especially the first generation. The second generation is a modification of the first generation to mitigate the limitations encountered with the first generation of AMM. One of the limitations of the Constant Function Market Maker is . Impermanent Loss So, what exactly is this Impermanent Loss? When you deposit tokens to a liquidity pool and the token's price goes bearish or bullish after some time leading to a loss, the money lost dues to these events is known as Impermanent Loss. It results from the distinctive value over time between depositing your token to AMM and holding on to it in your wallet. It occurs when the value of your deposited assets changes from when you deposited them. How Impermanent Loss Occur Since the liquidity pool finances DEXes, Impermanent loss is only applicable to LPs—Liquidity providers—contributing to a liquidity pool. When LPs commit tokens A & B to a liquidity pool, it will be available for users to exchange token A with token B or vice-versa. From the formula represents the amount of token A while represents the amount of token B in the pool. This formula intends to create a price range for both tokens with respect to their quantities available in the pool. To maintain constant when the supply of either token increases, the supply of its counterpart in the pool must decrease. x * y = k , x y k, For example: Assuming token A is ETH and token B is BUSD with a 50/50 ETH/BUSD pool. If a user exchanges or buys BUSD with ETH, the number of BUSD in the pool decreases while the number of ETH increases. This, in turn, will make BUSD go bullish and ETH becomes bearish because the supply of BUSD has dropped while the supply of ETH has been increased. This event opens the arbitrage window for arbitragers to buy the cheaper ETH from such an exchange and sell at a higher price on another exchange platform. For that, if LPs who committed the bearish token decide to withdraw their portion from the pool, they'll be at a loss because the value of their token has dropped. This loss is termed Impermanent or Temporary loss. It is temporary because the market can readjust so that the value returns to its initial state. But LPs should pull out without waiting for re-balance; then, the loss will be permanent. As LPs, you withdraw the same amount of token deposited, but its worth to the corresponding token would have dropped. What if the worth eventually increases? In such a case, there's no impermanent loss. How to Calculate Impermanent Loss Before we can calculate the impermanent loss of any LP, we must first determine the LP's percentage share. Imagine a Bruno has 7 ETH and intends to contribute liquidity to a 50/50 ETH/BUSD pool. He has to deposit 7 ETH and 13,020 BUSD—assuming 1 ETH = 1,860 BUSD. If the total asset value of the pool is 159,960 BUSD (43 ETH and 79,980 BUSD), his percentage share can be calculated as follows: Where VoCA = Value or worth of Committed Assets VoPA = Value or worth of Pooled Assets Therefore, Bruno's share of the pool is 16.3%. This also means the percentage of Bruno's assets in the liquidity will be his percentage share when he wants to withdraw his asset from the pooled liquidity. So when LPs deposit their assets to a pool, they will get the liquidity pool's tokens. These tokens are based on LPs' share of the pool, and they will be used to withdraw their share or percentage of the pooled asset any time they want to. LPs are prone to impermanent loss when their deposit's value drops compared to its value before or at the point of making the deposition. So how do we calculate Impermanent Loss? Using Bruno's example above, where he deposited 7 ETH and 13,020 BUSD when 1 ETH = 1,860 BUSD at the time of deposit. Assuming the price of ETH doubles where 1 ETH = 3,720 BUSD. Since the AMM model adjusts the pool using formulas, the commonly used formula is the constant product formula which goes thus: Using Bruno's figure, 43 ETH and 79,980 BUSD with the above constant product formula, we have: ETH price in the pool can be obtained using the formula: Now that ETH price has doubled to 1 ETH = 3,720 BUSD, the crypto liquidity and token liquidity can be calculated using: Using the new price of 1 ETH = 3,720 BUSD The above calculation can be verified using the constant product formula: Now that we have the equivalent values for the new price of ETH/BUSD, if Bruno wishes to withdraw his assets from this pool, he'll exchange his LP tokens for his 16.3% share of the pool. His percentage share will be withdrawn from each asset in the pool with respect to the updated amounts i.e. Now, the sum of assets withdrawn = [(4.86489465 ETH 3,720 BUSD) + 18,097.408 BUSD] * = 36,194.816 BUSD Assuming Bruno did not participate in this liquidity pool, his original 7 ETH alone would have earned him [7 ETH * 3720 BUSD] = 26,040 BUSD In addition to his his total assets would have been worth i.e. 13,020 BUSD, 39,060 BUSD 26,040 BUSD + 13,020 BUSD = 39,060 BUSD This difference that occurs due to how the AMM manages the asset ratio is known as Impermanent Loss. From the concluded example, Bruno's loss is: 39,060 – 36,194.816 BUSD = 2,865.184 BUSD Impermanent Loss can also be calculated using: Conclusion Impermanent loss is a temporary loss. If the AMM could readjust the volatility of crypto such that the value goes back to how it was during pooling, no loss will be recorded. But if LPs pull out their asset in such a dwindling market, the loss will be permanent.

What Is Impermanent Loss?

¿Qué es la pérdida impermanente?

Qu'est-ce qu'une perte impermanente ?

स्थायी नुकसान क्या है?

永久損失とは？

O que é perda impermanente?

Mất mát vô thường là gì?

