Written by: Terry, TechFlow
What is the main battlefield of Ethereum L2?
The Ethereum ecosystem has always been at the center of the crypto narrative, whether it was the ICO craze in 2017, the DeFi summer in 2020, the subsequent NFT craze, or today's crowded L2 battle.
However, although there are many L2 projects on the market, the Ethereum ecosystem is increasingly fragmented. So what problem does Ethereum L2 solve? For many people, it seems to be a difficult question to distinguish, and it has also become a must-answer question for L2 projects in the second half of the competition.
The increasingly crowded L2 battle
As the most intense Ethereum track, the competition in Ethereum L2 has been fierce.
From a data perspective, the L2 track over the past year can be divided into two stages with mid-October 2023 as the dividing point:
L2BEAT statistics show that before October 2023, the overall TVL of the L2 track has long been hovering around a bottleneck period of US$1 billion;
After October 2023, TVL started to rise rapidly from US$1 billion. As of the time of writing, it soared to US$4 billion in just half a year, an increase of 300%;
Even if calculated in terms of ETH, the growth of TVL in the L2 track has accelerated significantly from October 2023 to the present - breaking through the bottleneck range of 70,000 ETH and reaching a historical high of 12.5 million ETH, with an increase of 80% in the past six months.
At the same time, in terms of type, L2 projects mainly focus on the two mainstream expansion solutions: Optimistic Rollup and ZK Rollup, among which OP projects account for the majority:
There are 10 L2 projects with TVL over US$500 million, of which 7 are occupied by the Pan-OP series, with a market share of over 85%, far exceeding the ZK series' market share of less than 15%.
Among them, the top 5 seats are all occupied by the OP series, and the scale of the OP series' flagship project Arbitrum (nearly US$17 billion) and the ZK series' flagship project (about US$1 billion) differs by 17 times. Therefore, as of now, the competition in the L2 track is essentially that the OP series is sitting on the Diaoyutai, while ZK is still in a catching-up position.
Let's review the information on the surface and see the rise and fall of rookie projects and veteran players over the past year.
First, on March 23, 2023, Arbitrum officially issued tokens, which directly helped the TVL of the L2 track to break through the integer mark of 10 billion US dollars, and also raised the fluctuation range of the TVL of the entire L2 track to around 10 billion US dollars, but then it was difficult to overcome this volume bottleneck until the end of 2023.
At the same time, the Ordinals wave and the Bitcoin ecosystem narrative are in full swing, which has made Ethereum L2 less popular. With the revival of heterogeneous chains represented by Solana, the development bottleneck faced by L2 itself has caused the industry to once again have a big discussion on Ethereum and L2.
In particular, the L2s that are continuously launched based on the concept of expansion have already caused new problems such as liquidity fragmentation and incompatibility with each other, which once caused the Ethereum narrative to appear sluggish.
Until the biggest disruptor Blast was launched in November 2023, relying on the three trump cards of staking interest, airdrop expectations and invitation system, Blast's 5-day TVL exceeded US$500 million, surpassing old star L2 projects such as zkSync and Starknet in one fell swoop, and the growth rate was crazy:
As of the time of writing, TVL has reached US$2.6 billion in less than half a year, ranking fourth in the L2 track, only behind Arbitrum ($17 billion), Optimism ($6.7 billion), and Base ($5.72 billion).
In addition, Optimism's OP Stack superchain narrative also gave birth to Base's representative project in 2023, and helped accelerate the development of the "one-click chain + modularization" trend - according to incomplete statistics from Coin98 Analytics, as of the end of last year, the OP Stack ecosystem already had more than 20 L2 sub-projects (including test networks).
At the same time, various L2 projects have also accelerated their own super chain ecological process:
Arbitrum has launched Arbitrum Nova, a new network designed for games, social applications, and high-throughput DApp use cases, and Arbitrum Orbit, an open-source toolkit for building L3 networks that supports developers in deploying and creating their own chains.
zkSync launches ZK Stack, a modular open source framework for building custom ZK Rollups;
At the EthCC conference in Paris, StarkWare co-founder Eli Ben-Sasson also said that Starknet will soon launch Starknet application chains (Appchains), which can be started by applications using the Starknet stack and have the characteristics of customizability and decentralization;
It is also worth noting that the Dencun upgrade activated on the Ethereum mainnet on March 15 has significantly reduced the Gas fees required for transactions and transfers on L2 in the past month. The cost reduction and efficiency improvement are visible to the naked eye - OKLink statistics show that after the Dencun upgrade, L2 transaction fees generally decreased by more than 80%, and the actual fees have basically dropped to US$0.1 or even below US$0.05.
