The Urgency of Scaling in the Crypto World: A Deep Dive into Layer 2 Solutions | Ep 11

Ever wondered why your crypto transactions can't be as fast as swiping a credit card? Tune in to explore the groundbreaking solutions that are making blockchain ready for prime time. 

🎯 Why Scaling Matters
⚙️ What is Scalability?
🌩️ Lightning Network
🌐 Ethereum's L2s
🤔 The Trade-offs
🕒 The Urgency

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Transcript

Sheldon: 0:00

You're listening to the Sugar Cane podcast, where you get all of crypto's tastiest tidbits. Here's your hosts, Sheldon Trotman and Rudy Dogum.

Rudy: 0:12

Welcome to another week about crypto and blockchain. This time, we're talking about something that we need to do in this ecosystem in order to succeed, which is scale. Scalability is important, sheldon. How important is scalability?

Sheldon: 0:31

Very yeah, no.

Rudy: 0:35

I think we're trying to scale this, it is 100%.

Sheldon: 0:39

We're trying to scale this really to, honestly, the world. We need to start competing and getting to the place where the technology can be used like Visa or used like MasterCard, where there have tens of thousand transactions per second globally. Right now we can barely even scratch the surface of that. Scalability is huge, right.

Rudy: 0:58

That's really amazing about crypto what was happening in the Bitcoin, ethereum pretty much all of them. As soon as they started to scale, a lot of issues started showing up. Bitcoin it was slow transactions you can barely pay anybody because it was just so slow and unusable. The Ethereum gas fees are remarkably high. You can spend hundreds of dollars to buy NFTs. It just was showing flaws in the current systems. When it first came out, it was oh, you can transfer a thousand dollars with Bitcoin for a couple pennies. Now it's a little more expensive with Ethereum same thing. So these issues are real issues I definitely want to know a little bit more about. Why is scalability so crucial?

Sheldon: 1:43

The reality is that the ways in which we do use blockchain right now is pretty specific to the particular chain. If you're transacting, let's say, using Bitcoin, you're using produce, a Bitcoin blockchain, and again, things are very slow there. And also people start transitioning to solutions like lightning on Bitcoin. Specifically, that's mainly for payments. But if you're talking about Ethereum, there's a bunch of different L2s or layer 2s, they call them when they start to move their assets to and transact on, just because things are a lot faster there as well as a lot cheaper there. So that's the kind of ways in which both Ethereum and Bitcoin are kind of scaling. We can dive into that a bit more if you want to.

Rudy: 2:22

Yeah, for sure, because that's what we're using now for Bitcoin. Lightning is being developed, ethereum is being related to L2s and I definitely want to understand what are the overview about these different solutions.

Sheldon: 2:36

Yeah. So first I'll start with Bitcoin, because it's the very simplest side of it. So Bitcoin again is pretty slow to transact on the main Bitcoin blockchain. But if you're doing payments on Bitcoin blockchain, people typically use lightning. So lightning network kind of. The way that that works is that you open up what's called a payment channel and so, let's say, I want to transact with you. We kind of open up a payment channel on the lightning network and that allows us to transact with each other pretty quickly, because the actual settlement, the actual moving of the kind of I send you $5 down to the Bitcoin blockchain, doesn't happen instantaneously. So like let's say you, we went to dinner and I paid the bill, oh yeah, and now you, yeah.

Rudy: 3:17

Yeah.

Sheldon: 3:20

I took you out. Yeah, yeah, yeah, no. So like if the bill, let's say it was like 10 bucks, right, and you owe me $10, we'd open up a payment channel on the Bitcoin blockchain and you basically have 10 miles worth of Bitcoin on the lightning network and you can send that to me, and so I currently keep that in the lightning network. So it doesn't actually leave that, it doesn't go down to the Bitcoin blockchain, but I have essentially a payment receipt that you sent me that money, right.

