Scalability through add ons
Ethereums dominance as the leading blockchain has been under fire lately as competitors such as Binance Smart Chain and Polygon started attracting users. In addition, several high-profile Ethereum dapps moved over to their chains.
The main reason these alternatives are finding success is due to high transaction fees on the Ethereum blockchain and an increasing number of smaller investors flooding into the cryptocurrency space. These investors are looking for a low fee, fast transaction solution that is usable when investing hundreds and not thousands of dollars.
A surge in the usage and popularity of decentralized Finance (DeFi) and yield farming increased the usage of dapps resulting in more smart contracts being deployed to the Ethereum network. As usage grows, the amount of transactions increases as well, making it more expensive for users. To support an ecosystem of DeFi applications that can reach their full potential, Ethereum needs to scale.
Simply put, Ethereum cannot support the growing number of applications and users as it increases costs and slows the confirmation time of a transaction. Applications that require transactions with smaller amounts aren’t suited for this environment. Gaming dapps running on Ethereum suffered particularly badly in 2020.
The concept of rollups dates back to 2014, described as Shadow Chains by Ethereum co-founder Vitalik Buterin. As developers failed with solutions like Plasma, they have been led back to Shadow Chains — now known as rollups. While Plasma can scale millions of transactions per second, it’s not compatible with the smart contracts that power many of the DeFi applications which have surged in popularity.
A rollup allows off-chain aggregation of transactions inside an Ethereum smart contract, which reduces fees and congestion by increasing the throughput of the blockchain from its current 15 transactions per second (tps) to more than 1,000 tps.
Think of the way that your debit card or credit card operates when moving funds. These days it’s possible to push your money through several applications within a few minutes. For example, from your fiat bank account to a top-up card like Revolut or Monza on to an exchange like Coinbase. These transactions seemingly occur in seconds but there are processes happening in the background that take longer. But as a user, you just need peace of mind that the money is available and safe.
The two approaches to rollups are Optimistic Rollups, and ZK-Rollups and they differ in the way they ensure validity. For Optimistic Rollups, validity is ensured by a fraud-proof and synchrony assumption, while for ZK-Rollups, validity is ensured by zero-knowledge proofs.
Optimistic Rollups can support both simple payments and complex smart contracts, and 80% of the Ethereum Virtual Machine (EVM) tooling can be transferred over. Given that most costs on Ethereum are complicated, Optimistic Rollups are seen as an immediate solution. On the other hand, it is more difficult to port over smart contracts seamlessly from Ethereum’s main chain to ZK-Rollups. As a result, ZK-Rollups are viewed by Ethereum as a much more promising solution in the long term.
What are Optimistic Rollups?
The idea of Optimistic Rollups was first detailed by a post from John Adler in the Ethereum Foundation research forum in July 2019 and is much closer to the original outline of Shadow Chains mentioned earlier.
Optimistic Rollups provide near-instant transactions, smart contracts, and they do not require gas, except for aggregator fees. The transaction speed enabled by Optimistic Rollups is approximately 100 transactions per second with the potential to increase that to 500 tps.
Secure autonomous smart contracts are enabled on layer-2 through the use of fraud proofs and on-chain data availability. While ideally execution is not performed on the chain. Since blockchain data is made available without processing it on the main chain, higher throughput and a better user experience become possible.
In essence, rollups can add an extension to Ethereum that allows the batching of transactions to be processed quickly. Furthermore, these transactions can later be settled on the Ethereum mainnet. This technology would give users a faster and smoother experience, while the technology keeps working in the background.
What are ZK-Rollups?
In short, ZK-Rollups are a layer-2 scaling solution in which all funds are held by a smart contract on the main Ethereum chain. Meanwhile, it performs processes and storage off-chain where the validity of the sidechain is ensured by zero-knowledge proofs. Zero-knowledge proof is a method by which one party (the prover) can prove to another party (the verifier) that they know a value X, without conveying any information apart from the fact that they know the value X. The essence of zero-knowledge proofs is that it is trivial to prove that one possesses knowledge of certain information by simply revealing it; the challenge is to prove such possession without revealing the information itself or any additional information
Initially proposed by Barry Whitehat in 2018, ZK-Rollups have the same security guarantees as the Ethereum blockchain, and the potential to produce blocks in under a minute and increase throughput to as high as 2,000 tps.
It is vital to understand that Ethereum does not need saving and really just needs some help to deal with the massive influx of users that have arrived due to the popularity of decentralized finance and now non-fungible tokens. Still, Ethereum 2.0 is significantly far away that competing blockchains have already had time to establish their own ecosystems.
When ETH 2.0 does finally launch, it could arguably become just another one of the options for dapp developers. No doubt It should improve things for the Ethereum ecosystem, but it will be interesting to observe if 2.0 can once again make Ethereum the only viable option. The increasing popularity of parachains and other bridging technology would suggest that sole dominance is no longer an option.
Learn more about sidechains and layer-2 solutions