In this context, after entering 2024, with the expansion of modular narrative + DA concept, more and more fragmented L2 will undoubtedly become the new trend. Many projects have begun to consider issuing their own L2/L3. This is also destined to make the Ethereum L2 track more crowded and the homogeneity problem increasingly prominent.
How to find a differentiated competitive direction becomes the key to whether L2 can break through in the second half.
A new interpretation of the development path of the L2 track
From this perspective, the Dencun upgrade is far from the end of the L2 battle, and the market is calling for a new solution for Ethereum L2.
In this context, some new variables about L2 have also begun to emerge. New players in Ethereum L2, including Morph, have attracted more and more attention from the market since the end of last year. Many keen Web3 investors have sensed the huge opportunities hidden in it:
In November 2023, Blast completed a $20 million financing, with Paradigm and Standard Crypto participating in the investment;
On March 3, 2024, Taiko, a zkRollup-based Ethereum second-layer network, completed a $15 million Series A financing round, led by Lightspeed Faction, Hashed, Generative Ventures, and Token Bay Capital, with participation from Wintermute, Amber Group, OKX Ventures, and GSR;
On March 20, 2024, Ethereum L2 Morph completed a $20 million financing (including a $1 million angel round of financing), with participation from top VC players in the industry such as Dragonfly Capital, Pantera Capital, Foresight Ventures, The Spartan Group, and MEXC Ventures;
On March 26, 2024, the modular L2 Reya Network completed a $10 million financing, with well-known VCs such as Coinbase Ventures, Wintermute, and Fabric Ventures participating in the investment; On April 9, HashKey Group announced that it will launch the Ethereum L2 network HashKey Chain, using ZK Proof zero-knowledge proof technology to provide users with low-cost, efficient and developer-friendly on-chain solutions;
As the fire is boiling, the market has further turned its attention to the Ethereum L2 track, and the discussion on the Ethereum technical level has begun to increase again, especially building a prosperous on-chain application layer on the current L2, which is the mainstream long-term narrative.
This article will take Morph as an example to briefly analyze the new development paths these new players have brought to the L2 track, and what variables they can bring to the Ethereum ecosystem and the L2 track.
The “Horse Racing Mechanism” Behind the Decentralized Sorter
As we all know, the sequencer is responsible for controlling the order in which transactions are packaged from L2 to L1. Currently, many L2 projects operate the sequencer in a centralized manner, thereby providing users with faster transaction confirmation speeds.
However, this solution also has huge hidden dangers - once a few centralized nodes go offline, the L2 network will be down for a long time. In addition, these centralized sorters may arbitrarily sort transactions based on personal interests to maximize their arbitrage opportunities, thereby seizing MEV value, delaying user transactions, or even censoring and rejecting user transactions.
Therefore, there is no need to elaborate on the advantages of a decentralized sorter - it not only eliminates the impact of single point failures, but also ensures the decentralized nature of the network, maintains network security and stability; at the same time, it can also share the bulk of the profits of the sorter, the L2 network, with the Builders of the entire network.
As the first L2 network on Ethereum to implement a decentralized sorter design from the underlying logic, Morph has emphasized the importance of building a decentralized sorter from the very beginning, and has designed a feasible solution based on the principles of high efficiency, low cost, scalability, and easy maintenance:
In the Morph operating mechanism, the decentralized sequencer network allows multiple nodes (sequencers) to participate in the packaging and sorting of transactions, rather than being controlled by a single node.
In addition, Morph’s decentralized sorter mechanism design has also spawned another grand potential vision: redistributing sorter profits to on-chain project parties/DApp developers to provide more diverse and more proactive on-chain products and user experience.
