In the wake of DeFi’s summer frenzy in 2020, demand for ethereum-hosted protocols skyrocketed, causing gas fees to rise to sky-high levels and causing severe network congestion.
First, we discuss why Layer2 technology is so important. We start with the foundations of scaling, and then detail how the new off-chain tools can help solve both transaction speed and cost problems. Next, we discuss why NEC will be the unlocking of the next wave of killer applications based on blockchain technology.
If the promise of blockchain technology is to democratize access to finance — and reduce costs by removing rent-seeking middlemen — its greatest irony is that users are still expensive when it comes to transactions on Ether, which hosts most DeFi protocols. In a distributed network like Ether, every transaction requires storage and processing work on every node: this means that as the user base grows, the network will inevitably run into capacity constraints. This is the reason for the notoriously high gas fees. Because network congestion drives up the price of gas fees and increases processing time, making it impossible for small transactions to function properly. This makes it almost impossible for DApps, which require a high computational level, to run directly on an increasingly congested blockchain.
Simply put, ethereum has become a victim of its own success. Over the past year, the demand for processing transactions has spiked as millions of people have scrambled to accept and use the DeFi protocol, the NFT marketplace, and other DApps hosted on Ether. In this case, the processing power of each node has been disappointing due to its limited computing power and individual block size.
When more transactions emerge to compete for block space and computing power with certain limits, the gas fee rises and the volume and speed of transactions slows. in 2021, ethereum fees rose 845% from 2020; the average block capacity was about 70% in January 2020 and has now risen to a sustained level of 98%.
Problems in scaling
Increasing the capacity of a network like Ether is extraordinarily challenging. There are three main characteristics that define a blockchain: decentralization, security, and scalability. You can choose from two of these three features, but if you stick with the most straightforward approach, then you won’t have any of the three. This means that if you increase the scalability of a blockchain — by which it can handle more transactions, will be faster and will be cheaper — you will usually weaken its security or decentralization features.
This grand dilemma is often referred to as the “scalability triad paradox” and has plagued proponents of blockchain technology since the early days of the ecosystem’s development. In 2014, Vitalik Buterin made the memorable promise that the ethereum community would either solve the scalability problem “or perish here.” Thankfully, with the recent scalability upgrades and the launch of the groundbreaking Layer2 extension tool, the project’s success is within reach.
Broadly speaking, there are two ways to overcome the scalability triad paradox.” Layer1" or “on-chain” extensions focus on improving the blockchain itself; “Layer2” or “off-chain” extensions focus on improving how the blockchain is used.
In the Ethernet ecosystem, the leading Layer1 extension proposal refers to “sharding”, which would reduce the amount of data each verifier needs to process by creating new chains or “shards” to split the transaction database horizontally. This will allow the total number of transactions processed by the distributed network to exceed the computing power of a single node. Ultimately, this will lower the threshold for new validators to join the distributed network, increase its throughput, and reduce the cost of transactions on it.
However, there are serious limitations to the way Layer1 scales. This scaling approach involves challenging computer science and game theory challenges, and many of them have never been solved before. Hard forking of protocols is also an important foundation for implementing them; as a practical matter, this requires a strong consensus to be built around each Layer1 upgrade by all stakeholders. As in any complex and decentralized system, this is a daunting and time-consuming proposition.
The long delay in the planned hard fork upgrade of the ever-troubled “ETH-2” Ether demonstrates the difficulty of implementing major Layer1 changes in terms of technical and community coordination.
While the Layer1 solution focuses on improving the performance of the core blockchain, the Layer2 approach looks at improving the way the blockchain is used. Its proponents argue that because distributed ledgers are by nature capacity-constrained, they should only host the highest value transaction data. layer2 migrates low-critical operations off-chain, but leaves assets and cryptocurrencies in layer2. it allows users to return to layer2 at any time to resolve disputes or recover their crypto assets. This anchors Layer2 operations in the security of the local Layer2, freeing up valuable block space on the core blockchain. Ultimately, this allows Layer2 to process more transaction volume faster and at a lower cost.
