What new opportunities can the Cancun upgrade bring to L2?

2023 ushered in two important upgrades in the history of Ethereum. The first is the Shanghai upgrade, which was completed on April 13. After the upgrade in Shanghai, the beacon chain pledged withdrawal function was opened, making Ethereum officially change from the PoW mechanism to the PoS mechanism. This upgrade has become an important milestone in the Ethereum upgrade roadmap. Now, Ethereum is about to usher in the Cancun upgrade, which aims to add more data storage to reduce costs and increase efficiency for L2. It is expected to increase the speed of L2 by 10 to 100 times while reducing costs on the existing basis. According to the latest Ethereum core developer meeting, the Cancun upgrade is expected to go live by the end of the year.

How will the Cancun upgrade speed up the expansion of Ethereum, and what new development opportunities will it bring to Layer2? R3PO believes that through the Cancun upgrade, Layer 2 will be better integrated into the Ethereum ecosystem and provide users with a faster and lower-cost transaction experience. Both Optimistic Rollup and ZK Rollup will benefit from this upgrade and jointly promote the development of the Ethereum ecosystem.

1. Deterministic future - Layer2

In the latest article "The Three Transitions" by Vitalik, the co-founder of Ethereum, three main technical transitions that Ethereum needs to go through: transition to L2 expansion, everyone turns to Rollup; transition to wallet security, everyone uses Smart contract wallet; transition to privacy, ensuring privacy-preserving fund transfers are possible. **

The article clarified the importance of L2 and Rollup, and Vitalik pointed out that without the development of L2, Ethereum will fail due to high transaction costs. Compared with the performance of the world-renowned transaction system VISA, which can process tens of thousands of transactions per second, the performance of Ethereum, which can only process 15 transactions per second, is really difficult to meet normal transaction needs. The cost threshold of $3.75 per transaction also discourages a large number of ordinary users.

Ethereum supports a large number of transaction activities every day. With the continuous development of the ecology, due to the limitation of block space, in order to compete for limited resources, the network becomes increasingly congested. Low-level problems are gradually emerging, and there is an urgent need to reduce costs and speed up.

How to speed up the expansion of Ethereum has always been a problem that Ethereum developers pay special attention to. According to the Ethereum roadmap released by V God, after Shanghai upgrades to solve the problem of the consensus mechanism, it will then focus on solving the problem of expansion. The goal is to increase the transaction volume of the Ethereum network to more than 100,000 transactions per second.

There are currently two expansion solutions for Ethereum: Layer 2 and Sharding. Layer 2 is an off-chain solution for the expansion of the underlying blockchain (Layer 1). The principle is to put requests on the blockchain on the chain The actual transaction is executed and calculated off-chain, and then the final validity of the transaction is verified through a very small number of transactions on Ethereum. The current mainstream Layer 2 solution is Rollup. The principle of Rollup is to package more than a hundred transactions executed and calculated on the chain into a transaction summary, and send the summary data to Ethereum. Only the summary data needs to be saved without Complete calculation and storage needs to be performed on the Ethereum chain to achieve the purpose of expansion. In this way, the expansion can be achieved while ensuring the security of Ethereum.

二、Optimistic Rollup VS ZK Rollup

Rollup is mainly divided into two types: Optimistic Rollup (Optimistic Rollup) and ZK Rollup (Zero Knowledge Proof Rollup).

**Optimistic Rollup uses a fraud proof mechanism. **The system executes the reliability of the transaction data by default, and the waiting period can be entered without verification of validity. During the waiting period, if any node raises an objection and provides evidence that the transaction is malicious, the transaction will be cancelled. If there is no objection, after the waiting period is over, the transaction will be confirmed and written into the block. Through the fraud-proof transaction scheme, large-scale verification deployment is omitted, which saves computing resources and ensures the accuracy of transactions. Currently well-known solutions include: Arbitrum, Optimism.