In other words, in the future, after charging gas fees from users, Morph's sorter can completely reward the profits to the project parties/DApps on the chain according to the established distribution mechanism, which can derive a new incentive mechanism. For example, let the project parties receive rewards fairly and transparently according to their respective contributions, thereby realizing a competition mechanism similar to "community horse racing" - with the help of the decentralized sorter mechanism, Morph completely uses the disposal rights of the sorter fees and profits of the entire network as a baton, and uses rewards to inspire DApps to form a spontaneous ecosystem that contributes to Morph.
This will give full play to the advantages of different project parties, which is equivalent to achieving highly market-oriented competition among various DApps in Morph's marketing and innovative services, and motivating these contributors to jointly achieve the sustainable development of the Morph ecosystem:
The simplest example is that if Morph chooses to link incentives to the amount of gas spent by DApp smart contracts and the number of active users, then developers will undoubtedly be indirectly incentivized to make their contracts spend as much gas as possible and increase the number of active users of their projects as much as possible, thereby achieving a breakthrough from "0 to 1" and large-scale adoption.
Theoretically, this design concept can achieve "letting a hundred flowers bloom and a hundred schools of thought contend", helping Morph to quickly open up promotion and implementation "from 0 to 1" at low cost, while also providing users with differentiated, efficient, optional and diversified on-chain scenario services.
Finally, the project party/DApp that obtains the sorter fee income can also distribute this extra profit to different types of individual users in the form of incentives to meet their respective operational needs. In this way, each DApp has an additional means of operation to incentivize users, and Morph can also achieve its own promotion and large-scale adoption goals, achieving a "win-win" situation.
According to official disclosure, Morph plans to launch the mainnet and open the decentralized sorter function in the middle of this year. Judging from the current progress of the L2 battle, this may also be the L2 network that developers/users can experience that actually adopts the first decentralized sorter.
A long-term development framework integrating OP and ZK
As mentioned above, almost all mainstream L2 solutions are derivatives of OP Rollup or ZK Rollup. When DApp/project parties decide whether to adopt OP or ZK, the core consideration is actually the trade-off between low cost and security.
Most directly, although Optimistic Rollup lacks security, it is easier to achieve Ethereum compatibility, and due to its optimistic challenge characteristics, it does not need to bear the cost of L2 state verification most of the time, so the cost is relatively low.
Although ZK Rollups is extremely secure, it lacks efficiency - it relies entirely on mathematics, which objectively brings higher security and does not require a dispute period to ensure network security. However, it is more challenging to implement ZK Rollups in the short term, proof generation is slow and it is difficult to make it compatible with EVM.
Therefore, although the vast majority of OPRs in the OP series do not implement an interactive fraud proof system, which means that users have no way to respond when they find that the OPR has submitted an incorrect L2 status, and cannot supervise the malicious behavior of the OPR operator, at least for now and even in the next few years, for DApps with high transaction volumes, ZK Rollup still does not have an economic advantage.
Faced with this situation, many DApps may prioritize cost advantages over enhanced security, which is also the reality that OP is now the only dominant player. Therefore, there is also a generally accepted judgment in the L2 world that is similar to a prophecy, that is, OP is the present of L2, but ZK is the end of Rollup and Ethereum L2.
The key point is, with the development of ZK Rollup, once the economic and security of ZK reaches a good balance in the future, what will happen to the DApps that originally chose the OP system for deployment? If they migrate again, how will the technical and time costs be resolved?
For this reason, the fusion of Optimistic Rollup and ZK Rollup is also seen as the future of Ethereum expansion, and Morph innovatively proposed a responsive validity proof (RVP) that combines the advantages of both:
As a state verification method, RVP combines Optimistic Rollup with Validity Proof and uses ZK-Proof to verify the correctness of the state. After L2 accepts the state change, if a challenge is initiated, the sorter must generate and submit ZK-proof to L1 for verification within the challenge period. This design reduces the complexity of verification and theoretically shortens the challenge period from 7 days to 1-2 days to achieve fast, secure, and low-cost transaction processing:
In traditional Optimistic Rollup, a malicious sorter has the motivation to dos attack L1 to reject the challenge process. However, since RVP is generated by the sorter, this motivation does not exist in RVP, which completely eliminates this problem and can significantly shorten the challenge period.