什么是无常损失？

Trade it Like it is HOT: A Review of Popular ZK Projects and the Zero-Knowledge Proof Technology

Opérelo como si estuviera CALIENTE: una revisión de los proyectos ZK populares y la tecnología de prueba de conocimiento cero

Échangez-le comme s'il faisait chaud : un examen des projets ZK populaires et de la technologie Zero-Knowledge Proof

ट्रेड इट लाइक इट इज़ हॉट: ए रिव्यू ऑफ़ पॉपुलर ZK प्रोजेक्ट्स एंड द जीरो-नॉलेज प्रूफ टेक्नोलॉजी

熱く取引しよう: 人気の ZK プロジェクトとゼロ知識証明技術のレビュー

Negocie como se estivesse quente: uma revisão dos projetos ZK populares e da tecnologia à prova de conhecimento zero

Giao dịch nó Thích nó đang HOT: Đánh giá về các dự án ZK phổ biến và công nghệ chứng minh không có tri thức

像热一样交易：流行的 ZK 项目和零知识证明技术回顾

Trustless interactions, immutable record keeping, high levels of security, and trust are some of the features that people love about blockchain technology. The introduction of bitcoin through its whitepaper a decade ago was the first step in this blockchain journey. However, the introduction of Ethereum in mid-June 2015 changed the landscape for the better. The introduction of smart contracts was something that previous networks such as Bitcoin did not have. People could now create decentralized apps, and it was also the era that decentralized applications were introduced. Ethereum supports thousands of transactions from NFTs to decentralized applications and games. More than $170 billion is also locked on the platform, not forgetting that transactions worth trillions of dollars are settled every year. Although, Ethereum, just like Bitcoin, has its shortcomings. Issues with ETH Scalability Even though blockchain and cryptocurrency are great for the banking and finance industries, scalability is still challenging. The Bitcoin network can only handle seven transactions per second, while Ethereum can handle 15 transactions per second. The demand for Ethereum is far beyond 15 transactions per second. It even gets interesting when we compare it with centralized payment processors such as VISA that processes 1,700 transactions per second while MasterCard claims to process 5,000 transactions per second. As a result, there are long wait times on the Ethereum network, and the transaction (gas) fees can even go up to $200 per transaction. Ethereum 2.0 Both Bitcoin and Ethereum use the same consensus algorithm, proof-of-work. Miners must prove that work has been done to verify a transaction. Proof-of-work is demanding and consumes a lot of power. Ethereum 2.0 is an upgrade of the existing Ethereum network. The following are some of the proposed changes: Introducing Proof-of-Stake Proof-of-work is a processing-power-intensive process. All the participating nodes compete to generate cryptographic hashes to solve mathematical equations. The complexity of these equations makes it hard for anyone to hack or corrupt such a system. By design, proof-of-work is inefficient. Ethereum 2.0 introduces proof-of-stake where an algorithm chooses the node that records a transaction. The chances of a node being selected rise with the number of tokens that the node’s owner stakes. Proof-of-stake reduces the complexity of cryptographic work, which essentially means massive throughput gains for the entire network. Attacking the network is also prohibitively expensive as every node must stake Ethereum. eWASM replaces EVM The presence of the Ethereum Virtual Machine has been one feature that has made Ethereum cut on Bitcoin’s dominance. EVM facilitates smart contract processing as it is an execution environment that runs on all network nodes. EVM is the feature that makes the network a global computation machine rather than just being a financial system. Smart contracts on the Ethereum Virtual Machine can execute complex financial transactions, operate social networks and run games. Despite the wide usage of EVM, it is worth noting that it is complex to use, not only for beginners but also for those who understand computing. Ethereum WebAssembly (eWASM) will replace EVM in Ethereum 2.0, and it will be possible to run Ethereum’s code on modern browsers. Programmers will now be able to choose from different languages such as C, C++, and Rust to write code on the blockchain. eWASM will open up Ethereum to more programmers as they don’t need to learn the Ethereum-native language. Sharding In the current Ethereum blockchain, all data added to the chain has to go through verification by all participating nodes. Therefore, the speed of the slowest participant will affect the processing speed of the entire network. This approach creates bottlenecks, which decrease throughput and increase transaction costs. Sharding will break down data verification tasks across various nodes, and every node will verify only the data it receives. There will be parallel processing, increasing processing speeds and reducing transaction costs. Scaling Solutions Decentralization is one of the most promising features of blockchain technology. However, we can already see that centralized payment processors such as VISA and MasterCard can handle more transactions per second than Bitcoin and Ethereum. Do we go back to these centralized solutions that seem fast and cheaper? Scaling is the only way to ensure that DeFi adoption goes to the next level. The aim is to increase the number of transactions handled per second while maintaining decentralization and security. There are three solutions; build a competitive network that competes with Bitcoin and Ethereum (Layer 1s), create a sidechain that is somehow complementary to Ethereum, or create a Layer 2 solution that complements Ethereum. Layers 1s Both Bitcoin and Ethereum are Layer 1 blockchains. Ethereum is an independent network that secures users’ funds and enables the execution of transactions all in one place. Other Layer 1s do everything that the Ethereum blockchain does with a few tweaks here and there. Most of these Layer 1s are differentiated by new designs that translate to higher throughput and lower transaction fees. However, most of these new L1s are introducing higher levels of centralization. Layer 1s have come in droves over the past year, and their aggregate value has grown from $0 to over $75 billion within the same period. Some of the notable Layer 1s that have recently joined the space include Solana, Terra, Avalanche, and Binance Smart Chain. Most of these growing ecosystems are worth more