- The Ethereum network could experience a standstill if the layer two scaling solutions like Polygon and Arbitrum were to shut down.
- Amid the crypto regulatory crackdown in the United States, Polygon (MATIC) is among the digital asset projects accused of violating the securities act.
The growth of blockchain technology has experienced several hurdles in the past years amid the mainstream adoption of digital assets. The question of how far a blockchain is decentralized has made a huge difference in relation to the regulatory aspects. The Bitcoin network uses the proof-of-work (PoW) consensus mechanism to ensure the highest level of blockchain trilemma: security, scalability, and decentralization. However, the Bitcoin network has been challenged on the aspects of scalability, especially during crypto bull markets and other congestions.
As a result, other blockchains that were developed after Bitcoin have significantly adopted the use of rollups to assist in scaling the layer one chain. Essentially, the roll-up blockchains tap on layer one’s security and decentralized aspect to ensure sustainable scalability. Furthermore, transaction confirmation on layer one is often prioritized with network fees, whereas layer two facilitates cheap and fast transactions in batches, thus helping the former decongest.
Ethereum Cofounder Buterin Points on Layer Two Backdoor Scare
The United States SEC recently pointed out several digital assets thought to be unregistered securities including Polygon (MATIC), a major layer two scaling solution for Ethereum with nearly $1 billion in total value locked (TVL). The revelations sparked debate about large corporations controlling most layer two scaling solutions. Interestingly, the Ethereum co-founder admitted that all layer two scaling solutions have a security backdoor, which significantly compromises users’ assets in the future.
Vitalik acknowledges that all Ethereum L2s have “backdoors”.
I’ve obviously been saying this for years.
These L2s are run by large corps and they’ll eventually face regulation.
They’ll never be sufficiently decentralized.
It’s big banking 2.0.
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The notion of layer two backdoors was seconded by Binance co-founder and CEO Changpeng Zhao (CZ), who noted that decertification aspects of blockchain technology are subject to a degree of scale. Nonetheless, Buterin highlighted that decentralization aspects through layer two scaling solutions on the Ethereum network have a ‘training wheel’, which is basically a learning curve to a desired point.
The use of tokens on layer two networks has also made the regulators think of them as organizations raising money through unregistered securities. Furthermore, Coinbase introduced its Ethereum-based scaling solution dubbed Base without a crypto token and stated no plans to issue one in the future.
With large corporations investing their money to build scaling solutions, blockchain experts fear for their security aspect. Moreover, the smart contracts used in the Ethereum layer two scaling solutions are subject to human change and not mass consensus like Bitcoin.
Bigger Picture
The cryptocurrency bull rally is expected to kickstart in the second half of 2024, with more players anticipated to join the industry before then. The use of layer two scaling solutions will remain a huge factor in especially onboarding retail investors. Furthermore, transaction fees on Bitcoin and Ethereum tend to scale as high as three figures, which is more costly than Web2 payment solutions like Visa. As a result, scalable layer one blockchain – like BNB Chain, Tron, and Cardano – are expected to reap huge gains in the near future.
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