Welcome our latest episode for The Crypto Explorer, a podcast by Sygnum, which takes you into the exciting world of crypto assets and Future Finance with conversations with leading figures in blockchain and finance.
In this episode, host Aliya Das Gupta and guests Omar Azhar, Head of Enterprise and Infrastructure Business Development at Matter Labs, as well as Rico Müller, VP Asset Management at Sygnum, discuss Layer 2s, the evolution from plasma chains, side chains, optimistic roll-ups to zero-knowledge proofs and the arrival of Layer3s.
Aliya Das Gupta: As a starting question: what is a roll-up? Why do we need a roll-up in to scale in crypto?
Omar Azhar: Throughout history, I guess, when you look at all the previous leaps that we made in different forms of technology, there’s been what we call “10X-scale moments”. We are facing multiple 10X-scale moments in crypto, and particularly in Ethereum.
As an analogy: when we look back in history, when people were riding a single horse they had one horsepower, then the Ford Model T gave even more horsepower, and afterwards greater combustion power in cars was followed by jet engines and rockets. Each of these steps can be considered a scaling moment or a 10X-scale moment for scaling up efficiency and power. This effect is significant, it has a great impact on applications, use cases and the economy connected with these scaling moments. In each of these scaling moments you can see an even bigger moment in terms of what is possible for us as humans and what we can build and do.
Crypto is going through the same type of moment right now. For example, Ethereum does about 10-15 transactions per second today, and there will be 10X-scale moments in scalability on Ethereum. There will also be a couple of 10X moments for scalability on Ethereum itself. The Proto-Danksharding (EIP-4844) for Ethereum, which will probably happen in the next couple of quarters, will give scalability on the Ethereum layer to achieve about 100 transactions per second.
Then we have layer2s, where the main concept is: if you keep data in a settlement layer with Ethereum, execution should happen somewhere else, and you kind of get into a stacks concept. The reason we have layer2s is because we want to separate execution from the rest, this way we can focus on scalability and other key concepts. And so the layer2s, with the optimistic roll-ups and the zero knowledge roll-ups – they also all provide a 10X moment for scalability and usability. And now, we can get into 100 or even 1000 transactions per second. In the last couple of cycles, we’ve already seen the different applications that we can do, such as DeFi, NFTs and DAOs. But now we can ask: where does this go when we have 100X in throughput. This is what everyone is really excited about.
Aliya Das Gupta: Rico, could you tell us about layer2s and why we need something different?
Rico Müller: Layer2s as a concept have existed for several years. I mean, from the very beginning, it was clear that the blockchain space in general needs to scale. Layer2s are one of the very early concepts that were proposed to achieve exactly what Omar has alluded to: separating the execution from the settlement. Because if you don’t do that, you are trying to achieve two things that contradict each other: for execution you need speed and for settlement you need security.
As a result, you must choose one of these two aspects. In fact, this is what lies at the bottom of the blockchain trilemma, where you must choose two out of three elements: speed, security and decentralisation. One approach is separation rather than trying to do everything or all three things. Instead, you split it out and have a modular blockchain design and separate execution to achieve speed, but maintain secure settlement and data storage with a decentralised, secure setup.
Early on, there have been very different ideas about how to achieve this, such as state channels or plasma chains that the Ethereum community explored. Some organisations or projects that accompany Ethereum for scaling, such as Polygon, actually started as one of these earlier ideas like plasma chains.
More recently, a predominant solution has crystallised with roll-ups, such as optimistic roll-ups and zero knowledge roll-ups. Basically, the idea is to execute transactions off chain and then bundle them together and put them on a layer1. It allows you to achieve speed while maintaining the layer1 security. This has been a predominant solution in the Ethereum ecosystem for a while now.
Aliya Das Gupta: What is the difference between optimistic roll-ups and zero-knowledge roll-ups? Why is everyone excited about them?
Omar Azhar: Initially there is a staged approach to scaling Ethereum on layer2. The idea was that optimistic roll-ups would come first, from a purely technological standpoint. Then, the idea of zero knowledge roll-ups followed. Zero-knowledge proofs are the underlying technology, and creating new circuitry as well as creating a theorem prover would take a couple of years. This was naturally considered a second stage and also the end game for scaling on Ethereum.
The key difference is that an optimistic roll-up makes trust assumptions about the transactions. It initially assumes that all transactions are valid. Then, it is the job of the so-called watcher to monitor transactions as they are being settled. And, if they find an invalid one, they create a proof, a trust mechanism, which is why you have a seven-day settlement.
This provides seven days for someone to create a proof that there is an invalid transaction in a block. Then you have zero-knowledge drops, which make no trust assumptions because they rely on the cryptographic validity of the proof. As a result it is faster – pretty much in the next block – because there is no real way to create an invalid transaction or mess with a valid transaction. It creates cryptographic proof, through this zero-knowledge proof, that these transactions are valid. Then it is sent to the sequencer, and they get sent over Ethereum during the settlement.
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