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Exponential scaling + low fees = tokens go up

Introduction

In the beginning, Vitalik Buterin created Ethereum and a token to go with it. Eventually, everyone started using Ethereum. Using it too much. Using Ethereum so much that it became unusable for the vast majority of market participants*.* Due to its high transaction costs, Ethereum became a bit of a rich man’s game, through no fault of its own. Gas fees took over, making those with a smaller bankroll seethe and shout at the sky (Ethereum devs).

Want to trade $100 in USDC for ETH? Cool, better be willing to pay $123 in fees to accomplish that.

Quickly, the market saw the alternative L1s versus Ethereum movement play out, with L1s (like Solana) experiencing huge gains, all while touting lower fees and more capable scaling solutions. Just recently, we saw Avalanche gain (yet another) Su Zhu seal of approval, sending it to ATHs and the top 10 coins by market cap list.

As all this has been happening, Ethereum has been awfully quiet. The current champion of the L1s has remained in Bitcoin’s shadow for far too long, despite an overwhelming majority of crypto transactions taking place on the Ethereum network. Many even believe Ethereum to be undervalued as a token after advancements like EIP-1559 and the soon to come Ethereum 2.0 update. Ethereum’s price action has been relatively positive, showing more upside than Bitcoin at times, and performing better on the downside. Unfortunately, not all is well.

Because of Ethereum’s abundance of users, the network is clogged to the point of absurdity. It would not be recommended to shill Ethereum to any of your “norm” friends, as they probably wouldn’t want to continue using it after catching a glimpse of the transaction fee(s). They’d be much better off doing their dirty work on another L1, and believe me - there are plenty.

The blockchain trilemma has long been disputed in the cryptocurrencies community, and Ethereum’s situation is one of frequent debate. Choosing to prioritize decentralization and security over scaling, Ethereum has unfortunately had its popularity catch up to it. While other blockchains like Avalanche and Solana prioritized the latter two over decentralization, they have been much more useable by newer users with smaller bankrolls. Their extremely low fees appear almost nonexistent when contrasted to Ethereum’s, making them clear winners in the short term.

But what if I told you there was a solution (actually, a few of them) that set out to eventually scale Ethereum to 100,000 tps?

Let there be rollups with a positive attitude

I’ll start by giving you three names: Arbitrum, Optimism and zkSync. These are three of the most popular and well known Ethereum rollups currently on market (in some form). For the uninformed, a rollup is a solution that processes transactions off-chain, typically to improve network speed and lower fees for users. The two types of rollups are zero-knowledge rollups and optimistic rollups, which we will explain in detail further along. Of these three, two of which (Optimism and Arbitrum) utilize Optimistic rollups, while the other (zkSync) achieves scalability through zk rollups.

Optimistic rollups

Optimistic rollups move pretty damn fast, and this is because they don’t actually compute transactions, rather just send them in batches. Ethereum’s need to process and validate every transaction is what unfortunately slows it down, giving Optimistic rollups the opportunity to move much faster. With faster speeds, the network is able to operate without congestion, therefore lowering fees. This process is evident when utilizing Arbitrum and Optimism, as transactions are commonly less than 0.001 ETH - a stark contrast to the high fees over on Layer 1.

Optimistic rollups achieve this by assuming (rather optimistically, wink wink) that every transaction sent is good and that no bad actors are working to bring the network down. By doing this, the L2 doesn’t have to validate the transactions as an L1 would, speeding the process up. These transactions are settled off of the Ethereum mainnet, and sent back later once approved.

To incentivize good behavior, bad actors are targeted and if proven to be acting not in good faith, lose a bounty of money they posted. Those who catch the wrongdoers are given this sum, therefore leading to a cat and mouse type game where good behavior is monetarily rewarded.

Arbitrum and Optimism are probably the two biggest examples that are live right now, and after explaining zk rollups, you’ll get a better understanding of why that is.

The other L2 that might be better

Moving ahead, it is clear to me that Optimistic rollups will inevitably get beat out by zk rollups. While definitely a step in the right direction, there was simply never enough momentum or excitement behind these scaling solutions. Sure, a bunch of people on CT used them and probably were able to qualify for an airdrop (if that ever happens) but normies were never able to migrate to L2. Why is this?

Well, in my opinion, there just wasn’t enough development and not enough of a use case. Not all coins were compatible for trading on Optimism and Arbitrum, and most dApps weren’t appealing for the average crypto enjoyoooor. Sure, if these had really taken off, we’d be in a different scenario at this point in the L2 hype cycle. With more users comes less responsibility and need to innovate - just look at Opensea. Had they been able to accumulate a huge portion of active (real) users, it would be unlikely that zk rollups would be dominating the narrative like they currently are.

