Fintech

The battle to 'win Ethereum' is on

The key to fast, cheap crypto transactions is "rolling up." The question is how.

Ethereum

Will developers and users flock to the most advanced technology, or will they just go with what works when they need it?

Illustration: Christopher T. Fong/Protocol

Ethereum, the second-most-valuable cryptocurrency blockchain after bitcoin, has been hailed for its programmable smart contracts and greater flexibility. But it faces challenges in scaling up: Transaction speeds are slow and costs high.

Layer 2 networks that sit on top of Ethereum are designed to address these challenges. Ethereum co-founder Vitalik Buterin has said that the future of Ethereum will depend on Layer 2 networks for scaling, even after Ethereum moves to a faster, more environmentally friendly system known as proof of stake.

This intense competition to "win Ethereum" boils down to this question: Will developers and users flock to the most advanced technology, or will they just go with what works when they need it? Convenience often wins, unless the technology is so much better or some other incentive drives them to try something new.

Scaling Ethereum is still its biggest problem. The company that can solve this will be in the driver’s seat to power a range of services on Ethereum, including decentralized finance, NFTs, gaming and more. Because Ethereum is the largest smart-contract protocol and is popular with developers, whoever becomes the dominant Layer 2 on Ethereum could end up handling a sizable portion of crypto transactions. The debate over which option will prevail is as fierce as any in crypto.

Layer 2 networks are still relatively small compared to other Layer 1 blockchains — the primary ledger and protocol associated with a specific token, like bitcoin or litecoin. "That will change over time" as more users shift to Layer 2 applications, said Haseeb Qureshi, managing partner at Dragonfly Capital.

A key Layer 2 strategy is the rollup, or bundling of transactions off the main chain for faster processing. The two main approaches are optimistic rollups and zero knowledge, or ZK, rollups. Both approaches reduce congestion on the Ethereum blockchain, speed transactions and lower costs.

Optimistic rollups are live. Arbitrum is the largest player with $2.9 billion in total value locked, or deposited, in the network. Crypto entities using Arbitrum include decentralized exchanges SushiSwap and Uniswap and NFT project Treasure.

Optimistic rollups validate and execute transactions and send them to Ethereum, and only run a computation fraud proof if a transaction is challenged — thus the moniker "optimistic." These transactions can be challenged after they’re sent back to the Ethereum chain for up to seven days.

ZK rollups, on the other hand, always run an advanced cryptographic proof called "zero knowledge" and then submit it back to Ethereum. ZK is designed to be foolproof since transactions are all verified and thus can’t be challenged. The newer technology is still just emerging in the wild.

But the technology is much better, and sure to improve, supporters say. "It’s really hard to do" zero-knowledge proofs, said Qureshi, whose firm invested in Matter Labs, a ZK rollup startup. “Only in the last year and a half have they come up with ways that were thought to be theoretically impossible.”

Optimistic supporters like Steven Goldfeder, CEO of Offchain Labs, which created Arbitrum, says ZK rollups are "orders of magnitude" more expensive than optimistic ones, because of the intensive calculations required. Some ZK systems that have launched are not including the costs of the proofs that they run off-chain for customers, which obscures their true costs, he said.

"We think optimistic systems are more practical and much cheaper to operate than ZK systems," said Ed Felten, co-founder of Offchain Labs.

ZK supporters say optimistic rollups take too long to be fully completed, since they can be challenged up to seven days after they are executed. This means that someone seeking to get their ETH tokens out of a Layer 2 such as Arbitrum to the Ethereum network would have to wait seven days. That’s not viable in crypto, where people want fast access to capital, Qureshi said. One week is "worse than a wire transfer," he said.

There are several services, however, that will pay users instantly, minus a small fee, and take on the risk of being challenged. And this type of challenge is rare and actually hasn’t happened yet, due to the financial penalties for posting a rollup that is wrong or making an unsuccessful challenge to a correct rollup, Felten said.

Even though there is a delay with withdrawing funds to Ethereum, these optimistic transactions actually have already been fully verified on Layer 2. The reason for the delay is Ethereum doesn’t see the transactions and has not validated those transactions yet.

Firms like Andreessen Horowitz are betting on ZK rollups as the future, and NFT-focused Immutable X uses StarkWare’s ZK rollup technology. But the best technology doesn’t necessarily win.

Even Arbitrum’s Goldfeder admits that ZK rollups are technologically impressive and doesn’t rule out supporting ZK rollups in the future.

But he says it’s unfair to compare optimistic rollups in their current state to ZK rollups in the future, since optimistic technology will improve in the future as well.

This isn’t the first time Ethereum has pushed for an off-chain scaling solution: Plasma was a previous effort that didn’t work out. But Buterin and others believe a new system based on rollups will work, even if it takes years to become mainstream.

