The Challenge of Layer 2 ft. dYdX, Starkware and Polkadot
Some thoughts around the complexities of moving to layer 2 versus layer 1
Good morning - from here in Sydney! Apart from the sun shining bright and looking at engineers getting nervous about YAMs I wanted to dedicate this piece around where I think the future might look post-Ethereum. This probably isn’t going to be popular amongst maximalists but the facts in my mind look a little something like this:
Ethereum has found DeFi product market fit. 500gWei prices aren’t going to bother whales doing $100k transactions since it’s better than the traditional financial system.
People who aren’t doing transactions worth $100k such as DeFi plebs, NFT shenanigans and other use cases will start to suffer. These users will look for alternatives.
The alternatives are currently one of the following: Layer 2 OR another blockchain.
Layer 2 seems to be a magic bullet which will solve our problems and retain ETH’s value proposition. Not.
Why am I bearish on the last point and why am I excited about dYdX & Starkware simultaneously? Let’s start unpacking.
The Fun of Layer 1
Assuming you’re actually a power user of the blockchain and don’t just speculate about things you haven’t used, Layer 1 is incredibly fun to use. Everything you do is easily viewable by everyone, spinning up or connecting to a node to get existing data or historical data is super easy. The mantra of don’t trust, verify extends itself in really cool ways.
That’s only just the beginning.
All your favourite protocols work seamlessly with each other
Developers aren’t afraid of changes given the large amount of standards and support by the entire ecosystem
Tooling is superior and maintained by a lot of people
Block explorers are incredibly advanced (Etherscan is so complex in the work it does behind the scenes)
Large pools of liquidity are available on-chain
Most of these you already or take for granted, but the difference which I really would like to reiterate here is that Layer 2 is literally a whole new blockchain on a blockchain with some extra complications…
What they don’t tell you about Layer 2
It really frustrates me whenever people say “oh, scaling is going to be solved by <insert layer 2 shill here>”. Yes, it solves part of the problem but it introduces more at the same time. The reason why I speak about this so strongly is the fact that I’ve worked closely with the Starkware team during my time at Gods Unchained and managed to see some of the issues of Layer 2 firsthand.
For the record, I love the Starkware people and have incredible respect for the boundaries of computer science they’re pushing + the amazing human beings who work there. This isn’t meant to be a downside of Starkware, but instead any layer 2 system include SNARKs, Rollups and everything else you can think of. I’m not bearish on layer 2, I’m simply explaining some of the less talked about aspects of layer 2.
Let’s take a look into how any layer 2 system works at a conceptual level:
You have a bunch of data/state transitions done off-chain and validated by some sort of special sauce (SNARKs/STARKs)
The special sauce will generate some sort of proof that everything was indeed valid and no-one spent more money than they have or did something that is against the constraints of the system
That proof is submitted on-chain periodically and serves as a checkpoint for the entire layer 2 ecosystem anchoring the security to the main Ethereum chain
Users can enter/exit the layer 2 ecosystem instantly or after a delay (depends on the implementation)
It’s taken many years of research for us to get many flavours of this working, live on main-net. However the bit which none of these has solved perfectly is that of data-availability. What’s that you may be asking? Well in a traditional blockchain system, you people who run archive nodes which store each transaction and can reconstruct the state at any point in time or the current state very easily. In all layer 2 systems you need to hope/pay someone will store all the data for you. It’s not that it’s impossible, it’s just that you don’t have the same open-ness of the system compared to a regular blockchain and more or less end up with the same state bloat problems L1 chain nodes face. Starkware attempts to solve this with certain parties who have to sign off on state transitions as an acknowledgement that they do have the data and have saved it. So what’s the larger implication of this well? Well the open-ness of data is far more limited. How?
You can only query data based on the benevolence of the API providers of the data
You need to re-construct block explorers from scratch which takes an enormous amount of effort and can be really hard to reconstruct the level of detail we see on things like Etherscan
So what does this mean?
I’ve been thinking about this myself to be honest and I think this integration of dYdX + Starkware AND Synthetix L2 will be very large data points about where the future of crypto lies. So let’s run through the idea of maze of a few possible simulations and scenarios:
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