In fact, this can also be understood as providing a fusion solution - allowing DApp to start with a more economical configuration (OP) while maintaining the flexibility of gradually enhancing security measures (ZK Proof) without making major changes to existing infrastructure.
This also highlights the flexibility of the Morph architecture. Counterintuitively, just as alloys often have better performance than pure metals, Morph's current hybrid solution has also achieved the best balance between scalability, low cost and high performance - lower cost than ZKR, while more secure than most OPRs without permissionless fraud proofs.
Modular design for low cost and low maintenance threshold
In addition, from the perspective of how to attract project parties/DApps, the migration threshold and usage cost are the core considerations in the competition between different L2s.
The degree of modularity is undoubtedly the key. Morph is divided into three important modules: Sequencer Network responsible for consensus and execution; Optimistic zkEVM responsible for settlement; and Rollup responsible for data availability.
Morph adopts a design mechanism similar to Ethereum 2.0's separation of consensus client and execution client to prevent invalid transactions from being included in blocks and avoid losses in user transaction fees.
The Rollup strategy also maximizes efficiency, allowing one transaction to contain multiple batches and one batch to contain multiple blocks. In addition, using the ZK Proof function, the content of the block is compressed to effectively manage the cost of L1 data availability.
At the same time, the design of multiple batch submitters also allows each sorter to submit batches to Ethereum in turn, thereby solving the single point failure problem of a single submitter, ensuring the activity of batch submission, and combining incentive mechanisms to ensure that there will be no transaction conflicts.
This modular collaborative architecture not only provides developers with attractive deployment options, but also enables them to quickly adapt to new standards, reduce trial and error costs, and maintain consistency with Ethereum as much as possible.
For example, when performing major Ethereum upgrades such as Dencun, Morph can efficiently integrate EIP-4844, add new features as soon as possible, and achieve synchronous compatibility with Ethereum's development path; in contrast, ordinary Rollups require a mainnet hard fork or contract proxy upgrade, and undergo extensive testing phases to achieve seamless interaction with existing systems.
To sum up, if Arbitrum and Optimism are the leading stars in the L2 track, Base and Blast are newcomers with fierce momentum, then Morph is more like a potential stock that is about to emerge and has a promising future.
Can Morph and others bring about a turning point in the second half of L2?
At present, new players like Morph are only online on the test network and have not yet issued tokens. Therefore, we can still look at their competitive advantages and potential growth space compared to other L2s in a relatively objective manner.
As mentioned above, in the current Ethereum L2 ecosystem, the competition for underlying performance may not be the mainstream narrative that the public is concerned about: compared with improvements in scalability and performance, how to attract more and more developers, project parties, communities and markets, and create a prosperous ecosystem with a variety of use cases in AI, DeFi applications, NFT, GameFi, etc., is the breakthrough point to avoid the embarrassing situation of "high valuation" but lifeless on-chain construction.
After all, time seems to be a cycle. In 2021, we were impressed by Axie Infinity sweeping across Southeast Asia and bringing a new wave of incremental users to Web3. But now in 2024, we are back to the beginning. With the accelerating brutal expansion, the Web3 world is increasingly facing its own unique traffic dilemma - the stock of Web3 users has peaked, but it is difficult for incremental users to enter the market.
In this dimension, the unique positioning of "consumer-grade L2" proposed by Morph is quite consistent with this incremental demand - on the one hand, the scenarios involved in the consumer level are rich enough, and the ecosystem can focus on enough points, from satisfying the spiritual level of entertainment and leisure to satisfying the material level of on-chain assets, Morph can cover them one by one through continuous and in-depth ecological construction.
On the other hand, the consumer-level user market is also broad enough. At a time when blockchain is seeking to break out of its circle of development, by providing a low-threshold and seamless experience, it can become a gateway for massive Web2 users to enter the Web3 world.
Especially the long-term development framework that integrates OP & ZK mentioned above, the "horse racing mechanism" behind the decentralized sorter, the low cost & operation and maintenance threshold of modular design. In essence, this combination of punches is also a L2 internal development solution that utilizes the advantages of different resources, talents, technologies, etc. to achieve market-driven transparent and fair distribution.