Both technologies will coexist for a while, said Jake Brukhman, founder and CEO at CoinFund, which has made some Layer 2 investments. Over the longer term, ZK rollups have a technology advantage, he said. Meanwhile, he said, other Layer 1 blockchains could eventually be an even bigger threat in terms of speed, scalability and security.

That’s part of what’s at stake as Layer 2 networks develop: If Ethereum can’t scale to handle the demand for transactions, it could drive developers to other blockchains. And the software industry has proven that developers are key to winning.
Policy

Musk’s texts reveal what tech’s most powerful people really want

From Jack Dorsey to Joe Rogan, Musk’s texts are chock-full of überpowerful people, bending a knee to Twitter’s once and (still maybe?) future king.

“Maybe Oprah would be interested in joining the Twitter board if my bid succeeds,” one text reads.

Photo illustration: Patrick Pleul/picture alliance via Getty Images; Protocol

Elon Musk’s text inbox is a rarefied space. It’s a place where tech’s wealthiest casually commit to spending billions of dollars with little more than a thumbs-up emoji and trade tips on how to rewrite the rules for how hundreds of millions of people around the world communicate.

Now, Musk’s ongoing legal battle with Twitter is giving the rest of us a fleeting glimpse into that world. The collection of Musk’s private texts that was made public this week is chock-full of tech power brokers. While the messages are meant to reveal something about Musk’s motivations — and they do — they also say a lot about how things get done and deals get made among some of the most powerful people in the world.

Keep Reading Show less
Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

Sponsored Content

Great products are built on strong patents

Experts say robust intellectual property protection is essential to ensure the long-term R&D required to innovate and maintain America's technology leadership.

Every great tech product that you rely on each day, from the smartphone in your pocket to your music streaming service and navigational system in the car, shares one important thing: part of its innovative design is protected by intellectual property (IP) laws.

From 5G to artificial intelligence, IP protection offers a powerful incentive for researchers to create ground-breaking products, and governmental leaders say its protection is an essential part of maintaining US technology leadership. To quote Secretary of Commerce Gina Raimondo: "intellectual property protection is vital for American innovation and entrepreneurship.”

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Fintech

Circle’s CEO: This is not the time to ‘go crazy’

Jeremy Allaire is leading the stablecoin powerhouse in a time of heightened regulation.

“It’s a complex environment. So every CEO and every board has to be a little bit cautious, because there’s a lot of uncertainty,” Circle CEO Jeremy Allaire told Protocol at Converge22.

Photo: Circle

Sitting solo on a San Francisco stage, Circle CEO Jeremy Allaire asked tennis superstar Serena Williams what it’s like to face “unrelenting skepticism.”

“What do you do when someone says you can’t do this?” Allaire asked the athlete turned VC, who was beaming into Circle’s Converge22 convention by video.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Enterprise

Is Salesforce still a growth company? Investors are skeptical

Salesforce is betting that customer data platform Genie and new Slack features can push the company to $50 billion in revenue by 2026. But investors are skeptical about the company’s ability to deliver.

Photo: Marlena Sloss/Bloomberg via Getty Images

Salesforce has long been enterprise tech’s golden child. The company said everything customers wanted to hear and did everything investors wanted to see: It produced robust, consistent growth from groundbreaking products combined with an aggressive M&A strategy and a cherished culture, all operating under the helm of a bombastic, but respected, CEO and team of well-coiffed executives.

Dreamforce is the embodiment of that success. Every year, alongside frustrating San Francisco residents, the over-the-top celebration serves as a battle cry to the enterprise software industry, reminding everyone that Marc Benioff’s mighty fiefdom is poised to expand even deeper into your corporate IT stack.

Keep Reading Show less
Joe Williams

Joe Williams is a writer-at-large at Protocol. He previously covered enterprise software for Protocol, Bloomberg and Business Insider. Joe can be reached at JoeWilliams@Protocol.com. To share information confidentially, he can also be contacted on a non-work device via Signal (+1-309-265-6120) or JPW53189@protonmail.com.

Policy

The US and EU are splitting on tech policy. That’s putting the web at risk.

A conversation with Cédric O, the former French minister of state for digital.

“With the difficulty of the U.S. in finding political agreement or political basis to legislate more, we are facing a risk of decoupling in the long term between the EU and the U.S.”

Photo: David Paul Morris/Bloomberg via Getty Images

Cédric O, France’s former minister of state for digital, has been an advocate of Europe’s approach to tech and at the forefront of the continent’s relations with U.S. giants. Protocol caught up with O last week at a conference in New York focusing on social media’s negative effects on society and the possibilities of blockchain-based protocols for alternative networks.

O said watching the U.S. lag in tech policy — even as some states pass their own measures and federal bills gain momentum — has made him worry about the EU and U.S. decoupling. While not as drastic as a disentangling of economic fortunes between the West and China, such a divergence, as O describes it, could still make it functionally impossible for companies to serve users on both sides of the Atlantic with the same product.

Keep Reading Show less
Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.

Latest Stories
Bulletins