Almost a month after Ethereum's long-awaited Merge, the proof-of-stake network based on the Beacon Chain is functioning exactly as intended and for end users, there is no difference in UX.
On-chain activity is once again rising, and there is a now silver lining to the higher gas prices this also brings: The daily increase in ETH supply has slowed, and in the last few days increased transaction volumes have meant Ethereum's deflationary mechanics have become apparent.
In the future, the majority of Ethereum users will transact using various scaling solutions, including SKALE and rollups-based L2s. This will establish Ethereum as the secure settlement layer and combine its "ultrasound money" narrative with enough capacity to power the needs of global Web3 users.
Ethereum: Ultrasound Money
Over the past week, popular new projects launching on Ethereum have brought an increase in network activity. While it's too early to say whether this heralds the end of the bear market, it is a promising development and indicates that interest in Web3 has not disappeared.
At the same time, rising transaction volumes have brought soaring gas costs, up several multiples from their single digit lows. YCharts shows that gas recently hit a three-month high.
Although this may not be such good news for mainnet users, the Merged Ethereum's new dynamics mean that this activity is sharply deflationary. Charts from the data-rich site Ultrasound.Money show this clearly, and contrast ETH's new emissions path with that of both the original PoW Ethereum, and Bitcoin:
Since the Merge, Ethereum has become the hardest money in existence, as well as the foundation of Web3. And, while users who transact directly on the base layer are being punished with higher gas fees for the first time in months, there are alternatives in the form of the growing number of L2s.
Ethereum mainnet's future is to act as a settlement layer for all the transactions taking place in the Ethereum-based Web3 ecosystem, across dozens of layer-2 solutions. This is a necessity, since it's hardly reasonable to expect regular users to pay the kind of gas fees that early adopters have taken in their stride as the price of doing business (most people won't accept a $50 or even $5 fee for a simple AMM swap). dApps like Ruby rely on maintaining minimal fees and friction to reach out to the maximum possible user base.
This is how we square the circle of a deflationary currency and global store of value—complementary to BTC's digital gold narrative—that can also process enough transactions to support mainstream DeFi adoption.
A Brief Summary Of Scaling Solutions
The only way for Ethereum mainnet to become the settlement layer is for appropriate scaling solutions to take up the burden of everyday transaction processing. Fortunately, there are plenty to choose from, based on a range of different technologies.
- Optimistic rollups bundle (roll up) batches of transactions and post them to mainnet. They're called "optimistic" because transactions are assumed to be valid unless shown to be fraudulent. There is a specific time window within which fraud proofs can be submitted. This slows final settlement and withdrawals from the L2 to the base layer, but is easier to implement than some alternatives.
- Optimism is a layer-2 solution powered by Optimistic Rollups. Hundreds of transactions on Optimism can be secured by a single mainnet transaction, sharing the gas costs of the L1 interaction, while gas on the L2 is paid in the native OP token. At the time of writing, Optimism has over $1.4 billion TVL.
- Arbitrum also uses Optimistic Rollups, and is similar in many ways to Optimism, with a few key differences. Arbitrum uses multi-round, off-chain fraud proofs, which are cheaper and more efficient than Optimism's single-round, on-chain proofs. It also has its own Arbitrum Virtual Machine, capable of running all EVM compiled languages; Optimism only has a Solidity compiler. Arbitrum has around $2.4 billion TVL. Together, Optimism and Arbitrum account for around 80% of L2 TVL.
- ZK rollups are a second major class of rollups. They use cryptographic operations known as zero-knowledge proofs to guarantee the validity of the bundles of transactions being posted to mainnet, without the need to check them (as is the case with Optimistic Rollups). ZK rollups offer greater security, efficiency, convenience, and privacy than Optimistic Rollups, but it is harder to implement complex solutions with them.
- Loopring provides a partial solution using ZK rollups, which supports token transactions and AMM functionality.
- StarkWare has built the permissionless StarkNet and permissioned StarkEx scaling solutions, based on STARKs, a specific type of ZK rollup. dYdX, a decentralized exchange dApp, and Immutable X, a scaling solution geared towards NFTs and games, use StarkEx.
- Polygon (best-known for its proof-of-stake sidechain), Scroll, and zkSync are expected to launch full zkEVM L2 solutions in the coming months, which will support any Ethereum smart contract.
- Sidechains are run by a set of external validators, which bundle transactions and pass them back to mainnet. However, unlike rollups, they lack the same cryptographic guarantees and are not secured by the base layer itself, and so are not considered true layer-2 solutions. Polygon and Gnosis Chain both take this approach.
- SKALE is a multi-chain "layer-1.5" scaling solution that offers an unlimited set of EVM-compatible chains. As a hybrid L1/L2 network, SKALE differs from sidechains in that transactions are ultimately secured by Ethereum mainnet, but with dedicated SKALE nodes to increase throughput and enable near-instant finality. This drives fees into Ethereum, rather than simply taking traffic away from it.
Different types of solution may have different use cases, and will likely coexist indefinitely as Ethereum continues to attract users. However, for SKALE and conventional L2s, it's important to leverage the security of the underlying base layer. This also has the effect of bringing additional transactions to Ethereum mainnet, rather than moving them fully off-chain and relying on other, arguably less secure methods of validation.
The Next Cycle
Scaling solutions that leverage the enormous security benefits of Ethereum mainnet look set to power the next cycle of Web3 adoption. These include both rollups-based and hybrid L1/L2 solutions like SKALE.
As the number of transactions once again increases, projects and users will naturally gravitate towards the solution that offers the best combination of security, scalability, fees, and features. SKALE has taken a different approach to other solutions, providing a gas-free experience for the end user, along with additional features including on-chain storage, fast finality, and built-in protection against front-running.
This feature set is attracting a wave of new dApps to SKALE, and the number of transactions processed by the network as a whole is steadily increasing.
SKALE now processes almost 5 million transactions per month—roughly the same as both Optimism and Arbitrum—with zero gas fees. For comparison, Ethereum is capable of processing 15 tps, which gives an upper limit of around 40 million transactions per month.
SKALE And The Future Of Ethereum
Alongside rollup-based L2 solutions, SKALE achieves the aims of bringing greater transaction capacity to Ethereum, while leveraging the security of the base layer. As the next cycle of adoption gets under way, growing transaction volumes on Ethereum mainnet and Ethereum-secured scaling solutions will allow Ethereum to maintain its position as the foremost smart Web3 platform and build upon existing and all-important network effects, while continuing to drive ETH's new deflationary dynamics.