Dragonfly Partner: I worry that Rollup is born at the wrong time and will go unnoticed

This article is sourced from Chain News, authored by Haseeb Qureshi, a partner at Dragonfly Capital, and translated by Perry Wang.

The biggest story in Ethereum over the past six months has been the explosive growth in transaction demand. Transaction fees have reached all-time highs, and many ordinary users can no longer afford to use Ethereum.

Ethereum transaction fees in USD. Source: Coinmetrics

But don't worry. A savior is about to arrive.

What I’m referring to, of course, is Rollups (Layer 2 / L2 scaling solutions). Ethereum founder Vitalik has already designated Rollups as an important option for Ethereum's future scaling, and leading Rollup projects have now secured over $100 million in venture capital. Every major DeFi protocol has chosen a side in the Rollup solutions and will set up shop in these upcoming Rollups.

If you don’t know what Rollups are or need a refresher, here’s a brief summary:

A Rollup is a mini blockchain that inherits the security properties of the blockchain it is attached to. Even if the validators/nodes operating on the Rollups are untrustworthy, they cannot steal your funds (provided that the Rollups are implemented correctly).

There are two basic types of Rollup solutions: Optimistic Rollups and Zero-Knowledge Rollups (ZK Rollups). Optimistic Rollups are protected through fraud proofs—anyone can freely prove whether the computation is incorrect, while ZK Rollups are protected through cryptography—mathematical proofs confirm that the computation is correct. A more comprehensive introduction to Rollups is beyond the scope of this article; if you want to learn more, please check out Vitalik's article.

The beauty of Rollups lies in their complete trustlessness. If you trust Ethereum, you should trust Rollups. This is an impeccable scaling solution and has been welcomed by Ethereum leaders.

But now let’s look at the second biggest story in Ethereum over the past six months: the rise of Binance Smart Chain and Polygon (formerly Matic). These are not Rollups; they are more like sidechains—completely independent Ethereum clone chains that use a Proof of Stake (PoS) consensus mechanism. They essentially just use the ready-made Geth client, steal the consensus code, improve the Gas bottleneck, and use multi-signature bridges back to Ethereum.

Scaling has been achieved this way.

Comparison of transaction volumes: Polygon (green) vs Binance Smart Chain (black) vs Ethereum (blue). Source: Our Network

Both of these chains have soared in development, and now their respective transaction volumes exceed that of Ethereum itself. Other blockchains like Avalanche and NEAR are also rushing to launch their own Ethereum Virtual Machine (EVM) compatible systems that can connect to Ethereum.

The world now basically looks like this:

It’s almost like a sharding solution, with Ethereum 1.0 as the "beacon chain." Cross-chain transfers and messaging are facilitated by multi-signatures, temporary bridges, and of course, a few trusted parties. I call this architecture "poor man's sharding." This is how DeFi is practically scaling today.

But! This sad state of affairs will soon come to an end. Of course, Rollups will be ready soon.

I am excited about Rollups. I really look forward to them. They are disruptive and elegant, and they are designed so well.

But I am worried about whether users will be interested in Rollups. Here are the main concerns.

L2 Savior Complex

Let me tell you an old story.

Once there was a blockchain that could not scale. But then some very smart people invented trustless L2 technology to achieve blockchain scaling. Users were excited. Then, after years of effort, the smart people finally built L2. When users could finally use it, nobody cared anymore because they had already been using some other simpler, alternative solutions.

Does this story ring a bell?

Remember Lightning? People are just using WBTC now. Remember Plasma? People are just using xDai now. And now we are not waiting for Rollups; people are just using Polygon and BSC.

Great narratives can solve everyone’s problems. This story, the story of Rollup scaling, can make everyone feel like their problems are solved to some extent. Decentralization extremists tell a grand story of scaling Ethereum without trade-offs. Traders can chart how Rollups will send ETH soaring to $10,000. The general public nods enthusiastically as they madly yield farm through AAVE-MATIC and bet on digital horse racing.

I’m not saying this to be funny! There are indeed real class elements involved.

Rollups have overwhelming support from the Ethereum knowledge community, who always love to complain on Twitter about this or that project not being decentralized enough. I deeply understand this because I am one of them.

But it cannot be ignored that the general public has embraced Polygon and BSC. No venture capital opinion leader predicted this. A large number of users from developing countries—India, Indonesia, Thailand, the Philippines—are adopting these two platforms, many of whom seem to have never used Ethereum before (Ethereum Gas fees have pushed them out of this market!).

Remember the original intention of blockchain to "help the unbanked"? Well, now these platforms have a real global impact and cater to what users truly care about.

I often say that the three driving forces behind today’s cryptocurrency users are:

• Making money
• Having fun
• Ideology

Among these three, ideology is the weakest driving force. And I worry that ideology will ultimately become the main driving force supporting the adoption of Rollups.

This is the problem facing L2 solutions: they sound better in theory, but may not be so in practice.

The Sweet Pain of Rollups

Now on Polygon, a simple Uniswap-style transaction costs $0.0001. On BSC, it costs $0.20. On Ethereum, it costs about $7. On Optimism, it costs about $0.68.

Why are Rollups more expensive than these sidechains? This is because each Rollup ultimately has to publish call data to Ethereum; thus, their fees are tied to Ethereum fees. Each Rollup can only achieve Ethereum scaling by a constant factor. Therefore, the fees will not be low enough to match the extremely low levels that many users have become accustomed to.