There are three main types of Layer2 solutions: stateful channels, sidechains and rollups. while all three can provide compound gains in blockchain capacity, the ethereum community has embraced rollups as the most promising way to scale the network. While other Layer2 solutions can achieve scalability after accepting significant trade-offs in terms of security or decentralization, rollups accept some centralization without sacrificing de-trusting (which is a key priority for decentralization).
Rollups move the majority of computation off-chain and then periodically push bulk transaction data and the resulting state roots to the Layer1 blockchain. By performing operations outside the main network but recording transaction data and/or proofs on Layer1, ‘rollups’ can benefit from the security of the core blockchain, while enabling greater throughput and significantly reducing costs. Broadly speaking, there are two types of rollups: ZK-Rollups and Optimistic Rollups.
ZK Rollups transfer computation to Layer2 and periodically batch and compress transaction data performed outside the main chain, generating a proof of validity of its integrity and publishing it to the Ethereum mainnet. By publishing proofs of correctness for each state transition, ZK-Rollups guarantees the validity of the state on the chain and allows users to withdraw money immediately. But the computation of these proofs is complex and time-consuming. Even though developers will eventually be able to use Solidity in conjunction with ZK Rollup technology, they will currently need to rewrite the smart contract in a custom programming language. For now, ZK-Rollups are the most suitable for projects that implement direct payments, such as decentralized exchanges or payment platforms.
Unlike ZK-Rollups, Optimistic Rollups assume that transactions are valid and run fraud proofs only in the presence of challenges.Optimistic Rollups rely on parties to validate Layer2 submissions — and challenge incorrect states -to maintain the integrity of the transformation. While computationally efficient, this forces users to wait a challenge period before they can access their funds. That said, the scalability benefits from Optimistic Rollups are huge, reducing ethereum gas fees by 10,000+% and increasing throughput by up to 200x.
Optimistic and ZK Rollups’ ability and promise is to give users the option to revert to Layer 1 to recover their assets or resolve disputes by anchoring transactions in local Layer 1 security. They create game-theoretic incentives for users and operators to act honestly. This makes them an important catalyst for creating a secure and scalable network where users can transact without trusting a centralized intermediary or their counterparties. In short, the promise of blockchain and cryptocurrencies is clear.
NEC’s role in layer2 solutions
NEC (New Era) is a Layer-2 chain aggregator based on the core concept of Ethereum expansion, and is committed to building a modular, versatile and highly flexible expansion framework for Ethereum. Its core component is SDK, a modularized and flexible development framework, which supports the construction and connection of two mainstream expansion paths: Secured chains, or two-layer chain, which can rely on the security of Ethernet network.There is no need to establish its own authentication mechanism. In addition to the main chain completed at present, other Layer 2 expansion schemes will be supported in the future, such as Optimal Rollers, zk Rollups, Validium, etc., which will make NEC truly become the Layer 2 aggregator on Ethereum chain.
NEC proposes a decentralized and configurable two-tier side chain network, which provides storage function and supports transactions with high throughput, low cost and low delay. This system is the configuration and deployment of Byzantine fault-tolerant side chains with high throughput, compatibility with Ethereum virtual machines, support for storage, and can prove security.A subscription-based decentralized network is provided. The side chain of each certificate of interest is highly configurable, which is composed of nodes pledging NEC certificate on Ethereum main network, and its consensus mechanism uses asynchronous Byzantine fault-tolerant protocol.
In order for blockchain-based systems to achieve their vision of a transparent, secure, censorship-resistant, and privacy-protecting financial infrastructure, the ability to scale the ecosystem will need to be an iterative, enduring project. Right now, NEC can provide powerful, flexible, composite tools, and we can’t wait to see the wave of innovation NEC unleash.