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Hey DEFI TIMES community,
The need for scalability has never been more important than in 2020 and 2021. DeFi summer has shown us that gas prices rise to unsustainable highs during times of intensive usage.
It currently costs $5 to make an ETH transaction and way more to transfer ERC-20 tokens between two accounts. Ethereum will not scale with a PoW consensus algorithm. So the Ethereum community decided to switch to Proof of Stake and turn Ethereum into a sharded blockchain.
While sharding seems to be years away, we rely on short to medium term compensation. It seems like there will be a lot of new people experimenting with DeFi services in 2021. To process all the demand, many DeFi applications will need to move off-chain.
And that's what we will see in 2021. Most people believe that Ethereum is light years away from scaling. However, this is not the case because the technology is already here; it just needs to be implemented.
I want to highlight two critical scaling solutions today: Optimistic- and Zk-Rollups.
Today, Synthetix uses Optimistic rollups on the mainnet, and many more protocols will follow very soon.
Let's explore the world of scaling!
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How Ethereum scales
First, it is essential to understand the two ways a blockchain can scale to mass adoption. You can increase the transaction throughput on the blockchain itself or move the transactions off the chain. In his recent blog post, Vitalik Buterin explained the two ways of scaling as follows:
There are two ways to scale a blockchain ecosystem. First, you can make the blockchain itself have a higher transaction capacity. The main challenge with this technique is that blockchains with "bigger blocks" are inherently more difficult to verify and likely to become more centralized. To avoid such risks, developers can either increase the efficiency of client software or, more sustainably, use techniques such as sharding to allow the work of building and verifying the chain to be split up across many nodes; the effort known as "eth2" is currently building this upgrade to Ethereum.
Second, you can change the way that you use the blockchain. Instead of putting all activity on the blockchain directly, users perform the bulk of their activity off-chain in a "layer 2" protocol. There is a smart contract on-chain, which only has two tasks: processing deposits and withdrawals, and verifying proofs that everything happening off-chain is following the rules. There are multiple ways to do these proofs, but they all share the property that verifying the proofs on-chain is much cheaper than doing the original computation off-chain.
Today, we want to focus on second-layer solutions, mostly Optimistic- and zk-rollups.
What are Rollups?
The Rollups technology is a layer two solution, which moves most of the computation off-chain but keeps some data per transaction on-chain. Because the scalability is still limited by on-chain throughput, Rollups use compression tricks to keep the data as small as possible.
To compare the gas cost of an ERC-20 transaction:
On-chain: ~45,000 gas
Rollups: ~300 gas
Rollups make transacting on the Ethereum blockchain way more efficient. But the best part about Rollups is that you can run an EVM inside a rollup, which means that general-purpose applications are possible. Most other layer-two solutions don't allow for Turing-complete applications. Ethereum applications can decide to use Rollups without much effort. There is no need to rewrite any code.
Optimistic-Rollups vs. zk-Rollups
zk-Rollups use cryptographic proofs that the data published on the Ethereum main chain is valid. No matter how large the computation, you can quickly verify the proof on-chain. The data verification is quite heavy, which is why it costs approximately 500,000 gas per batch. The technology is also quite complex and the smart contracts implemented are very new. So there might be undiscovered bugs in them.
The off-chain costs are also high.
ZK-SNARK proving especially for general-purpose computation can be expensive, potentially many thousands of times more expensive than running the computation directly.
However, there are many positive sides as well. There is a concise withdrawal period for funds on the Rollup. The transaction throughput on the sidechain is quite remarkable, which is the main reason to use zk-Rollups.
Optimistic rollups have a much more extended withdrawal period than zk-Rollups. They rely on a trust model where the data published to the base chain is not checked for validity every time. If anyone sees a mistake, the transactions can be reverted.
The trust model demands a withdrawal period of seven days to ensure the integrity of the Rollup.
In comparison to zk-Rollups, Optimistic Rollups are less complex. Also, running EVM code inside the Rollup is way less expensive because it doesn't require complex computation to verify transactions.
Will we need Rollups when sharding goes live?
Sharding will split the Ethereum blockchain into 60 different shards, which will make it more scalable. But that doesn't mean that fees will be much lower. In fact, we can expect fees on some shards to be extremely high and on other shards to be very low.
Think about a sharded blockchain like a country. In some cities, the rents are extremely high (New York). In other cities, the rents are cheap. The prices depend on how attractive the city is. Everyone wants to live in New York because the opportunities are endless.
There are fewer jobs in more rural areas, fewer places to go out, and so on. The same thing will happen on the Ethereum blockchain.
On some shards, there will be valuable DeFi applications like Maker or Aave. On other shards, you will store your NFTs. The DeFi shard will be more expensive to use because it will capture billions of dollars on it.
Even though sharding increases the transaction throughput, we will need other scaling solutions as well: Rollups.
Vitalik Buterin believes that Optimistic Rollups will prevail in the short term while zk-Rollups will be successful in the long run.
Rollups are already here, and they are here to stay. They will increase transaction throughput shortly and help Ethereum become a global settlement layer for financial services.
Some implementations of Rollups already exist. Loopring uses zk-Rollups for its decentralized exchange, while Synthetix uses Optimistic-Rollups for its synthetic assets protocol. Loopring processes approximately $10 million in transaction volume every day, and it is reasonable to expect that it will increase by a lot in the near future.
Even though gas prices are incredibly high, we are building excellent solutions while not relying on sharding to be implemented.
We are building the future today. Nobody is going to stop us.
All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
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