Web3s Layer Cake – How Many Is Too Many？

Having previously used this platform to extol the virtues of a multi-layered blockchain ecosystem, balance demands an assessment of the challenges that this new paradigm throws up. While there are solid arguments to show that a multilayered ecosystem does indeed foster growth by enabling scalability and access to low-fee transactions, the sheer proliferation of new platforms means that solving one set of problems inadvertently creates a whole other raft of issues.

One of the most often cited is fragmentation. The user population isnt necessarily growing at the same rate as the number of new platforms, meaning that users – and the liquidity they bring – are spread more thinly across multiple protocols. However, other issues may be less evident to those unfamiliar with the underlying technology. Dinesh Pinto, Technical Product Lead at smart contract platform Flare Network, explains how security risks can also come into play:

“With a layered stack, you gain flexibility, but your security assumptions are only as strong as the weakest layer in your stack. Additionally, layered stacks are more complex for end users to navigate, as understanding the various layers and their associated security considerations often requires developer-level knowledge. For instance, consider a rollup user trying to withdraw their funds in the event of a proposer failure. The appropriate response varies depending on the technical idiosyncrasies of the specific rollups layered stack.”

The need to mitigate or overcome these challenges has, in turn, spawned an entire school of innovation and development, with a focus on interoperability as the key to ensuring the free flow of users and liquidity across networks. However, interoperability isnt necessarily straightforward when considering the various ways in which blockchain networks can interact. Diane Dai, co-founder and CMO at on-chain liquidity hub Dodo X explains:

“Numerous cross-chain bridges enable asset transfers between different blockchains, facilitating better liquidity movement. Interoperability infrastructure, like Chainlinks CCIP, allows various L2 solutions to communicate with each other seamlessly. Liquidity aggregators, such as 1inch, combine liquidity from multiple sources, simplifying asset access. Universal wallets and interfaces, such as MetaMask, streamline the management of assets across different platforms. These solutions are actively addressing fragmentation, enhancing efficiency and improving user experience.”

However, the user experience argument isnt necessarily watertight when we consider the pace of growth in the sector and the fact that each successful product attracts a slew of competitors. This introduces more complexity, potentially even making it more difficult for users to navigate the ecosystem.

Untangling the Knot

The Gordian knot of these intertwined challenges doesnt seem to faze industry leaders, though. Vitalik Buterin recently tweeted his optimism regarding the pace of development towards a “smooth user experience across the entire ethereum-verse,” while Jayant Krishnamurthy, CTO of Douro Labs, which is a core contributor to decentralized oracle network Pyth, believes that the ecosystem is already accommodating new paradigms. He says:

“Many projects have aligned their tech stacks to support a multi-layer, multi-chain world. For instance, Pyth uses a hub-and-spoke model for data distribution, providing a uniform experience for users and developers across various environments. Similarly, Wormhole and other bridge solutions facilitate fast and reliable asset transfers across different Layer 2 networks. As these solutions continue to iterate, evolve, and improve, the risk of fragmentation should decrease, making interoperability easier.”

However, he also remains circumspect about the fact that many of these challenges are likely to remain in the longer term, adding:

“Fragmentation into multiple layer 1s and 2s is inevitable – it‘s the simplest solution to provide more bandwidth (transactions per second) for users. A layer is just a big computer, like a mainframe in web2. In the same way that mainframes didn’t scale to meet user demand for compute in web2, a single layer wont scale in web3.”

So layers are here to stay, a necessary function of the fact that more users necessitate more infrastructure. A key question will be: how can the ecosystem shift from being one thats continually chasing the tail of its own problems to one that can deliver the features and functionality users and developers need without creating more issues？