Author: Dan Hughes, Founder of Radix, CoinTelegraph; Translated by Deng Tong, Golden Finance
For years, cryptocurrencies have looked to second-layer (L2) solutions as a panacea for scalability issues. What if they are exactly what’s putting us at risk?
Rather than paving the way for mass adoption, this obsession has created a tangled web of rollups, bridges, and fragmented liquidity that threatens the core tenets of blockchain decentralization and security. The dream of a seamless, decentralized web is fading, obscured by a complex system that echoes the inefficiencies and centralization of the traditional financial world. Are we scaling innovation, or are we simply reproducing the past?
The Blockchain Trilemma
L2s were supposed to ease the blockchain trilemma. However, while they may fill a gap at an individual level, L2 solutions have put cryptocurrencies at risk of losing all three.
The continued growth of L2s has resulted in a highly fragmented ecosystem that is difficult to navigate and reliant on complex rollup and bridging solutions. This has led to the centralization of parts of the ecosystem, drawing assets into fragmented islands of liquidity, hindering security and stifling competition from smaller projects.
These “solutions” introduce friction at scale and also unnecessary security risks. While bridge-related hacks have become less common over the past two years, hackers will always find new ways to balance ledgers — exploiting rollups, channels, and sidechains.
Many L2s’ reliance on sequencers or trusted validators creates additional chink in the armor as single points of failure, while siloed liquidity reduces validator availability for smaller L2s, threatening network resiliency.
These solutions also present significant technical challenges for application developers looking to integrate with L2s, requiring a deep and specific understanding of the mechanics of each L2 that the application may need to touch.
L2 proponents argue that these tradeoffs are necessary and easily overcome, but there are more fundamental issues at play here than sacrificing security, scalability, or liquidity.
The ultimate goal of cryptocurrency is a universal network where any asset or decentralized application can instantly interact with any other asset or decentralized application in a trustless, secure manner. However, the friction introduced by L2 undermines this instant interoperability, while the centralization of sequencers and validators undermines the foundation of a trustless system. Not only does this hinder the scalability of decentralized finance (DeFi), but it leads to an entirely different kind of scaling that replicates the inefficiencies of the existing siloed, fragmented, and middleman-ridden TradFi system.
If the goal of DeFi is to move all financial activity on-chain, we have to do better than we are doing today.
Building the Foundation
Crypto needs to be built from the ground up. Blockchain networks must prioritize scalability and security at Layer 1.
Sharding offers a clear path forward, but the industry must aim higher and build long-term solutions, not just quick fixes that “temporarily fix” current scalability issues. It’s not just about adding more shards; it’s about how we shard. The beacon chain just adds a bottleneck, dynamic sharding is complex, limits scalability and creates huge overhead. Even intra-validator sharding seems to solve all of these problems until you reach resource saturation on the network-facing node that has to receive all transactions, just pushing the problem to the back end to find more validators and reducing returns.
The obvious solution to scale DeFi to the same functionality as TradFi is state sharding, where the state of the blockchain is distributed across many different shards. Transactions involving state from different shards create an ad hoc consensus process.
The validators responsible for the state of a transaction communicate, agree (or disagree) and update the state atomically across all relevant shards. This allows transactions to be processed in parallel across multiple shards and even within shards, with the only concern of the shards being that transactions that modify the state they are responsible for have no cross dependencies, significantly increasing throughput without compromising decentralization or accessibility.
When these shards are integrated with atomic commitments, if any part of a transaction fails, everything aborts cleanly and no work is required to unwind pending state changes.
This is just one solution. DeFi will scale to the planet. It’s just a question of when and by what means. That being said, focusing on developing foundations on L1 rather than relying on a patchwork of solutions from L2 will eliminate fragmentation, reduce complexity and ensure that scalability and accessibility are once again at the core of blockchain networks. Ultimately, the future that developers want to prioritize — the founding promise of token economics or Web3 — is decentralization, efficiency, and security.
Scaling for the Future
L1 solutions are solutions for everyone. They secure the foundation of the ecosystem for developers, traders, regular users, and even billions of potential users. Without a resilient and scalable architecture in the foundation, just one strong push is enough to bring this house of cards down. Of course, specific use cases may be better suited for L2 solutions. High-frequency trading settlement is a perfect example, but the exception will never prove the rule. From the perspective of the entire ecosystem, developers must focus on integrated, native scalability solutions rather than just adding complexity and balancing more unstable “solutions” on top. Not paying enough attention to L1 will only bring problems.
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