L2 centralization is a ticking time bomb for blockchain

Layer-2 sequencers have turn out to be dangerously centralized, introducing vital dangers that undermine the basic rules of blockchain. To guard community integrity and forestall the erosion of belief, we urgently want to maneuver to a mannequin that’s higher capable of get rid of single factors of failure.

Failure to take action compromises community safety and exposes total ecosystems to critical threats, together with transaction censorship, safety breaches, and the potential compromise of buyer information and funds.

As of Q2 2024, layer 2 options constructed on high of the Ethereum community are processing on common twelve instances extra transactions than the bottom layer. Equally, on June 6, the entire worth (TVL) of the layer 2 ecosystem rose to a document excessive of $49 billion, signaling the growing adoption of those ‘execution’ networks. Nevertheless, as these options have gained traction, a urgent drawback has emerged: the centralization of their sequencer operations.

Sequencers are important community elements accountable for ordering and batching transactions earlier than they attain the Ethereum mainnet. Nevertheless, they’ve turn out to be a double-edged sword, providing effectivity on the expense of decentralization.

Learn extra in our opinion part: The largest menace to Web3’s safety is a well-known monster: centralization

Sequencers handle the circulate of information in Ethereum’s layer 2 options by figuring out the transaction order when a number of transactions happen concurrently. When two customers attempt to course of a transaction on the similar time, the sequencer decides who goes first.

Nevertheless, many of those devices carry the potential dangers related to being managed by a single entity. Whereas centralized elements can allow sooner transaction processing, in addition they include vital disadvantages, equivalent to the danger of censorship.

Such issues usually are not unfounded. At this time’s main layer 2s all depend on “centralized” sequencers, which usually signifies that the corporate that constructed the rollup handles the sequencing operations fully by itself.

For instance, information exhibits that Coinbase’s Base community generated $30 million in income for the corporate in March alone based mostly on sequencer charges alone – a determine that annualizes to roughly $360 million per 12 months.

Subsequently, in a quickly decentralizing panorama the place belief should be minimized, the concept of ​​one firm controlling a vital a part of a blockchain’s operation naturally raises eyebrows.

Christine Kim, vp of analysis at Galaxy Digital, argues that decentralization shouldn’t be considered as a binary state, however fairly as a spectrum, with centralized affect saved to an absolute minimal. She has emphasised:

“A decentralized sequencer may be probably the most troublesome initiatives for a rollup to work in the direction of… to enhance its decentralization and resilience […]”

As for minimizing centralized dependency, customers of the Consensys-backed zkEVM rollup Linea lately suffered losses of $2.6 million. Nevertheless, what was most surprising concerning the incident was the unanimous resolution by the undertaking improvement workforce to pause the sequencer and “censor attacker addresses to guard customers and builders.”

This incident highlights the important significance of decentralization and the hazards of sequencer centralization. By eradicating particular person factors of failure, decentralized sequencers make networks extra resilient to assaults and technical failures. Moreover, they higher replicate the core values ​​of blockchain expertise, particularly when it comes to transparency and effectivity.

On this regard, most layer 2 options are fast to acknowledge the advantages of dividing management. Utilizing a community of validators and block producers, layer 2 options can randomly choose and rotate sequencer nodes. These events share duty for ordering transactions and submitting batches, bettering the safety and resilience of the community.

This methodology ensures a good and secure sequencing course of whereas sustaining excessive efficiency, considerably decreasing the danger of censorship or manipulation. That, in flip, encourages neighborhood participation and aligns incentives between the community and its customers, extra intently adhering to the core rules of blockchain expertise.

Lately, Vitalik Buterin proposed a classification system for rollup networks – starting from Stage 0 to Stage 2 – expressing his perception that the majority main rollups as we speak depend on some type of ‘coaching wheels’.

Learn extra in our opinion part: Ethereum is ‘rather more centralized than individuals understand’: Blocknative’s Matt Cutler

Going ahead, Tier 2s should drop these interim measures or threat stagnation. Whereas centralization undeniably provides profitable advantages and operational comfort, it primarily serves the pursuits of the operator. Whereas decentralization is difficult, it brings long-term advantages to each the tasks and their communities.

This “self-reinforcing mannequin” reduces safety prices and begins a virtuous cycle. Higher neighborhood participation results in better engagement and improved safety, attracting extra dapps and innovators.

Moreover, the regular influx of liquidity into DEX’s post-sequencer decentralization exhibits that customers can settle for delicate latency will increase if correctly incentivized. Along with bettering safety by mechanisms equivalent to liquid staking, the decentralization of sequencers aligns with the distribution of worth to business contributors and contributors.

Income sharing fashions equivalent to sequencer mining enhance person retention and create a direct correlation between neighborhood participation, community safety and ecosystem progress. Now that technical primitives and useful examples are available, even Bitcoin layer 2s are getting ready to supply mining rewards by decentralized sequencers.

Sooner or later, it’s merely not sufficient for the Ethereum Layer-2 ecosystem to depend on only one community to have decentralized sequencers. Making the transition throughout a number of networks is important to making sure the integrity of blockchain expertise. Established layer 2 methods should act rapidly to forestall obsolescence and make sure the security of their customers.