Scaling Wars
While the mainstream adoption of Ethereum’s use cases such as DEFI and NFTs can be observed in the increase of the price of Ether, it has also resulted in slow and quasi-unaffordable transactions. This has given rise to “Ethereum Killers” like Solana which through a Proof of Stake (POS) consensus mechanism with high parameters offer similar functionalities that are both cheaper and faster. The increase in Parameters however means that validators require significantly more expensive machinery to participate. This leads to centralization concerns and by proxy, to potential security threats among other issues such as downtime. Ethereum is also switching to a POS consensus mechanism but instead of increasing the Parameters, it chose the route of relying on Layer 2 solutions and focus itself solely on security.
The first Layer 2 solutions came in the form of Sidechains like Polygon. They are linked through a bridge to the main Chain and offer higher transaction throughput with lower fees, but once again at the expense of both centralization and security. They are now regarded as a temporary soft patch with the focus quickly turning to Optimistic Roll Ups. These perform transactions off-chain and later propose a state change on Ethereum’s main net with the “Hope” that their block is correct. Since they don’t compute the transaction, funds are locked for around a week’s time in case a fraudulent transaction is flagged. In that case, the Roll Up will run the transactions’ computation and the fraudsters’ funds will be slashed. The long lock-up period however makes it yet another soft patch.
Most of the industry have now come to the consensus that Zero Knowledge Proofs based ZK Roll Ups are the end game. MatterLabs owned ZkSync is a leader in the field. Unlike Optimistic Roll Ups, they need to provide a cryptographic proof of the validity of the transaction in a block before it is included. Transaction finality is improved as there is no need for verification. They can also bring some level of privacy to the Ethereum Blockchain as there is no need to publish all transactions on-chain but only the resulting balances. The originating account will however remain public knowledge. Since Zero Knowledge Proofs offer mathematical guarantees, protocols like ZkSync do not need to rely on many verifiers or participants to run Full Nodes. They can remain fully centralized. They are in fact mostly fully owned by Venture Capitalist Firms (VCs) rather than networks participants.
The amount of capital invested in such solutions by the likes of Andreessen Horowitz, Softbank or Sequoia Capital signals that they might indeed be the end game in terms of Ethereum scaling. This justifies the concerns raised by Twitter’s founder and Decentralization enthusiast Jack Dorsey. He recently stated that there is no such thing as a “Web 3.0” owned by the people but rather a “Web VC”. In other words, power might just be shifting from the hands of publicly owned Big Tech and Banks to privately owned VCs.
As Layer 1 solely focuses on Security and Layer 2’s scope increases, ownership is not the only concern. These protocols are effectively competing for the Value-Added part of the Blockchain Economy and could commoditize the Ethereum Network.
In an industry where many have dedicated time and resources with the only reward being that of the price appreciation of Ether, late coming VCs might just be executing a well-orchestrated hijack.