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Understanding Ethereum Layer-2 Networks

Layer-2 (L2) networks are Ethereum scaling solutions that leverage separate blockchains extending Ethereum and benefiting from its security guarantees. These solutions aim to enhance network efficiency and capacity without sacrificing decentralization or security.

Why Layer-2 Matters

The blockchain trilemma suggests that a basic blockchain architecture can achieve only two out of three desirable properties: decentralization, security, and scalability. Ethereum's popularity has led to network congestion and rising gas prices, emphasizing the need for scalable solutions that maintain decentralization and security. Layer-2 networks offer such a solution.

Key Benefits of Layer-2 Networks

1. Lower fees
2. Similar security as Etheruem Layer-1
3. Expanded use cases

Ethereum Layer-2 Types

• Sidechains
• Optimistic Rollups
• Zk Rollups
• Validium

Sidechains: The Old Way of Scaling Ethereum

An Ethereum sidechain is a separate, independent blockchain that runs parallel to the Ethereum mainnet. It is designed to enhance the scalability, throughput, and functionality of the Ethereum network by offloading some transactions and computations from the mainnet. Sidechains can interact with the Ethereum mainnet through a two-way pegging mechanism, allowing for the transfer of assets between the two chains.

Although they offer efficient transaction processing and lower fees, sidechains involve trade-offs as they don't post state changes and transaction data back to Ethereum Mainnet.

Pros:

• High throughput: Sidechains can process thousands of tps, helping to alleviate congestion on the Ethereum mainnet.
• Customizability: Allows for the implementation of custom consensus mechanisms and rules, providing flexibility for specific use cases.
• Faster transactions: Sidechains can provide faster transaction confirmation times.

Cons:

• Security trade-offs: Sidechains rely on their own security mechanisms, which may not be as robust as Ethereum's mainnet.
• Interoperability limitations: Cross-chain communication can be challenging, and may require additional solutions to facilitate seamless transactions between the mainnet and sidechains.
• Centralization risks: Some sidechain implementations can introduce centralization risks, depending on the consensus mechanism and validator set.

Top sidechain projects today include

• Polygon PoS
• Skale
• Gnosis Chain
• Metis Andromeda
• BitDAO’s Mantle

Optimistic Rollups: A Secure and Efficient Solution

Optimistic Rollups aim to provide increased security and efficiency compared to sidechains, though transactions may cost more gas. Optimistic Rollup is a Layer-2 scaling solution for Ethereum designed to improve transaction throughput and reduce fees while maintaining a high level of security and decentralization. It does so by bundling multiple transactions together into a single "rollup" block and submitting it to the Ethereum mainnet. The key features of Optimistic Rollups include:

To ensure the security of the system, Optimistic Rollup relies on a concept called "fraud proofs." If a user suspects that an invalid transaction is included in the rollup, they can submit a challenge, known as a fraud proof, to the mainnet. If the challenge is successful, the rollup is reverted, and the invalid transaction is nullified. This mechanism ensures that the rollup maintains the security and integrity of the Ethereum network.

Pros:

• High throughput: Sidechains can process thousands of tps, helping to alleviate congestion on the Ethereum mainnet.
• Customizability: Allows for the implementation of custom consensus mechanisms and rules, providing flexibility for specific use cases.
• Faster transactions: Sidechains can provide faster transaction confirmation times.
• Direct Compatibility with Ethereum Virtual Machine (EVM)

Cons:

• Security trade-offs: Sidechains rely on their own security mechanisms, which may not be as robust as Ethereum's mainnet.
• Interoperability limitations: Cross-chain communication can be challenging, and may require additional solutions to facilitate seamless transactions between the mainnet and sidechains.
• Centralization risks: Some sidechain implementations can introduce centralization risks, depending on the consensus mechanism and validator set.

Top Optimistic Rollup projects today include:

• Arbitrum One
• Optimism
• Boba Network
• Coinbase BASE

Zk Rollups: Advanced Security and Scalability

Zk Rollup is a Layer-2 scaling solution for Ethereum that aims to improve transaction throughput and reduce gas fees while maintaining a high level of security. It leverages a technology called zero-knowledge proofs (zk-proofs) to validate transactions and ensure their correctness.

These cryptographic proofs allow a prover to demonstrate the correctness of a statement (such as the validity of a transaction) without revealing any additional information. This means that, unlike Optimistic Rollup, zk-Rollup does not require a challenge period or fraud proofs. The mainnet can trust the rollup block once the zk-proof is verified.

Zk Rollups offer advanced security and scalability, but may have higher fees and limited EVM compatibility.

