(Bloomberg): New technology that promises to solve Ethereum’s growth woes is gathering steam, raising the stakes that one day most of the network’s transactions may not take place on its own blockchain .
For years, slow speeds and high transaction fees have plagued the network that underpins the $550 billion cryptocurrency ether, home to the most popular blockchain applications. its weaknesses have allowed new competitors such as solana and avalanche to gain ground. however, the help of so-called layer 2 technologies, or stacks, could be a solution.
Digital ledgers like ethereum are designed to slow down and become more expensive as their popularity increases. But these layer 2 projects, many of which have only recently debuted, can extract transaction data from ethereum, compress it, and publish it back to the original chain for a fraction of the time and cost. so far, the user base is relatively small. But the rapid growth is raising expectations that ethereum will not only be able to avoid competition, but that other blockchains could adopt similar scaling solutions.
If the technology takes off, networks like ethereum may only be used directly for very large transactions in the future, with most activity taking place on layer 2 networks.
“That’s where we’re headed with ethereum,” said jeff dorman, chief investment officer at arca, a digital asset investment manager. “It’s a good problem to have. it’s that old yogi berra who says ‘no one goes to that restaurant anymore because it’s too crowded’ – of course it’s too crowded because everyone goes there! it will take some time to scale properly, but it will definitely work out because there is demand for it.”
Layer 2 solutions, including arbitrage, looping, optimism, and starkware, are leading the charge, thanks in part to their adoption by cryptocurrency exchanges. Rollups can provide a huge competitive advantage by making it significantly cheaper to trade Ether and other Ethereum-based currencies. a transaction that could cost merchants $50 and take 14 seconds to confirm directly on ethereum could cost less than a penny and happen instantly, according to the program.
Dydx Decentralized Exchange moved to Layer 2 in April and its daily transaction volume reached that of Coinbase Global Inc. for a day this fall as merchants, in part, liked its lower rates. Additionally, Binance, the world’s largest crypto exchange, integrated with Arbitrum in November and Coinbase is also working on Layer 2 integrations.
“They are at the center of ethereum’s future,” Tim Beiko, a computer scientist who coordinates ethereum developers, said of layer 2.
About $7 billion of value is locked in layer 2 chains, up from just $48 million at the beginning of the year, according to tracker l2beat. however, there have been barriers to adoption. it can take a week to move funds from the arbitrum network to ethereum without additional technology called bridges. transaction fees may still be too high for many apps. and there are still not enough popular ethereum apps that use stacks.
“if I can use layer 2, I’d rather use it, because I don’t want to pay all the fees,” said david mihal, who runs a few sites that aggregate layer 2 stats. “but of course the problem with any string new is to get these network effects. I still use ethereum layer 1 more than layer 2, because a lot of the fun apps are still there.”
however, further development could encourage further adoption. Ethereum is currently considering a proposal from its co-founder, Vitalik Buterin, that could reduce Layer 2 transaction costs fivefold. More hoards are issuing tokens, offering followers additional incentives. funding is being wasted. and existing companies are redoubling their efforts. Polygon, whose token has a market cap of $14 billion, is working to expand its capabilities, and Starkware is implementing a way to further scale and reduce costs in the coming months.
“Today, Ethereum could look like Manhattan in the mid-17th century,” said Starkware CEO Uri Kolodny. “Farms and manufacturers are all producing there. what we’re doing is we’re the skyscraper technology that uses the same footprint and now serves many, many more people. we believe this can be built to whatever height is needed.”
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