than $10 billion. Layer 2s Layer 2s are meant to increase a system’s throughput without tampering with the underlying network’s original security or decentralization features. There are two main types of Layer 2 solutions; optimistic rollups and zero-knowledge rollups. Zero-knowledge rollups ZK-Rollups or Zero-Knowledge Rollups are data bundles that are collateralized by smart contracts on the main chain and transported off-chain for computing and processing. ZK-Rollups can produce blocks in a minute while the speed is 2,000 TPS. Zero-knowledge refers to a situation whereby all verifiers know that they have the same message without necessarily being disclosed. These solutions function better than L1s as data is usually stored off-chain. These solutions also request data less frequently, resulting in less demand for processing power. As a result, gas fees reduce, and transactions become cheaper and fast. Optimistic rollups Optimistic rollups run on Ethereum’s base layer. As a result, the network many smart contracts without being overburdened. They are slower when compared to ZK-Rollups because optimistic rollups depend on external validators who check the Merkle roots before the status is updated. Their main advantage is that they support smart contracts similar to those on the underlying blockchain. Sidechains Sidechains are built to handle Ethereum’s excess capacity rather than compete. These chains are closely aligned with Ethereum’s community and technology stack. Ronin sidechain of Axie Infinity is a perfect example. Axie Infinity is a blockchain game built on Ethereum. To avoid expensive Ethereum gas fees, the Ronin sidechain allows players to move their NFTs to low-fee environments. Polygon POS is another example of a sidechain but is suited for more general-purpose applications. It is the industry’s leading Proof-of-stake sidechain with over $5 billion deployed in various gaming and DeFi applications. Interoperable chains Cosmos and Polkadot are perfect examples of interoperable chains. The developers don’t create standalone projects; they create standards that make it easy to build application-specific blockchains that communicate with each other. Tokens from a gaming environment can be used on applications on a different blockchain for a different purpose, such as social networking. Ethereum Layer 2 Scaling solutions Optimism Optimistic Ethereum is an EVM-compatible optimistic rollup chain. Optimism is loved as it is fast, secure, and straightforward. The Optimistic Ethereum Gateway makes it easy for users to move assets in and out of the network. In addition, projects that want to deploy can submit a request to be whitelisted. Arbitrum Arbitrum is a Layer 2 solution designed to boost the scalability and speed of Ethereum smart contracts. Arbitrum comes with additional privacy features and allows developers to run unmodified Ethereum Virtual Machine transactions and contracts without compromising the security of L1. It positions itself as the scaling solution for decentralized apps and scales any Ethereum contract using Arbitrum rollups. Starkware Starkware is another Layer 2 scaling solution that comes with three different products: . A Layer 2 scalability engine running on the mainnet since June 2020. The solution has been deployed on Immutable, dYdX, and DeversiFi. It uses ZK-STARK technology, whose benefits include trustless scalability, the ability to design self-custodial services, and creating a robust and secure scaling solution. StarkEx . A permissionless decentralized ZK-Rollup L2 solution for the Ethereum blockchain. Developers can deploy smart contracts permissionlessly on its testnet. Decentralized apps on StarkNet can achieve unlimited scale while still benefiting from Ethereum’s security and composability. StarkNet . The Turing-complete language behind both StarkEx and StarkNet. This product makes it easy to scale dApps using STARKS. Cairo Bitcoin’s L2 Scaling Solutions Bitcoin Lighting Network The Bitcoin Lightning Network was proposed in 2015, but it was not until 2018 the beta was launched. This Layer 2 solution takes transaction bundles off-chain before transferring them back after verification. Another benefit of this protocol is the introduction of smart contracts to the Bitcoin blockchain. Some of the features that lightning network promises include scalability, instant payments, cross-blockchain swaps, and low cost. It also promises to process millions to billions of transactions per second, way higher than legacy payment processors such as VISA and MasterCard. The process of processing transactions off-chain dramatically reduces transaction costs, and even allows micropayments. Cross-chain atomic swaps are possible off-chain as long as the corresponding chains support the same cryptographic hash function. Competitive Outlook for Layer 1 Platforms and Scaling Solutions in 2022 Even though Layer 1s and Layer 2s seem to perform similar functions from a user experience perspective, they have different technical limitations and security guarantees. Users must bridge their funds from an L1 such as Ethereum to take advantage of the cost and speed improvements of both L1 and L2 chains. The bridges from L1 to L2 indicate the amount of capital moving from a particular L1 to an L2. Optimism bridge is a perfect example of an L2 bridge whose TVL grew from $47 million in June 2021 to about $517 million at the start of December 2021. However, L1 bridges such as Binance Bridge had a TVL of about $31 billion by the end of November 2021. Layer 1s are still dominant as they come with crucial infrastructure features such as bridges, application support, centralized exchange support, and oracles. On the other hand, L2s are starting to show signs of growth, as evidenced by the introduction of liquid incentives. We are likely to see native tokens for L2s in 2022. But in general, L2s will likely compete with L1s as the former has greater opportunities for yield generation, low fees, fast transactions, Ethereum-level security, and the combined efforts of onboarding dApps. Wrapping Up Layer Wars are not ending anytime soon as developers explore different uses cases of blockchain technology. However, the main goal of all these solutions is to provide scalability and efficiency while carrying out blockchain-based transactions without compromising on the foundations of blockchain technology. Also Published Here