**ZK Rollup adopts the mechanism of zero-knowledge validity proof. **Prove that all transactions are valid by generating a zero-knowledge proof, and upload the final state changes after all transactions are executed to Ethereum. ZK Rollup does not need to upload all the compressed transaction details like Optimism Rollup, but only needs to upload a zero-knowledge proof and the final state change data. The ZK Rollup layout mainly includes ZKsync, Starkware, Scroll, etc.

Pros and cons of Optimistic Rollup:

Advantage:

**Compatibility: **Optimistic Rollup is relatively easy to support general-purpose contracts and is compatible with the Ethereum Virtual Machine (EVM), making it easier for developers to develop and migrate applications.

Disadvantages:

Time delay for fraud proof: When there is a malicious transaction or dispute, Optimistic Rollup has a longer exit time, usually a week, which may cause funds to not flow freely for a period of time.

Network stagnation: When the network encounters a dispute, the entire Optimistic Rollup network may stagnate, resulting in the inability to proceed smoothly due to the need to wait for the processing and verification of the objection.

Pros and cons of ZK Rollup

Advantage:

**Privacy protection: **ZK Rollup uses zero-knowledge proof technology to verify the validity of transactions while protecting user privacy. Transaction details are kept private and only the correctness of the proof needs to be verified, providing a higher level of privacy protection.

Security: The verification process of ZK Rollup is based on mathematical proof, which has a strong security guarantee. Through zero-knowledge proof, the validity and consistency of the transaction can be ensured without disclosing the details of the transaction.

Disadvantages:

**Computational cost: **Generating and verifying zero-knowledge proofs requires a large amount of computing resources. Therefore, the computational cost of ZK Rollup is relatively high, which may result in longer processing time and higher computational overhead.

**Limited smart contract functions:**Since ZK Rollup is designed to optimize transaction processing, it has limited support for complex smart contract functions, and some complex contracts may not be directly implemented on ZK Rollup.

Due to the first-mover advantage of low development difficulty and early launch time, the OP series currently occupies more than 90% of the TVL in the market. The market share of the ZK series is relatively small. The ZK series needs faster construction progress and ecological construction to participate in the competition for user growth . As the Layer 2 ecology gradually matures, the cost of Rollup can be greatly reduced after the Cancun upgrade. User growth and ecological construction may be the most critical factors for winning the competition between ZK and OP.

3. The future of Layer2: the way forward led by the Cancun upgrade

In the previous article, we compared the pros and cons of Optimistic Rollup and ZK Rollup, two Layer 2 solutions. With the upcoming Cancun upgrade of Ethereum, Layer 2 will usher in new development opportunities. The Cancun upgrade is an important milestone for Ethereum, aimed at improving scalability and performance. Through the Cancun upgrade, Layer 2 will be better integrated into the Ethereum ecosystem, providing users with a faster and lower-cost transaction experience. Whether it is Optimistic Rollup or ZK Rollup, they will all benefit from the improvements brought about by the upgrade. **After the Cancun upgrade, the speed of Ethereum Layer 2 will increase by 10 to 100 times and transaction costs will also be reduced. ** We have reason to expect that Layer 2 will be widely used in Ethereum, which will achieve high throughput and low cost. Centralized applications open up new possibilities.

1. Main content

The Cancun upgrade includes five EIPs designed to add more data storage and lower fees. The core of the upgrade is EIP-4844. In addition, it also includes four improvement proposals: EIP-1153, EIP-4788, EIP-5656, and EIP-6780. There's no firm date for the upgrade yet, but it's expected to go live by the end of 2023.

