Ethereum coin
Photo: Jievani/Pexels

Get ready for rollups: The fight over Ethereum’s Layer 2

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: Ethereum’s Layer 2 rumble, Brian Armstrong’s Crypto Bowl fumble, and SoFi’s stock tumble.

Off the chain

Why do so many people cling to the notion that new internet technologies wipe away centuries of copyright law? The latest example is a particularly sad one: The father of Alison Parker, a TV news reporter who was fatally shot on air, is trying to wipe the video of her shooting from the internet using copyright takedowns, The Washington Post reported. The problem is that he doesn’t own the copyright, so he came up with the idea of turning the video into an NFT — which, of course, has nothing to do with copyright. The station that does own the copyright didn’t give permission, and Rarible, the service he used to mint the NFT, promptly removed it. I feel sorry for the grieving father, and angry at the people who gave him this false hope about NFTs. It may take more cases like this, unfortunately, for the public to get the legal message.

— Owen Thomas (email | twitter)

Winning Ethereum

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, even after Ethereum moves to a faster, more environmentally friendly system known as proof of stake. But there’s an intense debate over which one will prevail.

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 roll-ups and zero knowledge, or ZK, rollups.

  • 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 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, still just emerging in the wild, run an advanced cryptographic proof called “zero knowledge” and then submit it back to Ethereum. ZK transactions are all verified and thus can’t be challenged.

The intense competition to “win Ethereum” boils down to one question: Will developers and users flock to the most advanced technology, or will they just go with what works?

  • Steven Goldfeder, CEO of Offchain Labs, which created Arbitrum, said ZK rollups are “orders of magnitude” more expensive than optimistic ones because of the intensive calculations required.
  • 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, which could mean a delay in withdrawing tokens. Some services will pay users instantly, minus a small fee, and take on the risk of being challenged. Challenges are rare, though, because of the penalties in posting a faulty rollup or challenging an authentic one.

In many ways, it’s a classic tech standards fight. But there’s a twist: If Ethereum can’t solve its problems on Layer 2, developers could instead adopt rival Layer 1 blockchains.

  • Solana, Avalanche, Cardano and others are waiting in the wings and wooing crypto developers with promises of faster transactions and lower costs.
  • 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 Ethereum co-founder Vitalik Buterin believes a new system based on rollups will work, even if it takes years to become mainstream.
  • Even Offchain’s Goldfeder admitted that ZK rollups are technologically impressive, and he didn’t rule out supporting ZK rollups in the future. But he said 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.
  • Both technologies will co-exist for a while, said Jake Brukhman, co-founder and CEO at CoinFund, which has made some Layer 2 investments. Over the longer term, ZK rollups have a technology advantage, he said.

There’s a lot at stake. The company that can solve Ethereum’s Layer 2 question will be in the driver’s seat to power a range of services, including decentralized finance, NFTs, gaming and more. That’s why it might be time to step on the gas.

— Tomio Geron (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

A MESSAGE FROM CLARI

How do you maximize Sales and Marketing performance? Point them at the same targets. Watch the latest episode of Club Revenue on Nasdaq as Bhaskar Roy, Chief Marketing Officer at Workato, reveals his remarkable tactics so that Marketing and Sales can outperform.

Learn more

On the money

On Protocol: Circle CEO Jeremy Allaire thinks that cryptocurrencies, specifically stablecoins, are the future of finance. Allaire explained to Protocol why the push for the digital U.S. dollar should be led by private companies and why crypto is “too big to ignore.”

SoFi shares tumbled over 8% after it announced its acquisition of Technisys for $1.1 billion. The addition of Technisys, a banking software provider, is expected to produce between $500 million to $800 million of additional revenue through 2025.

Also on Protocol: While the U.K.’s Boris Johnson was reportedly all for it, it seems like the U.S. is hesitant to sanction Russia by blocking its SWIFT access. SWIFT sanctions have been deemed the “nuclear option,” and blocking SWIFT access could raise the risk of dedollarization.

Coinbase added support for Ledger hardware wallets. The Coinbase wallet browser extension now has Ledger wallet integration, with the crypto exchange giant planning support for more types of hardware wallets in the future.

Huobi is planning to re-enter the U.S. market. After ceasing operations in the country in November 2019 due to regulatory issues, the crypto exchange says it will return to the U.S. with a focus on asset management.

FTX is launching a blockchain gaming unit. In an effort to draw more developers to the blockchain space, the crypto exchange is planning for services to help gaming companies issue tokens and NFTs

Overheard

While flexing about Coinbase’s viral QR code Super Bowl ad on Twitter, CEO Brian Armstrong claimed it was an in-house idea. “It was actually inspired by presentations our agency showed your team on 8/18 (pages 19-24) and 10/7 (pages 11-18) with ad concepts for the Super Bowl with floating QR codes on a blank screen,” Martin Agency CEO Kristen Cavallo tweeted as a reply.

On Ripple versus the SEC: After key memos became public last Friday, CEO Brad Garlinghouse took another shot at the SEC. “The truth is out for everyone to read. What we see is that the SEC waited 8 years to decide they disagreed with this analysis, decimating thousands and thousands of XRP holders (who they purport to protect) in the process,” he tweeted.

As tension mounts in the Russia-Ukraine conflict, many in the crypto industry are weighing its impact on prices. Mike McGlone, senior commodity strategist at Bloomberg Intelligence, thinks that bitcoin, ether and other digital assets “may find a firm foundation in 2022 on elevated inflation and asset prices,” along with the conflict.

Just one question for Nabil Manji, senior vice president and head of Crypto and Emerging Business at Worldpay

Before joining Worldpay, a unit of FIS, Manji was an analyst at McKinsey and worked in private equity.

There’s been a lot of talk about crypto payments, but relatively small usage. What’s the key to adoption?

I do think what's ultimately going to be the big tipping point is CBDCs, because once something becomes legal tender, merchants are obligated to accept it in most countries. So when we start to see CBDCs rollout, whether it's Singapore, France, the UAE or whoever is leading the charge there from a major consumer market standpoint, all of those merchants are going to have to accept it. And the reality is a lot of big international companies, those companies are operating in Singapore, France, UAE, and so they're going to have to accept CBDCs and consumers are probably going to want to use CBDCs. So CBDCs are the big elephant in the room when it comes to crypto payments that’ll really move the needle heavily forward.

But I think what's interesting is a lot of merchants don't want to wait until they're forced to become familiar with the technology. Of all the merchants we surveyed, about 60% are really interested in doing this at some point over the next one to two years.

A MESSAGE FROM CLARI

How do you maximize Sales and Marketing performance? Point them at the same targets. Watch the latest episode of Club Revenue on Nasdaq as Bhaskar Roy, Chief Marketing Officer at Workato, reveals his remarkable tactics so that Marketing and Sales can outperform.

Learn more

Thanks for reading — see you tomorrow!

Recent Issues