Layer-2 solutions won't work
What are layer 2 solutions?
Layer-2 solutions are an attempt to address the scalability and performance issues faced by the current generation of blockchains. The idea behind layer-2 solutions is to move some of the processing load and data storage off the main blockchain onto additional layers, which can then be managed by separate networks or technologies. This approach promises to deliver faster and cheaper transactions, and also reduces the strain on the main blockchain network.
Ethereum, which is famous for its congestion and sky high gas fees, already has several layer-2s:
Despite the benefits they promise, layer-2 solutions are not what the industry needs. Layer-2 solutions won't work, this is why:
A second layer ... of complexity
Installing your wallet, creating your address, writing down your 12 words seed phrase in some hidden place you'll have forgotten in two weeks, then getting some fresh native tokens to pay for gas fees is already too complex for many people.
When they realise that Ethereum gas fees are outrageous, they'll hear about layer-2s, but which one to chose?
Each layer 2 has its own way of working, its bridges, ... even understanding which token to use for paying your transactions isn't straightforward:
- if you are on Polygon, you have to pay in, yes, you guessed it: MATIC (!!!)
- if you are on Arbitrum, this layer 2 does not have a token, just pay in ETH
- if you are on Optimism, this layer 2 has a token, it's called OP, but actually, you still pay there in ETH
Honestly, do you really think we'll reach mass adoption with that level of complexity?
There is nothing more user adverse than hoping tokens from one chain to another using bridges. There are many of them. Some take a few minutes, others take hours. Some cost a penny, others will charge you more than 5% of the tokens you are bridging.
And in term of security, terrible bridge hacks have been raging the whole of 2022.
List of bridge hacks from https://defiyield.app/rekt-database
Fragmentation of the cryptoverse
That's the worst consequence of layer-2s. The ecosystems gets fragmented into many isolated islands, connected via slow, expensive or unsecured bridges. Liquidity gets fragmented, users get isolated. Applications cannot communicate with each other.
The beauty of writing a smart contract on a blockchain is that it can call, or be called, by any other smart contract on the same blockchain. That's how smart contracts can get tokens prices, that's how smart contracts can swap tokens and do many other things.
But if you deployed a contract on Polygon, there is no way it can call another smart contract on Optimism. That's the death of inter-operability. Imagine two great applications that could benefit by interacting with each other (think vaults, automated yield farming, staking, ...), if they are on a separate layer-2s, well, bad luck.
For users, when they want to use different Dapps, they'll end up switching networks all the time, bridging tokens, waiting for tokens to arrive on the other side of the bridge ... that's just as bad as using the traditional banking system.
For developers, choosing a particular layer 2 means not having access to all the applications, liquidity, users, of all the others.
Layer-2 create subnetworks, and that goes directly against Metcalfe's law.
Metcalfe's law rule them all
Here is Metcalfe's law: The value of a network is proportional to the square of its nodes.
So 4 networks (Ethereum, Polygon, Arbitrum, Optimism) with 100 users + apps (each smart contract has its own address, so we can count it as a user) each, has the same value as one network with 200 users + apps:
100^2 + 100^2 + 100^2 + 100^2 = 40 000 = 200^2
That's why any alternative layer 1 blockchain that will have a higher number of transactions per seconds while maintaining low gas fees will crush Ethereum, and all its layer-2s entangled in their bridges. It only needs a portion of their adoption.
We've seen that, we've lived that. AOL, Microsoft Network, Compuserve, where all independent networks competing with the Internet in the 90s. Each time Internet doubled, its value quadrupled. In the end, all these competing networks were just not worth it. They stopped.
Not so fun facts
Just before the conclusion, some little known fact, just to remember that the security of each of these layer-2s could also be a matter of concern.
First existing blockchain with smart contract, Ethereum has been plagued by congestion and high gas fees for years. Unable to address these issues for years, this gave room to layer-2 solutions and alternative layer ones, to appear.
Solana appeared for many of us, like the ideal solution, with its amazing throughput, and low cost. But developing decentralised applications on Solana is a nightmare, and Solana is by far the blockchain with the most outages.
We now have a fragmented blockchain ecosystem, with a terrible user experience. Things are very complicated for developers too. What is more annoying than having to deploy the same app on different blockchains to chase more users?
The direction Ethereum is taking, with current layer-2s and later with sharding, is the promise to a fragmented future and poor user experience.
This won't work. This is too brittle.
We need a single network to build on. We need a single user base.
That alternative layer one only needs to be scalable, fast and cheap.
Then Metcalfe will make it rule.