Key points to remember

  • Arbitrum, an Optimistic Rollup scaling solution for Ethereum, has been successfully launched for developers.
  • Layer 2 scaling aims to reduce congestion on the backbone while still benefiting from its security.
  • Reducing congestion on Ethereum will reduce gas costs for every user, not just those using Layer 2.

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Scalability has been Ethereum’s biggest challenge as its popularity increases. One of the key Layer 2 solutions hoping to fix the problem, Arbitrum, has now released for developers.

Ethereum’s path to scale

In the recent stock market crash on May 19, when BTC and ETH fell more than 30% in one day, gas prices hit 1,500 gwei. Some DeFi users have reported that Uniswap transactions cost over $ 1000. The miners earned a record $ 110 million during the day from gas charges.

The explanation behind these high prices is simple. For a transaction to be validated on Ethereum, the user must encourage miners to include the transaction in their block by adding a tip. Miners select the highest available predictions and include them as a priority in their blocks to ensure the greatest profitability of their transactions.

Ethereum has low throughput, focusing on security and decentralization rather than efficiency. While not a particularly pressing issue in its early years, the rise in the price of ETH and the growing demand for transactions led to high dollar values ​​for any transaction on the blockchain.

Source: The block

As the graph above shows, transaction fees have recently become the main source of income for miners ahead of block rewards received after each block mined. The chain’s low throughput and high demand led to high gas charges, which pushed DeFi users to other Layer 1 platforms such as Binance Smart Chain and Polygon.

The solution to these problems is to increase the flow of the chain. To do this, there are two options. One of them is to scale the base layer of the blockchain. This is what Ethereum 2.0 is working on through sharding, which will distribute the chain workload horizontally among 64 fragment chains while enjoying the security of the entire network.

The second option is to move some of the operations off-chain, to a second layer built on top of Layer 1, while taking advantage of its security. While Ethereum processes around 15 transactions per second (tx / s), Layer 2 could increase throughput to 2000-4000 tx / s. The higher the flow, the lower the gas prices should be. This is the vision that Ethereum founder Vitalik Buterin presented in his October 2020 article ‘An Ethereum roadmap focused on rollupwhich described the future of the Ethereum chain and the role rollups could play. He wrote:

“The Ethereum ecosystem is likely to be all-in-one on rollups (plus some plasma and channels) as a scaling strategy for the near to medium term future.”

How rollups will help Ethereum Scale

Layer 2 is a broad term that refers to a variety of solutions that help increase the capabilities of a blockchain by transporting transactions off-chain while maintaining Layer 1 security. scale include Bitcoin. Lightning Network. Users lock in their funds and execute an unlimited number of transactions between them, requiring only one final transaction to be given to the main chain.

Another type of solution is Plasma, which works by offloading transactions to child chains. Polygon uses plasma. However, the problem lies in bringing the funds back to the main chain; a transaction can take hours. Sidechains like xDai are independent and compatible chains on which decentralized applications can port their smart contracts to relieve the pressure of the main chain.

The scaling solution of choice for Ethereum is rollups. Rollups can consolidate thousands of sidechain transactions into a single transaction that the main chain can verify. If this single transaction is correct, it proves the validity of all the transactions grouped together.

This transaction is a type of zero-knowledge proof called SNARK, which means “succinct non-interactive argument of knowledge”. A SNARK is a form of evidence where an actor can prove possession of certain information without revealing that information.

No proof of knowledge.  Source: Towards Data Science.
Source: Towards data science

Arbiter, optimism and zero knowledge

The unconscious evidence is the most efficient way to scale Ethereum and the one that Buterin proposed as the best option for the near to medium term future. Rollups are divided into two subcategories, zk-Rollups and Optimism. Although zk-Rollups are faster, they are not easily compatible with Ethereum smart contracts. Optimistic rollups like Arbitrum allow decentralized applications to port their smart contracts with very minimal changes.

In the long run, zk-Rollups might be a more attractive option for decentralized applications as technology evolves, but, for the immediate future, optimistic Rollups are much more realistic. Two projects are working on optimistic rollups with two products that will fight for market share in the near future: Optimism and referee.

Optimism has seen some delays in recent months, pushing their public mainnet release date back to July, while Arbitrum launches today.

The highly anticipated Uniswap v3 update launched a few weeks ago with a release slated on Optimism, but delays have led the community to release a release on Arbitrum as well. The vote received broad support, and Uniswap founder Hayden Adams confirmed that the most popular decentralized exchange will deploy its smart contracts on Arbitrum.

A successful launch of Uniswap on Arbitrum would bring a large amount of liquidity to their solution compared to Optimism. Adams confirmed that Uniswap V3 would also launch on Optimism as planned. Synthetix, Ethereum’s main synthetic active protocol, is also currently testing a beta version of Optimism. Arbitrum uses ChainLink to secure the connection between on-chain smart contracts and off-chain resources, by paying for these services with LINK tokens.

How will Arbitrum benefit Ethereum users?

DeFi users will be able to trade on the Arbitrum version of popular decentralized apps like Uniswap for pennies with faster transaction speed. The implications of the launch of Arbitrum do not end there. Offloading a significant amount of off-chain transaction volume will have ripple effects on the Ethereum network. Currently, Uniswap is one of the largest consumers of gas in the market. If that volume leaves the main chain, the rest of the transaction will also pay much less in gas costs.

The existence of Layer 2 scaling solutions takes the strain off the backbone. This benefits gas prices for traders on both sides, reducing transaction costs for everyone. It is important to note that rollups are a complex and experimental technology, which means that the launch of Arbitrum certainly will not go without problems. Only traffic, time, and attacks will help create the perfect Layer 2 scaling for Ethereum.

Disclaimer: The author held ETH and several other cryptocurrencies at the time of writing.

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