Ethereum vs. Everything Else: The Layer Wars

With L2 scaling solutions such as Polygon and Arbitrum coming online, the Ethereum L2 ecosystem is growing much faster. At the same time, more and more DeFi protocols are announcing cooperation with L2 solutions to deploy or migrate their protocols to L2. Different DeFi protocols have different needs for expansion and may choose different L2 solutions. Therefore, it becomes a matter of how to interact between L1 and L2 or transfer funds efficiently between different L2s. For example, if a user needs to transfer funds between dYdX and DeversiFi, both of which are based on L2, he/she needs to withdraw funds from dYdX to L1 and then deposit funds from L1 to DeversiFi. Thus, the user will have to pay gas fees twice and spend a lot of time waiting. For L2 solutions with fraud-proof, the withdrawal to L1 can even take days. For this reason, it is necessary to achieve interoperability between L2s. StarkWare has introduced the concept of L2 interoperability, i.e., . Different L2 solutions have different interoperability methods. Below is a brief comparison between the interoperability methods of StarkEx, Loopring, Hermez, and Connext. transferring funds between L2s with as little friction as possible on L1 during the transfer StarkEx StarkEx defined a primitive called Conditional Transaction[a][b], where a transaction is validated or not depending on whether its preconditions for that transaction are met. Conditional transactions use the Fact Registry contract to monitor on-chain events. An event must first be "registered" with the Fact Registry contract before a conditional transaction can be used. For example, if Alice transfers 1 ETH to Bob directly via Ethereum without registering the Fact Registry contract, there will be no on-chain event that can be used as a conditional transaction. The Fact Registry contract has two functions, i.e., transfer() and isValid(). If Alice needs to transfer 1 ETH to Bob, she will send Bob's address as a parameter to the transfer() function, which then does two things. First, it transfers 1 ETH to Bob; second, it keeps a record of the transfer, for example, it saves information about the sender, the recipient, and the hash of the transfer amount. The isValid() function accepts a hash as a parameter and returns True if the input hash is equal to a hash previously recorded in the Fact Registry contract so that This process is often called "Fact Registration". the hash recorded in the contract can be treated as a "Fact", which means that an event has occurred. A signed on-chain event in a conditional transaction contains two fields (hashes): the address of the Fact Registry contract and the "Fact" that should be registered before the conditional transaction is executed. The diagram above shows the workflow of conditional transactions in the Fact Registry contract. In StarkEx's zkRollup solution, if a conditional transaction is included in a batch of transactions, it will ensure that its associated Fact is registered, otherwise, the entire batch will be rolled back. In L1/L2 interoperability, there are two use cases for conditional transactions. StarkEx (L2) → Ethereum (L1) — Fast Withdrawal There are two actors in this use case, where Alice needs to withdraw 1 ETH from L2 to L1 and the Liquidity Provider (LP) has a certain amount of funds on L1. First, Alice initiates a conditional transaction to LP, promising to pay 1 ETH on L2 to LP's address on the condition that LP pays 1 ETH on L1 to Alice's address. Then, Alice receives 1 ETH on L1 and the conditions of this conditional transaction are satisfied. At this point, LP sends this conditional transaction to the Operator on L2 and waits for it to be packaged into the next batch of proven transactions. After the proof of the conditional transaction is submitted to L1 for verification and approval, the LP's address in L2 will be increased by 1 ETH, which is the amount of money received from Alice. (For fast withdrawals in this way, Alice needs to pay a fee to LP.) Since LP's funds on L1 continue to decrease and funds on L2 continue to increase when the withdrawal service is provided, LP needs to periodically withdraw funds from L2 to L1 to rebalance the funds. StarkEx (L2) → StarkEx (L2) Use case 2 is similar to use case 1, i.e., Alice initiates a signed conditional transaction to LP, promising to pay 1 ETH to LP's address on L2_1, conditional on LP paying 1 ETH to Alice's address on L2_2. (Alice and LP are also required to pay a fee and rebalance funds separately.) Based on the above analysis, both systems that use proof of validity (zkRollup) and systems that use proof of fraud (Optimistic Rollup) can adopt the method of conditional transactions. Of course, there is a disadvantage in the funding efficiency of LPs using Optimistic Rollup compared to those using zkRollup, which has faster withdrawal confirmation. For proof-of-validity, users typically need to wait a minimum of 10 minutes. In a fraud-proof system, it may take several days. and enables the transfer of funds at the "blockchain-time" level. Withdrawing funds from L2 to L1 in any L2 solutions requires finalizing the status update of L2, which includes the withdrawal itself. The use of conditional transaction-based fast withdrawals frees withdrawals from reliance on L2 status updates StarkEx proposes conditional transactions to achieve L2 interoperability, and the idea is very similar to Rollup. Compared with the high gas fee, it is obviously more cost-effective for users to pay a small amount of fee to LPs. That is, the multiple fees for each user's withdrawals are converted into a single fee for LPs to withdraw from L2 to L1 when rebalancing funds. Loopring Loopring has proposed Ethport[c], a Bridge product across L1, L2 and CEX, by fusing components of its existing toolkit. Regarding the interaction between L1 and L2, Loopring's solution is to batch multiple L1 transactions as a way to share the cost of L1 gas. Close to the above idea, Loopring also sets up the role of liquidity provider on L2. However, considering the funding efficiency of the liquidity provider, Loopring proposes the Single Phase Converter (SPC). The single-phase converter uses the Flash Minting feature of L2[d]. That is, Flash Minting is used to mint all tokens that users want to buy so that all transactions can be completed on L2 (at the expected token conversion rate). Afterward, all the tokens sold by the users are withdrawn to L1, where token transactions are executed and users get the tokens that they actually want to buy (which have been previously distributed to them through Flash Minting). Finally, these tokens are repaid to Flash Minting. This creates the risk of not being able to repay the Flash Minting, meaning that all previous transactions