Moreover, no Rollup is fully compatible with EVM—there are subtle differences between each Rollup's virtual machine and EVM. Arbitrum uses AVM, Optimism uses OVM, each of which cleverly breaks some contracts and tools compatible with EVM. For ZK-rollups, it’s a completely different world—ZK-rollups compile Solidity into equivalent zero-knowledge circuits and execute them in a ZK virtual machine.

Now compare this with Polygon, where you can just copy and paste your contracts and everything works fine.

Then consider the movement of funds in and out of Rollups.

For Optimistic Rollups, when you want to withdraw funds, there is about a one-week challenge period during which your withdrawal will be frozen. This is bad. Therefore, to facilitate "fast withdrawals," market makers will be ready to quickly transfer your assets across borders—at a cost.

The fees they charge you will depend on their inventory and the liquidity of the assets. If you want to move ETH, it might cost 0.2% or some other level of cost, but if you try to move a random Dogecoin, it might cost more, possibly 1% or higher. If there isn’t enough liquidity, certain assets may not be able to be quickly withdrawn at all.

As a user, you need to consider all of this when planning your Rollups DeFi portfolio. That is, if you use traditional, multi-signature-based bridging in Rollups, you can avoid this withdrawal fee issue. However, if you use multi-signature bridging to take on custodial risks, what improvement does that offer compared to Polygon?

Note that ZK Rollups do not face this issue because their withdrawal speeds are very fast.

I personally worry that due to all these overheads, Rollups will not meet the needs of any end of the user spectrum. If you are a super whale who cares deeply about security, paying mainnet fees is no problem. If you are part of the general public who knows little about crypto, well, you will be very satisfied with Polygon. Who else is left after excluding these two groups?

Well, when will it cash out?

Here’s my theory on how L2 solutions will play out.

Every DeFi protocol on Ethereum will embrace L2 solutions—some protocols will choose Optimism, some will choose Starkware, and the L2 solution that collects the most DeFi brands will ultimately become the main Rollups.

Clearly, it is not suitable to consider this issue right now. In most cases, DeFi protocols will choose multi-hosting. AAVE, Sushi, and Curve have already launched on Polygon, pushing their total locked value (TVL) above $8 billion. Sushi is deployed on at least five chains, and Curve on four. For a long time, Uniswap was only linked to Optimism, but with the upcoming launch of Arbitrum, Uniswap's attitude has changed, and it will also become a multi-host architecture.

BSC taught everyone: if you don’t launch here, we’ll launch a fork of you and take the revenue you should have earned. Looking ahead, I expect every major DeFi protocol to launch ahead of time on every important chain.

So, is it really the protocols that determine where users go? Or is it the users who determine where the protocols go?

Currently, the lessons from Polygon and BSC seem to point to the latter—protocols follow users, and they are thus rewarded handsomely.

I can tell you that as an investor, the current consensus is that Rollups will win. Vitalik loves Rollups. Everyone loves Rollups. Rollups are the right path. Please invest in Rollups.

But I am worried. I worry that no one will care. People already have what Rollups initially promised: fast, cheap, EVM-compatible blockchains that integrate smoothly with the Ethereum ecosystem.

In the long run, can Rollups ultimately prevail?

In my view, there are two pathways: one is that non-Rollup sidechains catastrophically fail, and the industry has learned from the Mt. Gox incident. A catastrophic failure doesn’t just mean "nodes can’t sync." It means "money is gone" or "the chain has completely stopped." This is possible, but the likelihood is low.

So this leaves us with another pathway: Rollups must actually become significantly better than the alternatives. Simply relying on the virtue of decentralization is not enough. For this, I personally see only one way forward, which is the promise of cryptography and zero-knowledge proofs.

In recent years, the cryptography behind zero-knowledge proofs has followed a trajectory similar to Moore's Law, with no signs of slowing down. What was once thought to be infeasible—executing EVM-like computations in ZK Rollups—is now being approached by zkSync and Starkware, which are about to launch, proving arbitrarily long computation chains through recursive combinations of ZK-SNARK.

Over time, I expect we will see not just the constant factor scaling of today’s Rollups: large-scale computation compression, privacy-preserving smart contracts, provable MEV resistance, and more.

State growth is also not a big issue in ZK Rollups because no matter how large the state is, users can always verify its correctness by simply validating the SNARK sequence.

In the long run, ZK technology will only get better.

But even in the short term, I am excited about what Matter Labs is doing with zkSync 2.0 and its zkPorter architecture. zkPorter is a hybrid of Validium and ZK Rollups, allowing users to seamlessly migrate between the two. The data on the Validium side is off-chain and can charge fees comparable to Polygon, while those who want higher security can still use the more expensive ZK Rollups. This will integrate all types of users across the spectrum under one roof, achieving complete interoperability between them.

zkPorter architecture, source: Matter Labs

In my view, this is the direction of future development. Simply saying there are no stupid users, just that you made the wrong choice, and I don’t care if the fees are lower elsewhere, is out of touch. But we should not close the door on further scaling innovations.

As for Rollups, this is where I am placing my investment bets. But who knows! After all, I am wrong more often than I am right, and if users accept Rollups from the start, it will be good for them and good for Ethereum.

This article was hastily written on a plane; please forgive any oversights. Note that Dragonfly Capital has investments in almost all the projects and crypto assets mentioned in this article. Thanks also to Ivan and Celia for their brief comments.

Source link: medium.com