First of all, the integration of OP & ZK's long-term development framework, modular design, low cost & operation and maintenance threshold can effectively lower the migration and development thresholds for developers and project parties/DApps, providing developers with extremely attractive deployment options. At the same time, it also enables them to quickly adapt to new standards, reduce trial and error costs, and maintain consistency with Ethereum as much as possible.
On this basis, developers don’t even need to change a single line of code, maintaining high compatibility with Ethereum’s running execution end, thereby lowering the threshold for developers to use Morph to a minimum. This means that different on-chain projects, especially the leading protocols, can be quickly connected, leading to a positive cycle.
Secondly, the "horse racing mechanism" behind the decentralized sorter can give full play to the advantages of different project parties, which is equivalent to achieving highly market-oriented competition among various project parties in Morph's DApp ecosystem construction, market promotion, and usage services, and motivating these community builders to jointly achieve the sustainable development of the Morph ecosystem.
Because it is currently in the early stages of ecological construction, Morph has launched a series of ecological activities and long-term plans in recent months:
On March 25, Morph announced the launch of the Sparkloom Builder Program, which will last for 4 months and include an online hackathon and incubator program. The hackathon prize pool is $20,000, and the winner will be invited to join the Morph incubator program. The final incubator winner will have the opportunity to receive up to $100,000 in funding and share 30% of Morph's total airdrop.
On April 9, Morph, BeraChain, Solana, and The Graph jointly organized the Hack.Summit Hackathon competition, providing different workshops and lectures around various application scenarios of Web3 technology, and setting up winning rewards to promote the development and application of Web3 technology.
On April 13, Morph, OpenBuild, Chainlink, SNZ, EthPlanet, and MaskSolidity jointly held an offline Meetup & Mini-HackerHouse Shanghai event to help developers interested in blockchain enter the Ethereum ecosystem Build;
In addition, Morph has launched the Sparkloom incubator program, which will last from April 29 to June 30, mainly targeting projects such as AI, DeFi, GameFi, Infrastructure, NFT, middleware/tools, etc. Winners will receive guidance from mentors from Dragonfly, Pantera, LayerZero, The Block, Nansen, Pyth and other institutions, as well as a grant of up to $100,000 for a single project and 30% of Morph's initial airdrop, and a full quarterly return of the first year's sorter fees and profits. Comprehensive support;
This can not only help Morph "from 0 to 1" quickly promote and implement the situation with low cost by leveraging the mature user groups of existing encryption practitioners; at the same time, from the perspective of ordinary users, it is also an effective channel of "C2E" (Contribution-To-Earn):
Different types of user groups are included from different on-chain protocols, and differentiated reward opportunities are provided to on-chain users. Contribution is reward. As long as ordinary users contribute to the on-chain services designed by different B-side institutions (using protocols, holding positions, lending, etc.), they can obtain transparent and fairly distributed rewards.
In this way, each institution has an additional means of operation and new income options to motivate users. Ordinary users have a variety of opportunities to share the Morph network sorter fee profit rewards. Morph also achieves its own goals of construction, promotion, and large-scale adoption, achieving a "win-win" situation. If it can be steadily promoted, it may be a good way from self-circulation to positive feedback.
If "Web3 in 2022 is Web2 in 2002", then now may be a good time to do something. The focus should be on how to open up consumer scenarios and attract more and more new users to enter the market. Whoever captures the billions of future users in the Web3 world will win this war.
summary
Of course, new L2 solutions such as Taiko and Morph are currently in a very early stage. The core team’s focus is still on the development and improvement of the underlying infrastructure. However, with the rapid development of the L2 track and the L2 moves of crypto giants such as Coinbase and ConsenSys, the second half of the L2 era may have already begun.
All that is past is prologue. From a macro perspective, if everything goes well, whether it is potential stocks such as Morph and Taiko, or newcomers such as Base and Linea, they will lay the foundation for a new wave of DApps, new users and ultimately the growth of TVL of the Ethereum ecosystem, which may be completely different from the previous wave of L2/public chain craze.
In particular, the integrated solution like Morph is stirring up a lot of trouble. By integrating the long-term development framework of OP & ZK, the "horse racing mechanism" behind the decentralized sorter, and the low cost & operation and maintenance threshold of modular design, if it can be steadily advanced, it may be a good way for L2 to move from self-circulation to positive feedback. This is very imaginative and challenging.