on L2 will be rolled back. This is an idealized situation. In reality, the token conversion rate may change and there is a possibility that the transaction on L1 may fail. In view of this problem, Loopring then proposed the Double Phase Converter (DPC). The double-phase converter divides the transaction into two phases. In the first phase, the converter collects all the users' funds in a Vault (for a specific token) and gives them a token indicating their share in the Vault, instead of converting the token directly. This is followed by a transaction on L1, which determines the conversion rate. In the second phase, the converted token can be distributed to all users proportionally, thus solving the problem of an unstable conversion rate. In addition, the Bridge mechanism enables users to deposit funds in bulk into Loopring via smart contracts on L1, rather than joining the L2 network individually. This design brings together multiple deposit transactions into a single transaction, reducing gas spend. With the Bridge, centralized exchanges can also use the standard L1 infrastructure to support Loopring's L2 network. Ethport, based on the above components, first uses the liquidity on L2 as much as possible in practice. If the converter is available, it is used to pool L1 transactions and reduce transaction costs. If the above conditions are not met then the Bridge mechanism is used. Hermez Hermez was introduced by the iden3 team and the proposed solution for L2 interaction is Massive Migrations[e]. The idea is that first, the smart contract responsible for making L1 fund transfers has an address on L2_1. When a cross-L2 transfer is needed, the user will transfer funds to that address. After that, the Hermez protocol will group and extract a batch of L2 transfers with the same L2_2 address, and call the standard Hermez function to withdraw the total amount of funds from this batch of L2 transfers to L1 and deposit it to L2_2. The Hermez protocol includes the information needed to reconstruct the original L2_1 transfers on L2_2 and the corresponding account information when performing the aggregated withdrawal transactions described above. There is a coordinator role on L2_2 that handles the withdrawal transactions from L1 and decomposes the flow of funds from the transaction information before transferring to the L2_2 address that corresponds to the user's L2_1 address. Connext Connext is a state channel-based L2 scaling solution that supports fast transactions between EVM-compatible public chains and L2 systems. Earlier this year, Connext released version 0.1.0 of Vector, an instant cross-L2 transfer product designed to connect liquidity between L2 solutions and enable cross-L2 fund transfers. In March, Connext launched the beta version of xDai-Polygon Bridge, which allows users to use the state channel to transfer xDai to Dai on Polygon or Dai on Polygon to xDai using a state channel. Connext enables cross-L2 fund transfers via a router[f]. The Connext router is actually a state channel node that automatically forwards transactions sent to it within the state channel. For cross-chain transactions, the router is equivalent to a liquidity provider by transferring funds to the user within the state channel on chainB in exchange for the user's funds on chainA, which is similar to the ideas of StarkEx and Loopring. For example, if Alice wants to send 100 USDC from Polygon to Arbitrum, she needs to use a router to deposit 100 USDC into a state channel on Polygon. Alice then sends a transfer to that router within the state channel, provided that Alice receives the transfer in the corresponding state channel on Arbitrum, which relies on hashlock (Hashlock)[g]. These transfers are unlocked in an atomic manner, allowing for trust-free implementation. The router is able to earn the fee paid by Alice during the cross-L2 process. However, cross-L2 solutions under the help of liquidity providers face the problem of funding efficiency. Connext proposes Virtual AMMs (Virtual AMMs) to solve this problem. On Uniswap, the more unbalanced the conversion ratio of the pool, the greater the price difference. This also creates a consistently growing arbitrage opportunity. Virtual AMMs draw on the core concept of Uniswap to price fund transfers between L2s. Consider a situation where at some point the amount of ETH in the Arbitrum pool for an LP is greater than its ETH in the Optimism pool, and the system wants to balance the amount of ETH in both pools. According to the above equation in the diagram, if 0.99 ETH on Optimism can be exchanged for 1 ETH on Arbitrum, there will be an arbitrage opportunity. In this way, for LPs, the number of ETH in the Optimism pool becomes larger and the number of ETH in the Arbitrum pool becomes smaller, thus the liquidity is balanced through arbitrage activities. Also, anyone on Connext can initiate their own router to provide liquidity, so liquidity will not be aggregated as some routers may be overloaded and some routers may not be used at all. Connext then came up with the concept of Liquidity Auctions, which dynamically find the router that offers the lowest cost. When a transfer is made, the user broadcasts to the network the liquidity to be sent or received. The router submits “Sealed Bids” directly to the user to complete the transfer at the lowest price. This is somewhat similar to Uber matching users with the lowest-priced drivers. Conclusion The four projects mentioned above use a similar method to solve the cross-L2 and L1 and L2 interoperability problems by introducing a liquidity provider to aggregate multiple transactions into a single transaction. As for the funding efficiency problem of liquidity providers, each project proposed different solutions and has its own advantages and disadvantages. With the adoption rate remaining low, it’s a matter of time to tell which solution will prevail. References a. The Road to L2 Interoperability. StarkWare. https://medium.com/starkware/the-road-to-l2-interoperability-718ff69ec822. b. Conditional Transfers - The Key to Interoperability. StarkWare. c. Ethport: Loopring L1/L2/CEX. https://medium.com/starkware/conditional-transfers-the-key-to-interoperability-2e1de044fb65 https://medium.com/loopring-protocol/ethport-loopring-l1-l2-cex-8bb83c9032e3 d. Flash-Mintable Asset-Backed Tokens. OpenZeppelin. https://blog.openzeppelin.com/flash-mintable-asset-backed-tokens e. Introducing the First L2 Interoperability Mechanism with Hermez Massive Migrations. Hermez Network. https://blog.hermez.io/hermez-massive-migrations-mechanism/ f. Solving the Liquidity Problem. https://medium.com/connext/solving-the-liquidity-problem-88bde201501 g. Hashlock. https://en.bitcoin.it/wiki/Hashlock Note: This is an article jointly written by Sin7Y and the ZKSwap tech team.

