Do you like high gas fees? Slow transaction times? Neither do we, so let’s discuss scaling!
A Layer 2 Solution is a network deployed on top of a Layer 1 (such as ethereum) in order to take pressure off of the Layer 1 network. In the case of Ethereum there are many L2’s available today! We’re going to discuss two of these today, namely Optimism and Arbitrum!
So, what are Arbitrum and Optimism?
Both Arbitrum and Optimism are Layer 2 solutions on the ethereum blockchain made for deploying dApps. Arbitrum uses a technique called transaction rollups in order to batch transactions, execute them on the arbitrum layer, and then use the ethereum chain to ensure accuracy. Optimism uses a different type of rollup called an optimistic rollup. The optimistic rollup publishes the minimum amount of information possible, and only shares proofs in the event of a discrepancy. Optimism has many dApps deployed on it today including Uniswap, and Synthetix. The advantages of these solutions are two fold:
The first major advantage is scalability.
The Ethereum chain has a limited number of transactions that it can process per second - approximately 14 transactions per second. This is a major issue because the demand on the ethereum network is approximately 1.28 million transactions per day. The parabolic rise of DeFi over the last 2 years has put tremendous demand on the Ethereum network. The more complex dApps have gotten, the more transactions are required to fulfill new functions. For example a decentralized exchange (DEX) may require 3-4 transactions to fulfill a swap. A lending protocol can be the same. NFT minting, which has seen incredible growth in 2021 specifically, can demand hundreds of transactions to mint one series of NFT’s. The ability to use sidechains, rollups, and other techniques in order to process more transactions without clogging the network makes Layer 2 solutions very appealing.
The second major advantage of Layer 2 solutions is low transaction costs
In May 2021, Ethereum transaction fees reached an all time high of $68.72 per transaction. That was for a simple token transfer, interacting with complex smart contracts can make that fee many times higher. These fees make Ethereum prohibitive to use for smaller users. One of the core tenets of web 3.0 is the idea that anyone of any wealth level is able to participate in the decentralized financial ecosystem. Arbitrum and Optimism both offer significantly lower transaction costs, however you will still have to pay a normal Ethereum transaction fee to send your Layer 1 ETH to the Layer 2 of your choice. Once on layer 2, you will pay much lower fees, the exact amount depending on the L2 among a few other factors.
The Ethereum 2.0 update will switch Ethereum from the Proof of Work consensus mechanism pioneered by Bitcoin, to Proof of Stake. This will have major impacts across the network including increasing scalability, security, and lowering the environmental impact of mining. The switch to Ethereum 2.0 is currently underway, with the full transfer expected to take place in 2022.
You may be asking yourself, what do Layer 2 Solutions, Ethereum 2.0, and specifically Arbitrum and Optimism have to do with CertiK? We keep a close eye on the DeFi and crypto communities in order to help us meet our goals of continuously delivering value through security insights and data. In the interest of driving these goals, we have gone ahead and integrated both Arbitrum and Optimism to Skynet. This means that all projects launching on either Optimism or Arbitrum will have full access to the Skynet monitoring and analytics suite should they choose to enable it for their project. The resources committed to bringing this feature were quite intense, in fact we had to pull all data off of both of these chains in order to integrate them with Skynet. The fact that both of these are EVM compatible made integration easier than it otherwise would have been.
The future of the DeFi world will include many L1 and L2 solutions working in unison via cross chain bridges. This expansion into a multi chain, yet interoperable, world will improve access for all to decentralized finance, art, gaming, and more. In terms of continuing expansion of our security insights, CertiK will integrate new Layer 1 and Layer 2 solutions as well as cross chain bridges. Skynet will integrate cross-chain monitoring allowing us to provide our unique data across chains, bridges, and protocols ensuring accuracy of data on the Security Leaderboard.