Pros:

• High throughput: Can process thousands of tps, reducing network congestion.
• High security: Relies on zero-knowledge proofs for validity, ensuring only valid transactions are included.
• Fast withdrawals: As opposed to Optimistic Rollups, zk-Rollup withdrawals are much faster, with shorter challenge periods.

Cons:

• Limited smart contract compatibility: zk-Rollup currently supports a limited set of smart contract functionalities compared to the EVM.
• Higher computational requirements: Zero-knowledge proofs require more computational power, which can increase the cost of transactions.

Top Zk Rollup projects include:

• zkSync Era
• StarkNet
• Polygon ZKEVM
• Loopring
• Consensys Linea
• Scroll
• Taiko.

Validium: A Specialized Scaling Solution

Validium is a scaling solution that utilizes off-chain data availability and computation, combined withfeatures of zk-Rollup and zk-SNARKs (a type of zero-knowledge proof).

This offers increased throughput but with some trade-offs. While transactions are still being verified on chain, their actual data is no longer stored on chain. This more centralized approach allows Validum projects to scale at near zero transaction costs and super high throughput.

Pros:

• High throughput: Validium can process thousands of transactions per second, significantly increasing the throughput of the Ethereum network and reducing network congestion.
• By keeping data off-chain, Validium can significantly reduce on-chain data requirements, resulting in lower transaction costs.
• Fast withdrawals: As opposed to Optimistic Rollups, zk-Rollup withdrawals are much faster, with shorter challenge periods.

Cons:

• Data availability concerns: Since data is stored off-chain, there are potential trust and availability issues if data providers go offline or act maliciously.
• Limited smart contract compatibility: Validium currently supports a limited set of smart contract functionalities compared to the Ethereum Virtual Machine (EVM). This can restrict the types of applications that can be built on Validium.
• Interoperability limitations: Most Validium based Layer-2s are custo built to serve one specific need. Thus Integrating Validium with other Ethereum-based solutions might require additional development efforts.

Top Validium Layer-2 projects today:

• ImmutableX
• Sorare
• Apex
• Rhino.fi
• Myria

Important note: Validum Layer-2 project’s success is mostly dependent on the application’s user adoption and growth, instead of the technology of the layer-2. Therefore I would not place any Validium project in the category of Layer-2 infrastructure projects. If the core application of a validum Layer-2 does not have users, the whole layer-2 fails as no other projects are built on the network

Ethereum Post Shapella Upgrade

Ethereum (ETH) holders have a reason to celebrate! The cryptocurrency has surged past the $2,100 mark for the first time since May 2022, thanks to the successful implementation of the Shappella upgrade. Despite initial concerns about the upgrade increasing selling pressure on ETH, it has instead accelerated the upward trend.

Ether price cracks $2K amid staking withdrawals enabled post-Shapella upgrade

The movement in price follows a successful network upgrade that allows the withdrawal of staked Ether.

CointelegraphEzra Reguerra

The crypto community has responded positively to the Shappella upgrade, with many traders increasing their long positions in ETH. Open interest and futures contracts have reached impressive levels, reflecting the growing bullish sentiment surrounding the cryptocurrency.

One of the major highlights of the Shappella upgrade is the newly enabled staking withdrawals. While some feared that the fresh supply of Ether hitting the market could lead to a price dump, the opposite has occurred. ETH not only crossed the $2,000 milestone but has also managed to maintain its value.

Crypto analytics firm Glassnode had predicted that the upgrade's impact on Ether's price would be minimal, and so far, their prediction holds true. Ethereum co-founder Vitalik Buterin shared his optimism about the network's current state while acknowledging that there's still work to be done.

Lastly, major crypto exchanges such as Coinbase, BitGo, Binance, and Kraken have either enabled or announced their support for ETH unstaking, further solidifying the positive outlook for Ethereum following the Shapella upgrade.

With all these developments, the future certainly looks promising for Ethereum. I'm excited to see how Ethereum continues to evolve and shape the industry. So, keep an eye on this space – great things are on the horizon!

Quick Takes

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Montenegro Central Bank and Ripple Join Forces for CBDC Pilot

Twitter Partners with eToro to Enable Stock and Crypto Access for Users in Finance Expansion

Hong Kong Gathers Government Support to Develop Next Global Web3 Hub Mainland China Crypto Firms in Bid to Strengthen Finance Hub Status

PeckShield Estimates $10 Million Exploit Involving Aave V1 and Yearn Finance

Uniswap Wallet App Receives Approval from Apple iOS App Store

Mastercard Launches Web3 Music Accelerator, Abandons Free NFTs

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