Layer2 Interoperability: StarkEx Vs.  Loopring Vs. Hermez Vs. Connext

Transaction speed on the network is affected when the network is busy, resulting in a poor user experience for many DApps. The gas prices increase, making Ethereum very expensive for its users. In comparison, Ethereum L2 runs on top of Ethereum L1. Operating on Layer 2 frees Layer 1, taking transactions off the main chain. Due to transactions being processed off-chain on Layer 2, it results in higher transaction speed, faster confirmation time, and lower gas.    Layer 2 has numerous solutions, each with its own specification, such as Optimistic Rollups, ZK-Rollups, plasma, etc. Ethereum layer 2 is a collection of solutions that are specifically designed to scale applications by handling transactions off the Ethereum Mainnet, Layer 1. In this article, we will compare Ethereum Layer 2 Rollups projects. Rollups are solutions that execute transactions outside the Ethereum Layer 1. The transaction data or proof of transaction is on Layer 1, therefore, ensure security. It reduces the fee for users, allows open participation. What are Rollups? There are two types of Rollups out there. Also known as ZK-Rollups, it runs computation off-chain and submits validity proof to the chain. ZK-Rollups do not require transaction data. Therefore, validation of block is quicker and cheaper. Zero-Knowledge Rollups Optimistic Rollups assume that transactions are valid by default and runs computation only in the case of a challenge by utilizing fraud-proof. In this case, computation is slow. Optimistic Rollups Rollups Projects Comparison The following are ZK-Rollup implementation projects. ZK-Rollups zkTube zkTube uses Layer 2 ZK-Rollups to provide low transaction fees and high throughput transactions.  It ensures security by tracking the history of state roots and the hash of each batch. It is solving Ethereum scaling while ensuring transaction speed and security. It reduces transaction fees through batch processing and ZK proof functions. It is the first application utilizing PLONK technology for mining and is eco-friendly to decentralized energy management. It is an outstanding project both in terms of performance and security. zkTube is using Zero-Knowledge Rollups instead of Optimistic Rollups considering the speed of withdrawals that in case of Optimistic Rollups take one week. The speed can be increased but it reduces efficiency by increasing cost ultimately. Whereas ZK-Rollups make zkTube fast, secure, and cost-effective. It allows users to store their assets in a ZK-Rollup with Layer 1 security. Meanwhile, enabling users to interact with Layer 2 contracts. Therefore, offering effective interaction between Layer 1 and Layer 2. It allows multiple transactions to be bundled and executed as a single transaction on a layer at once. zkTube has developed the ZK proof algorithm into a miner, composing an architecture of Provers grids and miner verification nodes. zkTube is working to improve the current Ethereum system by breaking through the existing performance limitations to host a larger ecosystem. zkTube offers PayTube Wallet that enables users to access any Ethereum decentralized apps with just a one-click link. Loopring Loopring is an Ethereum Layer 2 scaling protocol that allows the building of high-throughput, low-cost, non-custodial AMMs and payment applications on Ethereum by leveraging ZK proofs. It is highly secure, providing 100% Ethereum-level security. Users in the Loopring ecosystem have full control of their assets ensured by ZK-Rollups. Loopring powers payments by batch-processing off-chain requests via ZK-Rollups.  Most operations, such as trade and transfer settlements, etc., off the Ethereum blockchain, reduce gas consumption and overall transaction costs.  Loopring can settle up to 2025 trades per second. StarkWare (ZK-STARK) ZK-STARK is a cryptographic proof technology that allows users to share data and perform computation with third-party without revealing data. It improves scalability by allowing developers to move computation and storage off-chain. ZK-STARKs are scalable in computational speed but are vulnerable to attacks from quantum computers due to cryptography. It satisfies asymptotically optimal efficiency. DeversiFi has integrated ZK-STARK that allows 9000+ trades per second. zkSync zkSync solves Ethereum scalability by ensuring 100% security. zkSync supports meta-transactions, instant confirmation with affordable finality, and less expensive privacy. zkSync is unconditionally permissionless and growing down the path of progressive decentralization. It takes 10 minutes for finality and has the lowest real tx costs-0.5k gas per tx. Users can sign the transaction with their usual Ethereum wallet by signing an EIP712 message. Aztec Aztec provides ZK-SNARK service to the mainnet enabling the scaling and shielding of transactions. Aztec is the ultimate security shield from the internet of money, ensuring user’s data protection on Web 3.0. The sender and recipient identities are hidden. They are also ensuring balance and code privacy.  