Are Current Ethereum Layer 2 Networks Cheap Enough?

With simple contract interactions now costing in the hundreds of dollars, Vitalik Buterin has shifted his focus to scaling Ethereum. Demand for blockspace on the mainnet has skyrocketed over the last year, and transaction fees are pricing many users out of using the most coveted decentralized finance (DeFi) and non-fungible token (NFT) ecosystem.

This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum 2.0 and its sweeping impact on crypto markets. Subscribe to Valid Points here.

How is this being solved in the short term without sacrificing decentralization? Buterin claims, “Rollups are in the short and medium term, and possibly in the long term, the only trustless scaling solution for Ethereum.” Plenty of alternative layer 1 blockchains have looked for expandable systems outside of vertical rollups but have sacrificed liveliness, state growth and more, something the Ethereum developer community has taken a strong stance against.

Are current layer 2 companion networks cheap enough?

Read more: Ethereum Could Hold Lead as Dominant Smart-Contract Blockchain: Coinbase Analysts

“Rollups are significantly reducing fees for many Ethereum users: Optimism and Arbitrum frequently provide fees that are ~3-8x lower than the Ethereum base layer itself, and ZK rollups, which have better data compression and can avoid including signatures, have fees ~40-100x lower than the base layer,” said Buterin.

Even without token subsidies, these rollups have seen significant adoption and are highlighting the demand for cheaper access to Ethereum. Arbitrum, for example, currently has over $2 billion in total value locked (TVL) and is home to a DeFi ecosystem that is beginning to show some promise. However, Buterin believes rollup fees must be even cheaper if they are going to encourage adoption in payments, gaming, and Web 3-focused products.

A future of 'blobs' and sharding on Ethereum

While the merge to proof-of-stake is still several months away, and sharding is likely even further down the road, Buterin proposed to implement an aspect of sharding before the upgrade is actually incorporated into Ethereum. By introducing “blob-carrying transactions,” a type of data-intensive transaction that will be implemented under sharding, rollups would have 1-2 MB of dedicated data space for posting blocks to mainnet.

The extra space would create a separate fee market, allowing fees to be substantially lower while only a few rollups access the system. This means the early implementation would only improve scalability by a fraction of what is capable under sharding, but it would provide short term relief to current users of layer 2s.

Of course there are drawbacks to the implementation. First, rollup teams will have to make the switch from utilizing calldata under their current format to blob-style transactions after the upgrade. Also, the implementation would increase the size of the short-term execution payload, which could put mild stress on the network’s validators. Buterin has also suggested counter proposals that would bring short term relief to high rollup transaction fees, like EIP 4488, which would lower the costs for transactions using calldata instead of switching to a new type of transaction entirely.

However, once sharding is implemented the same rollups would still have to make this change to stay competitive with other layer 2s on transaction fees. Regardless, the increased load will be temporary because blob data would only need to be stored for 30 to 60 days before expiry. The upgrade would be a big first step in making Ethereum accessible, thereby eliminating one of the largest arguments against the network at the moment. Cheap fees into perpetuity may just be enough to take market share back from the alternative layer 1 ecosystems, but the fight for dominance is likely just getting started.

Pulse check

The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

Validated takes

• Vitalik Buterin, Peter Szilagyi and Emin Gun Sirer debated the key differences in scalability between Ethereum and Avalanche. BACKGROUND: The Avalanche core team has made several claims that its consensus model has improved upon the “bottleneck” Ethereum is currently dealing with. Ethereum developers have long debated this, arguing the state growth of the nearly seven-year-old chain makes any easy scaling implementation a threat to decentralization.
• BuzzFeed News uncovered and revealed the identities of the Bored Ape founders. BACKGROUND: The founders of one of the largest NFT projects by both floor price and volume had developed and launched the NFTs anonymously, like many other builders in the crypto industry. The nature of open-source code and decentralization makes this uniquely possible, but BuzzFeed News and others have called into question the ethos of anonymity and sparked a wider debate.
• A U.S. Federal Reserve research team released a report on the drawbacks of stablecoins. BACKGROUND: Just weeks after the first stablecoin report that looked at the potential for payments in the future spoke highly of stablecoins, another central bank research team argued against the digital assets. Locking dollars up to back the stablecoins could create liquidity issues within the economy due to the lack of “safe, liquid assets,” the report stated. DeFi projects have continued to look for ways to create non dollar-dependent stablecoins, using collateralized crypto assets and algorithms to keep the assets at peg.
• Polygon raised $450 million from Sequoia Capital, Softbank and Tiger Global in a discounted token sale. BACKGROUND: Polygon now has a war chest to continue building its current ecosystem and simultaneously develop Ethereum scaling products Hermez, Miden, Zero and Nightfall. The team plans to use the capital to onboard the next billion users onto Ethereum and help keep developer talent around even during a sustained crypto bear market.

Factoid of the week

Open comms

Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site.