Ethereum’s becoming closer to its goal of being the global compute layer, but it’s not coming as we thought. Instead of execution taking place using expensive on-chain resources, transactions are being moved off-chain, and Ethereum is being used as a data availability layer. Layer 2s are becoming the new Layer 1, and three prominent competitors with solutions live today aim to create an ecosystem around their layer. Let’s dive into the idea of a multichain or appchain future, how Ethereum became a main player, and what could happen next.
For several years, Ethereum has suffered from a transaction congestion problem. Simple transactions cost $25 or more in fees at their highs, rendering the chain prohibitively expensive. New chains like Solana, Avalanche, and Binance Smart Chain took advantage by offering much faster transactions and significantly lower fees, leading to a better overall user experience. In response, Ethereum has been focusing its development efforts on scaling at the protocol and infrastructure level while keeping the blockchain as decentralized as possible. This highly complex goal led to the realization that the optimal way to scale the chain while making little security and decentralization tradeoffs was by moving transaction computation, the expensive part, off-chain and keeping the transaction storage and validity proofs on-chain.
To facilitate successful off-chain execution, Layer 2 solutions were created. They execute transactions in an off-chain environment and either post cryptographic proof to the Ethereum blockchain or use a waiting period in which transactions can be challenged. Since the transaction data is available in this trustless environment, anyone can validate the correct execution of transactions, making this system effectively as secure as execution directly on Ethereum. L2s will become even more desirable after EIP-4844 is implemented, creating dedicated storage for L2 data in an Ethereum block that will cost a fraction of EVM-compatible storage. Between this upgrade and future parallel processing improvements, it may be possible to see Ethereum processing hundreds of thousands of transactions per second at near-zero fees within the next few years. While Layer 2s have succeeded in making transactions on Ethereum tens if not hundreds of times cheaper, they have a loftier goal: a network of interoperable app chains.
An app chain is a blockchain primarily used for one specific task or set of related tasks, as opposed to a general-purpose smart contract blockchain that can handle near-infinite use cases. While this may initially sound useless, they offer several benefits over a general-purpose model. First, they give the project much greater control over several important application features, including tokenomics, consensus mechanism, fee structure, and governance. Appchains could choose to use a fully unique development environment or capture MEV and distribute it to stakers instead of being at the mercy of Ethereum validators. Additionally, they get greater control over the nuanced trilemma of choosing between decentralization, scalability, and security. Maybe a gaming app chain needs fast and cheap transactions at the cost of centralization, while a financial settlement layer requires the utmost security, even if it means longer wait times.
Cosmos and Polkadot were the first projects focused on creating a multichain vision and validating the app-chain thesis. However, neither has seen massive success since their launches, even though they have had plenty of time to build their ecosystems. Ironically enough, the once general-purpose Ethereum has slowly become a goldmine for app chains because of its large developer base, new status as a data availability layer, and strong fundamental security and decentralization. The transition has also proven valuable for Ethereum, as stakers get a cut of the transaction fees required to store the L2 data.
It has been long speculated that Uniswap, a DeFi blue-chip, may one day release an app chain. Another decentralized exchange, DyDx, has already begun migrating from an Ethereum dApp to a Cosmos app chain for better latency and transaction control. Uniswap would likely stay in the Ethereum ecosystem and could benefit from the internalization of MEV, swap fees, and token value accrual that an app chain could provide. Others, like Ethereum co-founder Vitalik Buterin, disagree, and he specifically stated that the friction of an app chain and the bridging process would never be able to replace the ease of use of a smart contract that can be integrated with a full smart contract environment.
The transition to app chains is a fascinating up-and-coming trend in the blockchain industry. In the next and final part of this series, we’ll analyze the three live solutions in the Ethereum appchain space: Polygon Supernets, Optimism Superchain, and Arbitrum Orbit. Whether or not the app chain vision comes to life remains to be seen, yet it is certainly an exciting and thought-provoking time for Ethereum.
By Lincoln Murr