Private transactions are computed in seconds. Each Rollup aggregates 112 transactions, making users pay a much lower gas fee by splitting the cost of a single proof.  Aztec can scale on-demand up 300 transactions per second. Hermez Network Hermez is an open-source ZK-Rollup solution that enables secure, economical, and usable token transfers on the wings of Ethereum. It offers computational integrity for secure transactions. Using ZK-Rollups, Hermez offers 90% transfer cost reductions, allowing more accessible financial services for mainstream adoption. It guarantees computational integrity and on-chain data availability. Anyone can bid in a decentralized auction to create the next batch on Hermez, and each successful transaction is rewarded with collected transaction fees. Optimistic Rollups The following are Optimistic Rollup projects. Optimism Optimism is a scalability stack for Ethereum that offers instant transactions and scalable smart contracts. It is built to behave and feel like Ethereum but cheaper and faster. Transactions are checked via a Verifier to be incorrect or correct. When it successfully proves a transaction result incorrect, Verifier is rewarded. OVM Account contracts are redeployed able contracts Layer 2 contracts, representing a user and providing a form of “account abstraction.” Transaction fees on Optimistic Ethereum. Cost is related to primary actions taken by users while interacting with the platform. You can easily add or connect Optimistic Ethereum via MetaMask both manually and using chainid.link. Off-chain Labs Arbitrum Rollups Off-chain Labs is the ideal scaling solution for DeFi apps and any Ethereum contract. It offers a secure and economically efficient blockchain experience without any limits. Transactions on Arbitrum use 2-3k Ethereum gas. It can be further can down using the BLS signature. It is EVM compatible on the bytecode level. There is no need to use any custom compiler. It breaks out the limitations of Ethereum contract size and transaction gas limit. Fuel Network Fuel Network empowers fast, secure, and cost-efficient ERC-20 token transfers and swaps. It is completely decentralized, non-custodial, censorship-resistant, and permissionless. It has up to 10,000 TPS surge intake capacity. It allows users to pay fees in any token and complete withdrawals within 10 minutes using atomic swaps. No burdensome proof generation with high latency and no exotic cryptography. Cartesi Cartesi is a Layer 2 platform composed of both blockchain and off-chain components. It allows large-scale verifiable computations to run that are easily integrated into smart contracts.  DApps running inside Cartesi can process a virtually unlimited amount of data. It allows DApps to benefit from vastly increased computing capabilities Off-chain while ensuring security. It is built with the goal of shielding users from as much complexity as possible. OMGX OMGX is a Layer 2 solution maintained by OMG and Enya teams. It runs in EVM- compatible virtual machine, which allows it to handle any smart contract running on Ethereum. OMGX enables developers to leverage much richer compute capabilities to create more compelling DApps. It is the next generation optimistic rollup that offers economical smart contract support and stake rewarding. OMGX onboard team assists developers to ensure smooth transactions for porting contracts to Optimistic Rollups. Conclusion Layer 2 solutions seem very viable and allow developers to start projects by deploying them. Vitalik Buterin thinks that Optimistic rollups are suitable for near terms while ZK-Rollups are used for longer. Layer 2 solutions are needed because otherwise, it would be unnecessarily expensive to use blockchain applications. Vitalik says, “ If you are building applications, you must also be facing problems in scalability. Every transaction consumes gas, and the price of Ether (ETH) has been high. Therefore, if you are looking for ways to optimize your applications, a Rollup scaling solution is highly recommended.” Since these solutions are new and slowly being deployed, we can expect more out of these in the future. Stay tuned!

