Thread by @CrossChainAlex

🧵 What if we never needed an #ETH killer, just a faster and cheaper #Ethereum network? Enter #Layer2 solutions.

A brief thread on what they are in simple terms, why I'm bullish, and how they'll drive the next wave of #DeFi adoption. 1/12

A traditional business has sales to generate revenue (transactions) and accounting to keep the books (settlement).

Putting the accountant in charge of everything would be slow and costly and inhibit growth!

#Layer2 = sales and #Layer1 = accounting. 2/12

So, business needs multiple skillsets to scale, #blockchain needs decentralization, security and speed to scale.

Similarly #ETH excels in decentralization and security but increased costs and reduced speed inhibit growth. 3/12

#Layer2 solutions attempt solve the scalability (speed/cost) challenge whilst maintaining decentralization and security

They are separate #blockchains that extend #Ethereum whilst inheriting the security guarantees. 4/12

This enables #ETH to do what it's good at settling transaction in a decentralized and secure manner.

Whilst allowing #Layer2 to handle the workload of an increased number of faster and cheaper transactions. 5/12

The preferred #Layer2 solution is via rollups. They bundle hundreds of txs into a single #Layer1 tx.

The tx are executed outside of #Ethereum but the data is posted to the main chain ensuring security and finality. 6/12

There are 2 types of rollups. Optimistic rollups assume tx to be valid but can be challenged and rectified via fault proofs.

Zero-knowledge rollups proof validity of txs off chain and compress and send that data to #Ethereum as proof of validity. 7/12

Benefits! Lower fees - tx are bundles off chain reducing on chain #Ethereum tx fees making it more affordable for more people.

New applications - faster throughput and finality offer the scope for new applications and better user experience. 8/12

Generalised #Layer2 solutions behave like #Ethereum but faster and cheaper, e.g. #Arbitrum #Optimism and #Metis.

Application based solutions focus on a specific use case, e.g. #dYdX which is a high throughput exchange. 9/12

Many #Layer1 solutions emerged to try and compete eith #ETH with speed and cost, but lacked decentralisation and security.

But none have managed to successfully capture significant market share with #Ethereum TVL dominance at 65%. 10/12

I wrote a recent thread on how the bear market is building the bull case for #Ethereum (linked below).

#Layer2 helps to realise that by offering up fast, cheap and secure access to #ETH and a whole world of new #DeFi use cases.

https://twitter.com/CrossChainAlex/status/1525962939848699905?s=20&t=ptD1JzSHpAKktKesw_oHGQ

11/12

This is a simple overview of a complex topic. Let me know if you'd like me to cover #Layer2 in more detail.

If you've found the thread useful let me know your thoughts below, give me a follow, give the thread a retweet. 🙏 12/12