The Ethereum blockchain is moving to a Proof-of-Stake mechanism. Merging the network will make transactions within the blockchain faster and cheaper, reduce grid electricity consumption by 99%. Everyone from crypto has been expect for this dramatic event for more than seven years. But how does this hard fork affect L2 solutions, which were created precisely to solve the problem of scalability and low transfer speed in Ethereum?

In centralized finance, there are payment systems like Visa and Mastercard, where processing centers confirm transactions, allowing the network to treat 65,000 financial transactions per second. However, due to decentralization, Ethereum is not able to process more than 30 transfers. So, to solve the trilemma of scaling blockchain while maintaining decentralization, security, and ensuring fast transfers, Layer 2 solutions emerged (along with plans to migrate to POS, sure).

It is expected that with the transition of the Ethereum network to the Proof-of-Stake protocol, the number of transactions processed within the Ethereum blockchain will increase to 100,000 per second, which is even more than what Visa can process. But will there still be a need for L2 solutions?

When it comes to transaction speed and fee price, L2 solutions and the Ethereum blockchain will be on par after the transition to Ethereum 2.0. The scaling problem, however, will not go away in the long run as users of L2 solutions will directly switch to Ethereum due to low mainnet transaction fees. Thus, gas prices and network load will increase again, leading to a rebound in demand for L2 services, as people still want fast and cheap crypto transfers.

Starting in 2023, Ethereum developers plan to implement sharding to reduce rising transaction costs in the mainnet. This method means that transaction processing will take place in isolated groups of validators, which is another blow to decentralization after the network transitions to the POS protocol. Sharding could become an additional challenge for L2 protocols, the existence of which could again be called into question as off-chain scaling solutions need to offer even more benefits to their users, i.e. say something more than fast crypto transfers.

It is clear that not all projects will adapt to the new reality, but those that can evolve over time will remain on the market.

As you may know, processing operations outside of the blockchain enable high-speed transactions in L2 solutions. This scaling approach is known as rollups. There are two types: optimistic aggregates and ZK aggregates.

Optimistic accumulations are based on the following principle. A smart contract does not verify every transaction at Layer 2, but rather assumes that they are legitimate and true if no one disputes them.

Calculations are performed only on fraudulent transactions. Since optimistic rollups don’t perform any calculations by default, this solution can improve scaling by up to 10 to 100 times. This number is expected to get even higher with the transition to Ethereum 2.0. Some L2 projects using these Rollups are Optimism, Arbitrum and Boba Network.

In turn, Zero Knowledge Rollups combine hundreds of off-chain transactions into a single transfer and generate zero-knowledge cryptographic proof on the mainnet, known as ZK-SNARK. This allows a party to prove that it has certain information without revealing it. Such a function guarantees a high level of privacy in public blockchains and other networks.

ZK-SNARK is used to verify every block added to the network, eliminating the need to trust validators. While the Optimistic Rollups solution is based on the assumption that all validators act in good faith, ZK-Rollups verifies their honesty using a ZK-SNARK mathematical proof. All transactions take place at level 2, and ZK-SNARK is placed at level 1. It turns out that ZK-Rollup does not need to rely on the honesty of validators, and L2 network security is at the same level as the security of the main network.

In addition, ZK-Rollup has no delay when withdrawing funds from level 2 to level 1 since the proof of validity accepted by the ZK-rollup contract has already confirmed the transfer of funds. So, unlike optimistic rollups, there is no need for fraud checks, which can delay withdrawals for up to a week.

According to a recent speech by Vitalik Buterin at ETHSeoul, although Optimistic Rollups technology is more mature, Zero-Knowledge Rollups will replace Optimistic Rollups in the long run. The reason for this is that ZK-Rollups move funds to the mainnet faster because there is no seven-day withdrawal period, which can lead to wider adoption. That’s why in 10+ years, according to Buterin, Rollups will essentially all be ZKs.

Thus, to stay in the market after the transition to Ethereum 2.0, some layer 2 projects have already announced their intention to implement a computing environment called zk-EVM which will allow ZK-Rollups to execute all types of contracts. independently intelligent. Projects such as Scroll, zkSync and Polygon have already reported this.

In the long term, POS triggers the arrival of more users, as it opens the possibility of creating even more user-friendly applications that will match Web 2 solutions in terms of speed and quality of functionality.

Regarding market indicators, in the short term, the very news of the transition to POS is a bullish event because if the implementation is successful, the demand for ETH will increase and the price of L2 tokens could collapse . But we have to consider that under the hood is a staking mechanism. Currently, more than 13 million ETH are staked on ETH 2.0 at a price below $1000. Therefore, it is possible that after the ETH price rises, some funds will be released, but the market will gradually recover.

Thus, for L2 solutions to stay in the market, they must adapt to new changes and implement ZK-Rollups, ensuring fast transactions while maintaining network decentralization and security. Not only that, but projects need to consider the additional benefits they can provide to their clients. After all, one way or another, the demand for L2 solutions is likely to persist because Dex, Dapps, and metaverse projects will still require fast transactions.

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