Layer 2 Rollups Projects in 2021: A Comparison

In the wake of Ethereum’s network congestion and sky-rocketing transaction fees, technologies around layer 2 solutions have matured dramatically in the past year. Today, we’re seeing a meteoric rise in Ethereum layer 2 activity, as many leading DeFi protocols are now choosing to build on or port contracts to several thriving Layer 2 ecosystems. What is Layer 2? The term “layer 2” or “L2” collectively describes a number of solutions (rollups, validium, plasma, state channels, etc.) that help decentralized applications scale by taking transactions off-chain. They are conceptually built on top of Ethereum, hence the name. Despite the congestion on the Ethereum network, layer 2 solutions allow users of any Ethereum application to enjoy near-instant and affordable transactions for a tiny fraction of the gas cost while still leveraging the robust security and decentralization of the Ethereum mainnet. Top DeFi Protocols Are Leading the Way DeFi 1.0 has shown its potential to transform global finance. However, Ethereum network congestion and high gas fees are still pricing many out of usage. Now that DeFi has established a firm foothold, we’re seeing some of the most well-known protocols rushing to implement layer 2 solutions to ease the burden and barrier to entry for users. Aave , a non-custodial liquidity protocol for earning interest on deposits and borrowing assets. It launched on last month as part of a wider plan to make DeFi products more accessible to all and rapidly grew to over $1 billion worth of liquidity in just 10 days. Aave Polygon 1inch , a platform that aims to find the best deals across multiple decentralized exchanges (DEXs), just announced its expansion to Polygon. It joins Aave as arguably the most notable DeFi dapps to integrate with layer 2. The move provides 1inch users access to several Polygon-based liquidity sources that already include Curve, SushiSwap, QuickSwap, Aave. 1inch dYdX is a leading DeFi platform for margin and perpetual trading. To significantly scale trading, dYdX and StarkWare have built a Layer 2 protocol for cross-margined Perpetuals, based on StarkWare’s scalability engine (Layer 2) and dYdX’s Perpetual smart contracts. dYdX users can now trade with zero gas costs, lower trading fees, and reduced minimum trade sizes. dYdX StarkEx The List Goes On Additional projects include , with many more on their way. Chainlink, Sushiswap, Open Sea, Curve Finance, Graph, Polywhale, Decentraland, SuperFarm, Pooltogether L2 Network Effect is Heating Up As the technology continues to mature and the need to take Ethereum transactions off-chain grows, the growth of layer 2 ecosystems is getting interesting. Due to the recent surge in L2 activity, there is a significant network effect that provides even more incentive for DeFi protocols to integrate. Currently, it’s Polygon that boasts the most established and fastest-growing network. Since October 2020, the total value locked on Polygon has risen from under $5 million to $5.8 billion at the time of this writing. In comparison, xDAI’s TVL is currently around $71 million. L2 DEXs Also on the Rise Decentralized exchanges are the very heart of a layer 2 ecosystem. While some protocols have made integrations with layer 2 — native DEXs solely focus on increasing available liquidity for layer 2 ecosystems, giving users a “Uniswap experience” with extremely low gas fees. L2 DEX trading volume in the last 24 hours: Quickswap (Polygon): $668,286,390 Loopring Exchange: $22,181,254 ZK Swap: $18,449,198 Deversifi (Starkware): $6,053,032 Leverj (Gluon): $3,011,540 By comparison, Uniswap's volume in the last 24 hours (at the time of writing this article) was 1.65 billion. Hottest Upcoming Projects Are Building on L2 While many projects on Ethereum are migrating to layer 2 after initially building on layer 1, some of the most anticipated projects of 2021 are choosing to build there from the start. One example is , an upcoming IDO launchpad that is in partnership with Polygon. Scaleswap is leveraging layer 2 scaling and a state-of-the-art UX to improve the IDO experience, making it accessible and fair to all. Scaleswap IDO launchpads have fully revolutionized crypto investing and fundraising ever since the rise of in late 2020. However, as with many early DeFi protocols, the current platforms haven’t been able to provide truly open access due to high gas costs and less than ideal selection criteria for deciding participation in launch pools. Layer 2 scaling and a community-centric approach are helping Scaleswap tackle both of these pain points head-on. Polkastarter Ethereum 2.0 on the Horizon The big question on everyone’s minds is . Ethereum 2.0 has multiple layers, and not all are being immediately deployed. One aspect, the PoS merge, is scheduled to go live later this year but is just the first of five major concepts that make up the future of Ethereum. The big throughput upgrade is sharding, and that will not happen until 2022 or 2023. Sharding itself will be deployed in stages and could take additional time beyond that to fully roll out. whether the layer 2 space will still be relevant once Ethereum 2.0 arrives The bottom line? No amount of Ethereum 2.0 scaling will ever be enough to meet demand. Users will always want the network to be cheaper and faster. Vitalik Buterin, in response to whether L2 scaling solutions will still be relevant upon the release of ETH 2.0, : stated “Fully off-chain L2s based on channels and Plasma will continue to be relevant … an ecosystem where Ethereum covers the world could easily have a need for even more, especially for micropayment-oriented applications. TLDR: the "layer 2" space is about to get a lot more interesting.” There won’t be a battle between Ethereum 2.0 and Layer 2 solutions. Instead, the two will work together synergistically. Ethereum is and always will be the main highway. Layer 2 provides the surrounding roads, bridges, on-ramps, and additional infrastructure necessary to grow Ethereum into a robust and globally scaled network. The Ethereum Layer 2 ecosystem is thriving, and it’s only just getting started. Sources: https://dappradar.com/polygon/defi/aave https://defipulse.com/polygon https://defipulse.com/xdai https://twitter.com/L2Wars https://info.uniswap.org/#/

Ethereum Layer 2 is Rising to the Challenge

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