After all, does the average Opensea user really care the site isn’t decentralized? Would the average user of Optimism or Arbitrum really care the tech wasn’t the absolute best, as long as fees were 10-100x cheaper? I’ll let you come up with an answer.

To summarize, zk rollups will rule the world, let’s find out why.

The differences between Optimistic rollups and zk rollups lays in the processing of transactions. Where O-rollups (yeah, using that abbreviation from now on) assume all transactions are good, zk rollups simply generate a validity proof to verify cryptographically if a batch of transactions is valid. Both of these solutions are very fast, but zk rollups are faster as the proof is instantly verified when sent to the L1. With O-rollups, this takes longer as potential fraud must be verified and every transaction can be disputed. Going deeper, zk rollups have a much faster time to finality, helping to clean up the EVM and avoid an overabundance of pending transactions on-chain.

Looking at the leader in zk rollup technology, zkSync plans to release zkSync 2.0 sometime soon, with full EVM compatibility. While there isn’t a lot to do at the moment besides minting an NFT and depositing money, there will soon be much more activities for the young and hungry degenerate. While Uniswap is not currently live on zkSync 1.0 (or whatever version we’re on), you can still utilize UniSync, available on testnet. Once zkSync 2.0 is out, expect many protocols and dApps to migrate over.

Through the use of zk rollups and zkSync’s zkPorter technology, they plan to scale Ethereum to over 100,000 tps, with a goal of achieving this in half the proposed time. Through exponential growth (versus linear), zkSync will outpace any other L2, with a goal of onboarding more users to bring affordable and accessible transactions on the Ethereum network.

In regards to the actual cryptography and math behind zero-knowledge rollups, that’s a little outside my wheelhouse at the moment. If you’re looking for more on that, I’d highly recommend anything referenced on ethereum.org as they’re one of the best resources for those looking to learn more about Ethereum (duh).

L2s will change the market / Conclusion

At the moment, only a few notable L2s have tokens, these being Looping ($LRC) and Boba Network ($BOBA). As for the others, it is general consensus that there will be an airdrop for early and active users of the protocols. In zkSync’s docs, they explicitly state that there will be a native token, and it would only make sense for Arbitrum and Optimism to follow in their footsteps. Maybe one day Opensea will get some competition and this scenario can play out.

L2s are super easy to use. As long as you know how to input a custom network on MetaMask, you’re good to go. It’s as easy as that.

The UX for these are also very clean, with my personal favorite being Optimism. Arbitrum could definitely use some work in this department, and I’d be lying if I said zkSync didn’t need a change, too.

Once we get to a point where tokens have released, users are going up and L1 gas fees continue to skyrocket, I think we’ll see a huge shift toward L2s out of necessity. With all the Ethereum versus Avalanche versus alternative L1 wars that have been going on, it is of utmost importance for Ethereum and its developers to prove they can scale. Once users see the ridiculously low fees, they’ll be convinced. That’s all it takes, and the hardest part is getting them to try the L2s. In their docs, zkSync even said that token holders will be the ones who are the “guardians” that will sign and approve blocks of transactions. This would be huge, as becoming a guardian would warrant demand for the native token. As far as I know, this is only the plan of zkSync, and I’d be interested to see how other L2s incentivize token holders.

In my opinion, we will see the L2 narrative heat up over the next three months. As more catch on and learn about the benefits and how simple it is for Ethereum to scale, the market will take an affinity towards L2 tokens and other tokens that can benefit from this narrative shift. As far as general market conditions go, I think we’re fine. Sure, we’ve dipped a bit from recent highs but it really doesn’t matter. Everything will go up more, don’t invest more than you’re afraid to lose, blah blah blah. I’ll continue to use L2s and invest in this narrative, and I suggest you do the same if you wish to “make it” one day.

I like the tech. If it isn’t obvious enough, I crown zkSync the winner, the one that will inherit the earth. This doesn't mean I don’t want to govern the other L2s (believe me, I will accept all governance given to me) but I know who I’m betting on to succeed in the loooong term. I also think this could lead to a slow and painful death for all of the alternative L1s, and genuinely believe Ethereum will never be flippened by any other coin. Sure, some may find their niche. Solana might succeed with gaming, Avalanche might do whatever the hell it’s good at, and Cosmos might do very well being decentralized. At this point in time, it’s tough to tell, but I do know that it would be silly to bet against Ethereum.

This aritcles is from knower which contains a lot of insights, if you find this post helpful, please give him a follow.