Sheldon: 3:48

And so now, let's say, something happens and let's say I go out to dinner with another friend and let's say, instead of me taking them out, they took me out and so I and I still need to pay them, let's say, $5. So out of the $10 that you sent me that's on the lightning network I can take $5 from that and send that to that other person. So now, essentially, there's a payment channel between me and my other friend and me and you. So that's how we can like transact. And again, if my friend wants to transact with you, the way that that kind of works would be that like it'll use me as a hopping node. So like if they sent, let's say, $3 to you. They basically send $3 to through me to you, so kind of like touch my node as it gets to you.

Rudy: 4:27

On lightning specifically, so that's kind of like those apps that are like an aggregator for all payments and kind of Summing it all up and then distributing what's left over, kind of like split-wise. If anyone's ever used split-wise or an app like that kind of yeah, we have a pool of all your friends who are making payments together, and then whatever is remaining is what's distributed. Again, that makes sense and that's the DAP version of split-wise.

Sheldon: 5:02

Yeah, sounds like that works.

Rudy: 5:03

And then how does like layer twos work?

Sheldon: 5:07

Yeah, so now layer twos so kind of a bit of a context. So lightning can only work for payments. You can only do that with, like sending value, like money for one person to another. Now, taking a step higher, a little more complex, are layer twos and Ethereum. So Ethereum allows you to do any kind of general purpose computation. So, like, if I wanted to, I went to buy an NFT, for example. That's me sending money to a smart contract, the smart contract associating certain like NFT to me to my ownership. That's where you can do it on Ethereum.

Sheldon: 5:37

Blockchain and layer twos are a way which you can do that in a much more scalable, performant way.

Sheldon: 5:41

So, like, the way that that technically works is that there's a set of smart contracts that live on Ethereum. That kind of function as like the storage of what's happening in a separate location. So what I mean by that is like instead of so it's kind of talking more technically if I want to interact with the Ethereum blockchain, I basically talk to an Ethereum node, but if I want to actually talk to a layer two, instead of talking to an Ethereum node, I talked to a layer two like node, a computer there, and then that then talks to the Ethereum blockchain for me on my behalf, and so the reason why that works is because now, instead of having everyone pay the kind of Ethereum costs to make a transaction on Ethereum, you talk to like kind of this separate party as a computer that then aggregates all the actions or all the activity in the certain period and then aggregates that down and push that onto Ethereum, the main chain. So like it basically aggregates all the transactions and pays the cost of once for everyone.

Rudy: 6:42

So now everyone gets based like kind of a reduced cost for going to Ethereum Makes sense and they're still used in both cases are still using the main blockchain, just Ethereum or Bitcoin, as their consensus mechanism, as their final.

Sheldon: 7:01

They call it like the sediment layer, like the, where all the base assets are settled Gotcha.

Rudy: 7:06

And yeah, are we sacrificing anything in blockchain and our blockchain technology with scaling?

Sheldon: 7:13

Yeah.

Sheldon: 7:13

So the kind of caveat with the kind of Ethereum approach is that, like, instead of talking to Ethereum, where there's a bunch of different nodes across the world that all like kind of secure the Ethereum blockchain, in the kind of layer two context, you're talking to a smaller set of nodes or computers that then aggregate everything together and push down to the theory of main chain, and so with that you get a lot less kind of, as they say, security.

Sheldon: 7:40

But like I'll talk more about why I said but like you talk to a specific set of computers that then are the ones that function to batch everything together and put them on to Ethereum. But there are cryptographic ways in which you, as a user of a layer two, can still if, if the, let's say, layer two chooses not to like sensors your transaction or choose not to include your transaction, you can still take your transaction from the layer to and push it on to layer one, just because the main settlement still happens on layer one. And so, like that's way, that's ways in which you can actually like still have the security of like you're not getting censored because you always have an exit to layer one if you want to pay the gas and want to actually get to layer one still. So that's, guys, and ways which you can still get secure.

Rudy: 8:24

Yeah, and there's multiple. Like there's a competition between layer two is like optimism. The arbitration and ZK is also in there too. So those are the top three that I know of. I think there are more. Trying to start where I think they're more trying to come out. What are the tradeoffs between, I guess, the top contenders?

