What Ethereum Merge Means for the Blockchain’s Layer 2 Solutions

by · September 8, 2022

Ethereum is just over a week away from officially moving to a proof-of-stake (PoS) blockchain with the merger scheduled to be completed around the 13th-15th. September. With the transition, Ethereum would abandon its current proof-of-work (PoW) chain, eliminating miners from the ecosystem.

Ethereum is a huge ecosystem with thousands of decentralized applications and decentralized financial protocols working on top of it. In addition, there are several layer-2 solutions, i.e. solutions built on top of the blockchain itself, layer 1, to facilitate faster transactions and make Ethereum more scalable.

The merger will mark the completion of the second phase of the three-phase transition process. The upcoming event will only see the official change of consensus, where the Ethereum blockchain will start processing transactions on the PoS chain. However, it won’t have a major impact on scalability or gas charges.

The scalability fixes are supposed to come after the completion of the third phase, which will introduce sharding, a form of parallel processing that Ethereum’s founders and developers have claimed will increase Ethereum’s transaction throughput exponentially.

Will layer-2 solutions like Polygon, Arbitrum One, Boba Network and Loopering be viable after the merger? Cointelegraph reached out to industry insiders to gain insight into how these L2 ecosystems will be affected by the merger.

Bitfinex Chief Technology Officer Paolo Ardoino believes that the merger will not have any impact on L2s as the merger will not solve the scalability issues immediately. He told Cointelegraph that even after the completion of the third phase of the Ethereum transition, when it becomes monumentally scalable, L2 will still find a place in the ecosystem. He explained:

“It will be business as usual for L2s. These solutions still hold key value for scalability in the short, medium and long term. L2s will still be needed to meet the growing demand and use of blockchains worldwide. Even 100,000 transactions per second would not be sufficient to meet true global demand and adoption.”

Anton Gulin, global business director at AAX Exchange, told Cointelegraph that L2s will not face many problems or see the need for major technical changes as the translation is two years in the making, so the L2 chains are already prepared.

“The most important point is how successful the merger would be and whether it can meet the momentum. With the more significant investments flowing into space, we can expect even more efficient solutions, regardless of what will happen after the merger. The rest of the L2s would either adapt or seize to exist,” he explained.

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There is a general misconception that the Ethereum scaling solutions will eventually make L2 solutions redundant or useless, but a majority of L2 solutions like Polygon have said that the change in consensus for Ethereum will not really reduce the need for such L2 scaling solutions . In an official blog post, the protocol said:

“Although the merger paves the way for sharding, this future upgrade will not be enough to scale Ethereum. In fact, Polygon will benefit from it and it will increase the performance of our scaling solution.”

Looking at the short-term and long-term role of L2s post-Merge

Many are wondering how L2 ecosystems fit into the picture, given that Ethereum is leveraging the merger to build its infrastructure. L2 integrations have been boosting Ethereum’s performance for some time now. But experts have argued that the merger will not only improve the Ethereum ecosystem, but that L2s are set to become more efficient as well.

Vlad Totia, a research analyst at L1 blockchain platform Zilliqa, told Cointelegraph that L2 will improve in tandem with L1. He explained:

“Each L2 that is built to help Ethereum scale moves along with Ethereum. That means if we take, for example, Arbitrum is faster than Ethereum before the merge and L1 itself gets faster, then Arbitrum essentially scales in speed as well . The user and developer experience with L2s will improve as Ethereum improves over time.”

The merger is also expected to make L2s more environmentally friendly, with the likes of Polygon claiming it will ultimately reduce their carbon emissions by 60,000 tonnes, or 99.91% of today’s value.

Experts believe that the environmental aspect of the PoS transition can pave the way for better adoption via L2s. Pat White, CEO and co-founder of enterprise digital asset platform Bitwave, told Cointelegraph that the move to proof-of-stake would be key to legitimizing the Ethereum network and bringing more businesses to the blockchain. He said that “a significant number of businesses have been sitting on the sidelines of digital assets due to environmental concerns. The merger could be the catalyst to bring the business into the fold.”

Apart from efficiency and environmental benefits, the transition is expected to increase the network’s security against coordinated attacks. White explained that PoW blockchains are vulnerable to rearrangement attacks, “whereas similar attacks are much more difficult to occur on a PoS blockchain since the attacker would have to burn two-thirds of the supply of ETH.”

This de-risking of ETH will open floodgates for institutional capital as the network is more secure and friendlier to corporate environmental, social and governance goals, White added.

The merger will mark the completion of the second phase of the three-phase process. A significant part of scalability features such as sharding and high transaction throughput will be achieved after the completion of the third and final phase, estimated by the end of 2023.

Daniel Nagy, chief scientist at the Swarm Foundation, a provider of decentralized storage and communication systems, highlighted another aspect of the merger and its long-term impact on L2s. He told Cointelegraph that with the introduction of long-term scalability solutions, many projects, especially nonfungible token (NFT) projects, may choose L1 instead of L2s.

He said that in more advanced L2 transaction systems, the merger will be significantly helped by the merger and may also eat into the current market share of sidechains. Nagy added that rollups, both optimistic and zero-knowledge types, will greatly benefit from sharding, even in its most primitive form, where it is only useful for storing guaranteed availability data.

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This will also not be realized immediately with the merger, but can be expected soon afterwards. He explained, “mergers are likely to be adopted, while sidechains can be expected to lose popularity both to merges and to the more scalable L1 enabled by the merge.”

Many industry insiders have indicated that L2s will continue to thrive and gain traction on the Ethereum blockchain regardless of how scalable the network becomes, predicting that while the Ethereum network may see some traction following the completion of all phases, L2s will continue to be execution team.