Will the Merge Make Layer 2 Obsolete? Hardly.

Category: Ethereum, Layer 2, Uncategorized

The Merge is coming. 

There has been speculation that the Merge will make Layer 2 scaling networks irrelevant. 

But is there any truth to this?

Hint: Even the Ethereum Foundation says Layer 2 is still needed. 

The Merge is all about the Ethereum blockchain moving away from the proof-of-work consensus mechanism. Proof-of-work (PoW)  is essentially a competition. Whoever manages to solve a particular cryptographic equation first wins the right to validate a block of data, which gets added to the blockchain. This in turn is rewarded with 2 ETH, as well as gas (“gas” being the term for transaction fees). Solving these equations requires heavy-duty computing power. So much, in fact, that a year’s worth of Ethereum PoW consumes about as much energy as Finland, and has a carbon footprint comparable to Switzerland

This is what people are referring to when they talk about “mining” cryptocurrency and its enormous environmental toll.

In a move to go greener, the Ethereum blockchain is switching to the Beacon Chain. The Beacon Chain uses the much more energy-efficient proof-of-stake (PoS) consensus mechanism. Instead of relying on the energy-intensive technique of warehouses full of computers cracking complicated math problems, “miners” will now become “validators.” These validators will deposit ether tokens (or, in crypto lingo, “stake” 32 ETH) into a pool to secure the network. For each transaction, an algorithm will select a token and its owner at random. The tokens’ owners are given the opportunity to validate a data block and collect a commission as a reward for participating in securing the network.

While the Merge will reduce energy usage by ~99.5%, it will not decrease gas fees or improve transaction speeds. As The Block reported, “there are common misconceptions that the Merge will boost speed or lower fees — only neither are set to happen.” Hence, Layer 2 is still necessary. 

Gas prices are relative to network demand and capacity — and the Ethereum network is in high demand. As of September 14, Ethereum has a $196B market cap with $18.75B in daily trading volume, and Ethereum’s total value locked in DeFi is equivalent to $32.47B.

This is where Layer 2 comes into play. Using a transaction bundling method called rollups, Layer 2 solutions improve the scalability of Ethereum while keeping transaction fees incredibly low.  (Rollups cut down transaction costs considerably by recording dozens and dozens of transactions on the Layer 2 chain, then “rolling” them up into a single transaction that is fed back to the Layer 1 blockchain. By doing this, the cost of every single transaction is split across many users.) Here at GammaX, our order book-based derivatives exchange runs on StarkWare’s Layer 2 scaling solution, called StarkEx. 

Now, although transaction speeds won’t change much on Ethereum following the Merge, the Ethereum Foundation does estimate that proof-of-stake blocks will be produced ~10% more frequently than on proof-of-work.

This means that Layer 2 scaling solutions like StarkEx are still necessary for the fastest transaction speeds. So there’s nothing obsolete about them at all. In fact, things will only get better for Layer 2, since, once sharding (the breaking of blockchain networks into smaller pieces to spread the data load around)  is integrated, Layer 2 solutions will be able to offer low transaction fees while leveraging the security of Ethereum.

Layer 2 isn’t going the way of the dinosaur due to the Merge. On the contrary, the Merge is driving its evolution.

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