EIP-4844: As the core of the Cancun upgrade, EIP-4844, also known as Proto-Danksharding, is an expansion solution around Rollup. EIP-4844 is the first step on the road to scaling Ethereum. Before the upgrade, Rollup data is permanently stored on Ethereum, and the storage fee is expensive. 90% of the transaction cost that users pay for Rollup is due to the storage cost. To this end, EIP-4844 introduces a new type of transaction - Blob Transaction, the data will be migrated to the "Blob" for temporary storage, the storage time is about 1 month, after which the data will be deleted. If you want to store long-term data, it will be stored by other service providers according to actual needs. **When Blob becomes a part of the Ethereum protocol through Proto-Danksharding, it is possible to add more Blobs to the Ethereum block. At this time, the throughput of Ethereum will be greatly expanded again (>100 times), and the transaction Costs will also drop. **

Other selected EIPs include:

EIP-1153: Reduce fees for storing data on-chain, improving block space.

EIP-4788: Improve the design of cross-chain bridges and stake pools.

EIP-5656: Add minor code changes related to the Ethereum Virtual Machine.

EIP-6780: Remove code that could terminate smart contracts.

**2. Which opportunities deserve attention? **

①Layer2's Grand Narrative

**The era background of Ethereum congestion also created the grandest narrative. **The total TVL of the current L2 ecosystem has more than doubled from the beginning of the year to about 8 billion US dollars.

As the first step in the expansion of Ethereum, the Cancun upgrade will make Layer 2 faster by 10x-100x! cheaper! The expansion and low cost of EIP-4844 will benefit each L2 ecology, the OP ecology will be more diversified, and the ZK ecology will be more available due to the enhanced data availability, allowing the rapid growth of independent layer 2, which is difficult to operate at high cost. Benefiting from the reduction of on-chain fees, the L2 ecosystem will become more abundant and the number of users will increase.

Among the projects that have been launched, Arbitrum, OP, the rookie ZKsync, and the established application dYdX occupy half of the current L2. The strong is always strong, and the leading agreement of the popular track has greater potential after the Cancun upgrade.

In addition to the projects that have already been launched, Scroll, Linea, and Taiko, which are about to launch the mainnet, are worthy of attention.

In addition, the faster transaction speed and lower transaction costs of L2 will inevitably lead to a new round of rise of projects on L2. On-chain futures and on-chain options are vulnerable to the low TPS of Ethereum. The upgrade of Cancun to such projects with high transaction speed requirements such as GMX and GNX has brought substantial improvements and further expanded development space.

② Data Availability Layer DA track

Since blob data can only be saved for a short period of time, there is a problem with the call of historical data. This creates a need for decentralized storage, and the Layer 2 expansion solution also requires the use of a data availability layer. In addition, the Cancun upgrade will also benefit the L1 storage expansion network, such as Ethereum DA layer projects such as Eth storage, Arweave, and Filecoin.

**3. Where does Layer 2 go? **

In the foreseeable future, as Cancun upgrade blows the clarion call of Ethereum expansion, the expansion will provide higher throughput and lower transaction fees. This will enable Layer 2 applications to process more transactions and provide users with faster and instant transaction confirmation. Whether it is payment and settlement in the financial field, or in games and NFT, the high performance of Layer 2 will provide users with a smoother and more efficient experience.

However, technological advancement alone cannot attract users. In order to realize the real prosperity of Layer 2, innovative applications are essential. According to L2beat data, there are 29 Layer 2s that have already been launched and are waiting to be launched in research and development. Among them, Arbtirum One, Optimisim, zkSync Era, and dYdX account for 92.75% of the market share, and other L2s share the remaining 6.25%. market share. **

It's like spending a lot of time and energy building highways, but there are very few cars driving on the highways due to lack of demand. This is a common problem faced by most L2s. Without high-quality applications, the value of L2 cannot be reflected. It is precisely because of the rise of DeFi applications such as GMX that Arbitrum has gradually built a prosperous ecology. Only by developing more convenient, innovative and practical applications to meet the needs of users can we truly attract users' attention and participation. This requires developers and entrepreneurs to make bold attempts and innovations on Layer 2, and combine the advantages of Layer 2 to create unique and attractive application scenarios. Only in this way can Layer2 truly integrate into users' lives. ** Therefore, in addition to the development of technology in the future, user migration and application promotion are also key factors for the future success of Layer 2. **