Sheldon: 8:46

Yeah, so kind of the kind of fall into like two main buckets, if you're talking about a theory in terms of like, like roll ups or layer twos. One side of it, one flavor, is called optimistic roll ups, and so in that camp you find optimism, which is a pretty big optimistic roll up, arbitram, which is another huge yeah, the name is kind of funny. Yeah, the arbitram is also another one coin base recently launched their base blockchain. That's also an optimistic flavored roll up, or layer two, as people call it, and so those kind of one vertical, one kind of flavor of those and the kind of trade-offs there is. That Get me get very, very technical, real quick, and I'm gonna kind of work back up.

Sheldon: 9:26

So like the sediment period Four in layer two on an optimistic flavored roll up is typically seven days, and so what that means is that if you're interacting with anything on a layer to an optimistic roll up, typically you have to wait seven days for that kind of action to be kind of finalized, as they say. And there's a lot of like security guarantees that come into play when you talk about that seven-day waiting period, because if, within that seven-day period, someone figures out that like something occurred on the layer two that's invalid or false, that shouldn't happen. They can then provide what's called a fault or fraud proof, basically to say that, hey, this action that occurred on the layer to Shouldn't have happened. It's like a given good bit of context to that. It's like, let's say, the, the computer that you're talking to on the layer to, on the optimistic roll up, right, let's say that computer decides to say, instead of you, rudy, sending me five dollars, let's say you, Rudy, it says that you sent me ten dollars.

Sheldon: 10:25

Right, that's something that it could like kind of make up just because it's the one like producing the state and pushing it down to Ethereum. And what I could do is, if I again, I didn't agree with that something I saw was invalid, I can say, hey, here's the state that I signed, here's the thing that I wanted to happen and here's the thing that actually occurred. I can basically submit that to Ethereum On the main chain and then, within that seven-day period, it gets reverted, so that that thing that happened, that should have happened, should not have happened, gets reverted. So that's why, which specifically optimistic roll-ups kind of protect themselves, they have a seven-day waiting period for anything anyone to kind of dispute the claim that occurred in that seven-day period.

Rudy: 11:02

So it's a seven-day Like period of waiting, but you don't actually have to wait seven days to receive your funds via optimism, right that's correct.

Sheldon: 11:12

If you're transacting with anyone within optimism, optimistic roll-up, you get it instantaneously. So you have pretty much like a, a instantaneous Instantaneous. You can kind of take them as instantaneous actions. But if you're trying to go from optimism down to a fear, like, let's say, there's some like smart contract network that has a kind of lending flat product on optimism, and you want to take your assets from optimism down to Ethereum and actually use it on another kind of product, on a theory specifically, what'll happen is that you kind of exit from the optimistic roll-up. So you take your five let's say you have five ether on optimism. You can send a transaction on a theory of mainnet and get back your five ether. But that kind of Interaction that'll take seven days for it to be resolved. Gotcha, there's a lot of solutions out there that actually can reduce the time it takes to get that. So you don't have to wait that seven-day period, but again kind of the optimistic flavor of roll-ups in that context.

Rudy: 12:11

That's pretty nifty and it kind of does help the security side of things. On the optimistic side, yeah, how about the opera trim side?

Sheldon: 12:20

No. So the now our opera trim is also an optimistic roll up, but like in the kind of zk flavor of the zk. So like some pretty popular ones are like stark wear. So stark wear is a pretty popular zk layer to the technically not in the k Evm, that's the kind of technical nuance I could dive into as well. But like there's there's stark wear, there is zk sync which is a now up and coming zk Evm. So that's another kind of zk flavored roll up or layer two. I kind of keep saying like roll up and layer two because they're kind of synonymous in a sense. Yeah, there's, there's been a nuance and technical nuance people kind of dive into as like nerds, but like Francis Burr was there for much the same.

