2024 Crypto Industry Outlook: Three Major Narratives of Layer 2 Uncovered

The ZK system is about to go online, and the Layer 2 wealth creation effect will appear.

Written by: Asher Zhang, Bitui

Vitalik Buterin, the founder of Ethereum, once outlined the future upgrade route of Ethereum 2.0 in six concise stages: The Merge, The Surge, The Scourge, The Verge, The Purge and The Splurge. Among them, the Dencun upgrade is an important technical upgrade in The Surge stage, and among several EIPs, EIP-4844 is the most important. Judging from the results, EIP-4844 has the most direct impact on Layer 2, so Layer 2 will most likely become the most noteworthy track in the encryption industry in 2024. Recently, many leading projects on the Layer 2 track have begun to develop. This article believes that there will be three major narratives surrounding Layer 2 in the future.

Narrative 1: Decentralization of power, Layer 2 sorter begins to decentralize

The significance of Layer2 is to increase ETH throughput and reduce transaction fees. It is the sequencer that allows Layer2 to achieve this goal to a large extent. In layer 2, the role of the sequencer is to sort and compress hundreds of transactions into one transaction, and then hand it over to layer 1 for confirmation. In this process, the sequencer is charged, which is currently one of the main sources of income for Layer2.

Currently, layer2's sequencers are centralized and basically run by project parties, such as the OP Foundation and the Arbitrum Foundation. From a security perspective, if the centralized sequencer fails or is attacked, it can easily pose a threat to the entire layer 2. The decentralization of the sorter is very important, and at the same time, this will also give birth to an important L2Fi (Layer 2 decentralized finance) market.

According to the official plan, the optional sorting methods of the OP chain include: self-sorting, using Optimism Collective's sorter, and using decentralized sorter set services. Self-sorting introduces a new revenue model where developers can earn fees and MEV from the chains they publish. The decentralized sequencer will serve multiple rollups simultaneously and use cryptoeconomic incentives to hold operators accountable. A shared orderer enables atomic and trust-minimized cross-chain rollup communication because nodes generate blocks on each chain simultaneously. Early models of the hyperchain ordering model involved auctions, where potential orderers paid the network for ordering rights and earned their share of fees and MEV. Sequencers may also be required to share a portion of fee income with Retroactive Public Goods Funding (RPGF).

The Op chain's plan for the sequencer has not yet been implemented, but Metis's sequencer is already ready, and it is expected to further accelerate the implementation of the major Layer 2 sequencers.

Metis is layer 2 developed by Optimistic Rollup. It will be launched on the mainnet in 2021 and is the first Layer 2 network to launch Rollup. In 2024, it will be upgraded to Hybrid Rollup that combines the Optimistic Rollup architecture with zero-knowledge proof zk.

Metis' decentralized PoS sequencer is now running on the Holesky test network, which can be divided into three rounds, including simulating the behavior of real nodes, increasing the number of nodes, staking testing, etc. Starting on January 3, 2024, community testing will be opened. Users can interact with the new ecosystem dApps on the Holesky test network and receive rewards for one month. Each sorter node needs to pledge 20,000 Metis. Of course, the mining rewards will be relatively generous. 50% of the total Metis will be used for node rewards. For users who do not have enough funds to be nodes, Metis will launch a liquid staking Dapp Enki in the near future, allowing these community users to participate in node staking and obtain corresponding benefits.

Narrative 2: Learning from each other’s strengths, parallel EVM begins to explode

Former Polygon co-founder JD recently said on social media that he has a premonition that every L2 will rebrand itself in 2024 and label it "parallel EVM"; Paradigm's CTO Georgios also believes that 2024 will be "parallel EVM" "Year of EVM", it also means that Paradigm is also exploring and designing related technologies internally. Why is everyone so optimistic about parallel EVM?

EVM is the core of Ethereum and is responsible for running smart contracts and processing transactions. Its transaction logic is executed in sequence. This design choice prioritizes safety and reduces potential complexities and vulnerabilities associated with parallel execution. However, when faced with high load, network congestion and delays may result. Parallel EVM (Ethereum Virtual Machine) is a concept designed to improve the performance and efficiency of existing EVMs, just like extending this one-way road into a multi-lane highway, allowing multiple vehicles to drive at the same time.

Currently, there are some projects on the market that have begun to explore the design of parallel EVM. In the Layer 2 track, representative projects that combine the capabilities of other chains with EVM include: Neon, Eclipse, and Lumio. In addition to L2 projects, some representative L1 projects with parallel EVM are: Monad and Sei.

Narrative 3: The Zk system is about to go online, and the Layer 2 wealth creation effect appears.

Compared with the ZK Rollup solution, Optimistic Rollup is easier to implement in the short term, mainly because it has greater portability, but ZK Rollup is actually more promising in the market. According to L2B eat data, there are 26 ZK-Rollup solutions among 65 Rollup projects, while year-on-year, there are only 21 OP-Rollup. In the ZK-Rollup solution, Scroll, Taiko, etc. pursue the ultimate EVM equivalence, aiming to improve compatibility with the Ethereum main network; zkSync and Starknet pursue the comprehensive expansion capabilities of the chain, trying to improve transaction processing speed and throughput. The main network increases incremental users; Aztec focuses on solving transaction privacy issues through ZK. With the Cancun upgrade of Ethereum, the Zk series has also continued to make efforts recently, and a new round of wealth creation stories of the Zk series will most likely be staged in a new round of bull market.

Since the Zk series is more technically difficult, its development is relatively slow, but judging from various signs, some projects are expected to be launched one after another in this bull market. For example, Zk series leaders Starknet and zkSync, and the ensuing airdrops are bound to have a wealth creation effect again. For example, Starknet is expected to distribute STRK to DApp developers to encourage them to build projects; distribute STRK to early ECMP community contributors (contents, meetups, workshops, etc.), and distribute 900 million STRK for future user rebates, etc.

In addition to the traditional narrative of the Zk series, ZKFair is conducting another interesting ZK L2 network experiment. It proposes to build a ZK L2 network that is launched fairly, completely driven by the community and autonomous by the community. Users can provide suggestions for network development, and at the same time You can receive generous rewards based on your own contributions. This innovative L2 network narrative has the strength to compete with the inscription craze. ZKFair advocates community-driven Layer 2 values as follows: 100% of tokens will be launched fairly, and the initial valuation will be set to a relatively low range to ensure that everyone can participate; Gas fee income will be returned to all community contributors and users The L2 network; ZKFair encourages more creative projects to participate. Anyone can put forward ideas and suggestions for community development and initiate proposals. ZKFair uses ZK technology and has the following core highlights: L2 that uses USDC as Gas token to provide users with a stable and transparent fee structure; ZK-Rollup based on Polygon CDK and Celestia DA; L2 that supports atomic cross-Rollup communication, users can Directly interact with Dapps on Ethereum L1; support L2 of the decentralized prover network, providing more stable and reliable zero-knowledge proof calculations.

Summarize

The EIP-4844 in Dencun's upgrade will effectively reduce Layer 2 transaction fees. With the improvement of Layer 2 performance, its competitiveness will be greatly improved. In addition, the sorter in Layer 2 is crucial. With the launch of the decentralized sorter, there is a high probability that a new staking track will be born. Although the Dencun upgrade will improve Layer 2 performance, the gap is still large compared with Solana, but the emergence of parallel EVM will further enhance the competitiveness of Layer 2. In addition, the emergence of ZK series Layer 2 may also become a major focus of the market.