New Report From ByBit Sheds Insights on Layer 2 Scalability Solutions

What is Happening?

ByBit has released its report on “Layer 2 Scalability Explained: How ZK-Rollups Stood up to Subnet”, the report discusses layer 2 scaling solutions and rollups in relation to custom chains such as subnets or sidechains and looks at how these various L2 solutions stack up against each technology solutions.

There have been significant network disruptions on well-known Layer 1s (L1) such as Solana and BNB Chain due to their separate networks operating concurrently with DeFi protocols, NFT markets, and web3 games. In a similar fashion, Ethereum's network has been slammed for being overburdened by transactions and charging excessive costs for gas because of this, Layer 2 (L2) scalability solutions became a more prominent topic in the industry.

According to the report, DeFi Kingdoms and Crabada, two Avalanche L2 scalability solutions that were implemented early this year, have boosted Subnets' popularity. With the exception that subnets might opt to use validators from the mainnet, they are like sidechains in certain contexts. Web3 games' preferred L2 scaling methods seem to be subnets and sidechains at the moment. The report sheds light on scaling layer 2 solutions that can be leveraged by blockhain startups to create web3 applications that can scale.

What is ByBit?

Bybit is a cryptocurrency exchange established in March 2018 to offer a professional platform where crypto traders can find an ultra-fast matching engine, excellent customer service and multilingual community support. For retail and institutional customers throughout the globe, the firm offers unique online spot and derivatives trading, mining and staking solutions, as well as API support, for the burgeoning digital asset class.

Ben Zhou, the company's CEO and founder, formerly worked for XM, a major FX and CFD trading services provider. Among its members are investment bankers, IT companies, FX traders, and early blockchain users. From Morgan Stanley to Alibaba to Tencent are some of the members of the team who will be working on the project.

Understanding Rollups and their Impact on Blockchain

According to the report, in order to deal and solve with Ethereum's scalability difficulties, the Ethereum Foundation recommends using rollups. In addition to rollups, various L2 solutions like sidechains and subnets exist to address the trilemma of scalability. Rollups combine compressed off-chain transactions into a single order on an L1 network in order to cut gas expenses and increase transaction capacity for any given L1. This means that the L2 may execute computations while the L1 just needs to verify them. After all of these transactions are completed, the gas expenses for each one will be split between them, allowing thousands of transactions to be completed at once.

Two types of rollups exist: Optimistic and zero-knowledge rollups (ZK Rollups). The two ways of verification are different. Without verifying each transaction, optimistic rollups publish them to the base layer. Witnesses would then have a seven-day challenge opportunity to correct disputed transactions. Cryptographic proof of authenticity is generated by ZK Rollups and then posted to the mainnet. The time it takes to complete a transaction using ZK Rollups is currently about 10 minutes.

On the other hand, ZK Rollups are a relatively new technology, and EVM support is weak. There is still a long way to go until ZK Rollups are EVM-compatible, despite the fact that zkSync launched an EVM-compatible zkEVM on their public testnet earlier this year. It's not possible to do ZK Rollups without it. ZK Rollips and Optimistic Rollups allow for scaling of blockchain transactions through verifications methods that allow for settling of transactions for web3 applications. The impact of rollups is considerable on the future of Ethereum and other layer 1 blockchains.

Understanding the Pain Points with Rollups and Layer 2 Scaling

According to the report, the incompatibility of ZK Rollups with EVM is a frequent problem for general-purpose ZKs. Optimistic Rollups and Polygon PoS are the two most popular L2 scaling options for DeFi participants in Ethereum. As a result, Curve, Aave V3, and Uniswap elected to use Polygon and Optimism and Arbitrum, respectively. Matter Labs is evaluating zkEVM, while Netherminds is working on a transpiler for StarkNet using zkEVM. In the future, any progress in EVM compatibility might assist bring DeFi projects to ZK Rollups.

ZK Rollups' lack of communication is yet another issue as the disparity in liquidity and a central sequencing procedure raise security problems because of this. However, Immutable X's recently disclosed cross-rollup liquidity solutions may be a step in the right direction.

According to the report, there is a solid reason ZK Rollups haven't taken off in NFT and web3 gaming. Since Gods Unchained adopted Immutable X's solution, its trade volume has decreased significantly. Similarly, Sorare's success on the Ethereum Mainnet was short-lived until it switched to rollups. On the other hand, Avalanche subnets have gained a firmer foundation in NFT and web3 games, despite the failure of ZK Rollups in the aforementioned cases.

Final Thoughts on ByBit Report

The ByBit Report sheds light on layer 2 scaling solutions, subnets and how and when blockchain startups should leverage layer 2 scaling solutions such as ZK-Rollups and Optimistic Rollups. In my opinion, the report is rich insight for blockchain founders, consultants and blockchain enthusiasts to understand layer 2 scaling solutions and their application in web3 ecosystems.

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Image credits: Mariia Shalabaieva, and Rodion Kutsaev.