Rudy: 13:01

Imagine someone rolling up all the transactions together. Yeah, that's literally what you have to think about, and it makes a lot more sense because it took me a while to figure that out. I'm like, oh yeah, you just like you roll it up. Okay, I got it.

Sheldon: 13:14

Yeah because essentially everything has happened on layer two. You're rolling it up into one thing and pushing it out to the main chain. So yeah, so there's a couple of ones and kind of technical details of how those work. Is that so the key Evm users called zk proofs, or zero knowledge proofs, to basically take all the actions that occurred on that chain and kind of in the same way, bundle them together and push that one kind of change down to the Ethereum blockchain? So Ethereum again is that kind of sediment layer. Here's where all the kind of final states live.

Sheldon: 13:48

But zk, if you zk layer twos, they have a much stronger like cryptographic proof to now, instead of having to wait that seven day period, you can actually take it as instantaneous. So like there's a lot of like academic to technical details of it, but like for the most part it's a lot of like moon math and crazy complex cryptography that allow you to take all the actions that occurred on a zk Evm and bundle them together to make them on chain. Those are still very much in development mode and they're still coming out. Like only within the past like couple months have like a lot of teams really went live with their awful version of their zk Evm, so still very nascent field in that context.

Rudy: 14:27

And what's the meaning of zero knowledge in zk?

Sheldon: 14:33

Yeah, fun enough. So the zk wording or zk zero knowledge doesn't doesn't technically mean that there's like privacy, there's no like like 100%, like like zero knowledge of the actions that are occurred. So it's more a function of like how the cryptography is done. Again, we can dive into some technical details, but like there's a type of technology called zk snarks and zk Starks that allow you to kind of prove that all these actions that occurred are kind of cryptographically proven, they're perfectly secure.

Rudy: 15:06

So, yeah, it's more like a nuance of the naming of it rather than it being like yeah it's, it's from whatever to it, just mostly encrypting the transactions as they go along, just so it's not necessarily this address interacting with this person directly. It's more like this address is definitely done something with some amount of some money with maybe someone over here. That's. It's all good between us people. What happened between us people we don't know, but these two people are good, they're settled. Yeah, it's kind of like the idea.

Sheldon: 15:45

Yeah, it's kind of funny. You can actually like make proofs, like like actual, like mathematical proofs about things occurring without knowing what the actual inputs that that function were. This is very good complex moon math I can dive into the. That's the explanation.

Rudy: 16:04

It's like, well, the amount of math that goes into crypto photography and cryptocurrencies and watching is amazing. It's just amazing how we can even think of that type of stuff as humans. And it's also amazing the people who are working on making that as behind the screens as possible and behind the shades. It's like, okay, I'm glad we have this tech, but I don't understand it. But I trust the people who are working on it so great.

Sheldon: 16:31

How do I think about this less, it's tough.

Rudy: 16:35

So the last thing I want to know is like, how urgent is it that we find a solution for all these struggling layer twos and scalability issues? Because, yeah, we have good solutions now but they're not perfect yet, and I guess how urgent is it that we find like that perfect solution?

Sheldon: 16:55

The urgency is much less of like a kind of existential threat type of thing, more like a the space is halted until right, and so what I mean by that is like the space can't scale to the tens of thousands of millions, to hopefully like eight billion people in the world without having highly performance systems that don't break down, that are very secure and so like. In order for us to get to the point where we can have like a visa type experience on chain, you have to have like kind of a kind of cryptographically secure system that uses layer twos and uses like other types of payment networks to reduce the time and cost.

Rudy: 17:33

Yeah, I'm pumped for that. I mean you did. Yeah, I'm just you can't stop thinking about once we were able to just use crypto and transactions and whatever else as much as we can on the blockchain, as fast as we can. It's just an exciting time for me and yeah. I've been waiting for it for over 10 years now, so any minute now, but yeah, any minute.

Rudy: 17:57

You won't believe how far we've come already, people. It's been amazing journey and it's only getting better. Yeah, thank you again, sheldon's, because next week we got some more tasty tidbits.

Sheldon: 18:06

The tastiest of tidbits.