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L2ETHPOOL: Scaling Solutions

"Real L2s" that are 1) EVM compatible, 2) robust/proven, 3) scalable and 4) decentralized are not around the corner, they're AT LEAST one or two years away!

L2ETHPOOL is a higher level 'pool of pools' for protocols focussing on Ethereum L2 scaling (and sidechain) solutions. For more detail on motivation & rationale for this thematic pool, see Ethereum 2.0

TL;DR: It may have advantages to build up the composition of the L2ETHPOOL starting from at least one initial sub-pool focussed on the broadest scaling ecosystem with the most traction to date: Polygon

POLYDEFI: Polygon L2ETH Pool
POLYDEFI: Polygon L2ETH Pool

Polygon/MATIC - Sidechain+

MATIC’s price surge is rooted in the fact that Polygon is currently being utilized by blue chip DeFi projects such as Aave, Sushiswap, and Curve. Polygon’s TVL has already surpassed $10B and has been directly responsible for Aave’s surge to the largest DeFi protocol by TVL on Ethereum.

However, the main advantages that Rollup based L2s have over Polygon is that they inherit their security from the main Ethereum blockchain, this is not the case for sidechains. Sidechains are separate blockchain networks that introduce their own layer of risks, the main associated risks being: censorship resistance, finality, and guarantees about owning funds. Polygon may have benefited from being a scaling front-runner, but with projects like Uniswap and MakerDAO adopting composable L2 solutions on Optimism, Polygon may struggle to maintain market share going forward.

(Note: In future, Polygon may also deploy Optimism and Zk-Rollups-based options)

Overview of L2 Projects

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Ethereum L2 Roll-up Ecosystems

Due to limited composability on L2, there are about 5 other competing, barely-coupled L2 ecosystems that ETH-centric investors may want exposure to:

  1. Arbitrum - combine with Optimism?
  2. Optimism - combine with Arbitrum?
  3. Starkware
  4. zkSync
  5. Mechanism Capital

Optimism

Optimism, formerly known as the Plasma Group, is the team behind the development of the Optimistic Rollup. Rollups are smart contracts on Ethereum that bridge the Ethereum main chain and L2. Rollups receive transaction data from the Ethereum main chain, send it to L2 where the computations take place, and then receive the results of the L2 computations. It is important to note that there are two variations of Rollups: Optimistic Rollups and ZK-Rollups. Optimism utilizes only Optimistic Rollups.

Optimism has the potential to be the most impactful L2 scaling solution on Ethereum. It has already demonstrated its viability via its soft launch with Synthetix and has a proven team of developers behind the project. With projects like Uniswap and MakerDAO already committing to scaling with it, there are good reasons to be Optimistic about Optimism.

Synthetix has chosen to become one of the earliest adopters of Optimism not only because they think it is the best solution, but because they are hoping that it will inspire other high quality projects to adopt it as well. Picking a L2 solution is not merely an issue of what works best for a project in isolation, but is also an issue of social coordination between projects.

If other major DeFi protocols are able to adopt Optimism, all transactions between them will be able to remain on L2. This means users will not have to wait an entire week for their funds to be integrated back on the Ethereum main chain before they can interact with another protocol.

MakerDAO’s Optimism Dai Bridge

MakerDAO, like many projects, has been exploring a plethora of scalability solutions to support their ecosystem, including Arbitrum and non-rollup solutions such as Polygon, Binance Smart Chain, and Avalanche; however, the only community approved solution has been Optimism. The Optimism Dai Bridge will allow locking up L1 DAI to mint L2 oDAI. Once fast withdrawals are enabled in Q3/Q4, oDAI can be burned in exchange for near-instant access to L1 DAI, escaping the one week lockup period associated with Optimism.

The near instant transfers to L1 Dai associated with MakerDAO’s Dai bridge have the potential to make MakerDAO the primary off-ramp for Optimism. L2 to L1 swaps will be able to occur by routing trades through the Optimism Dai Bridge. Because Uniswap V3 will be scaling with Optimism, tokens will be able to be swapped on Uniswap for oDAI on L2, oDAI exchanged for L1 DAI, and then swapped back to the L1 token through an L1 AMM.

If MakerDAO’s Dai Bridge is able to meet expectations, this could increase the appeal of scaling with Optimism for other projects. Other projects may follow by building their own L2 bridges which would enable a greater variety of tokens to be swapped directly from L2 to L1 using Uniswap V3. During times of high demand, it is already shown that Uniswap V3 users are willing to pay large premiums in transaction fees for swaps.

Arbitrum

Arbitrum, like Optimism, is an Optimistic Rollup based scaling solution. There are few differences between the two. The benefit to both is that they are easy to integrate with DApps because they require very few changes to DApps’ underlying smart contracts. Because of this, the two solutions have become top picks for many developers.

While the two solutions will directly compete for market share, for DApps, there is only upside to using both. Deploying on multiple platforms makes the social consensus problem easier to manage. DApps adopting parallel solutions with each other enables inter-protocol transactions to remain on L2. Uniswap adopting Optimism and Arbitrum will increase the number of DApps that it can have L2 to L2 transactions with.

Perpetual/PERP

Starkware

Diversifi

zkSync

Loopring

OmiseGo/OMG

Raiden

Aztec

Immutable X

ZKSwap

Fuel

Gluon

Matter labs

Connext

Skale