A testnet for Ethereum’s forthcoming London upgrade, containing the highly-anticipated Ethereum Improvement Proposal (EIP) 1559, was deployed on June 24, 2021. Following the launch on the Ropsten Testnet, Ethereum’s Goerli, Rinkeby, and Kovan testnets will launch the London trial upgrade on their own test chains over the coming weeks. Following a launch on all the testnets, the Ethereum community and developers are targeting August 4, 2021 for mainnet deployment. EIP-1559 will see transaction fees burned, which users can track at Watch the Burn.
Ethereum Second Layer Solutions
Layer 2 or second layer scaling is a general term for solutions that help with increasing the capabilities of the main chain by handling transactions off-chain (off Layer 1). The two primary improvements Layer 2 can provide are transaction speed and transaction throughput. On top of that, Layer 2 solutions can greatly reduce gas fees.
Polygon
Technically, Polygon is its own blockchain with its own token, MATIC, but was built to become Ethereum’s internet of blockchains. Polygon provides the architecture that enables developers to create custom, application-specific chains that leverage Ethereum’s security similar to the Cosmos hub-and-spoke model. It provides an interoperable layer that can bridge many different projects and scaling solutions, such as zk-rollups, optimistic-rollups, and sidechains.
Since Polygon is a separate chain, it must be secured by a separate proof-of-stake consensus mechanism where validators stake MATIC. However, the MATIC is staked in smart contracts on the Ethereum main chain. Polygon connects to Ethereum through a bridge with the use of a lock and mint mechanism. Users deposit funds into the bridge, which locks them in a smart contract on Ethereum and mints the equivalent amount on Polygon. To withdraw funds, the user will have to go back through the bridge. The bridge and funds are secured by a 5/8 multi-sig scheme, making it incredibly more centralized than the Ethereum mainchain. Additionally, ~33% of staked MATIC is run by a node controlled by Binance. These centralization factors should be considered when weighing the cost of transacting on Layer 2 versus the main chain.
Despite potential centralization issues, Polygon has seen enormous growth in 2021, from ~$1B to $10B in total value locked on the chain. In fact, projects like Aave and SushiSwap now have more users on Polygon than on the Ethereum mainchain.
Rollups
Rollups improve scalability by combining or “rolling up” sidechain transactions into a single transaction, generating a cryptographic proof (called a SNARK),then submitting only the proof to the base layer. This removes the burden of data on Layer 1 while also allowing Layer 2 transaction data to be available on Layer 1 for validation. Moving transactions on a rollup Layer 2 solution guarantees that one could verify the integrity of the data if it’s actually present. Scalability is improved on the base layer due to the lack of reliance on Layer 1 storage.
Rollups offer similar capabilities as Plasma, but without suffering from the data availability problem. Rollups offer many-to-many transactions, smart-contract capabilities, and significantly reduced total Layer 1 block space requirements, all while extending Ethereum’s security assurance to Layer 2. Rollups are able to improve efficiency through a host of compression techniques that result in a 100x save in on-chain space.
There are two types of rollups, Zk rollups and optimistic rollups:
Zk rollups are faster and more efficient than optimistic rollups, but they suffer from friction and compatibility issues when migrating smart contracts to Layer 2. Loopring, Deversifi, and zkSync are examples of projects utilizing Zk rollups.
Optimistic rollups run an EVM compatible Virtual Machine called Optimistic Virtual Machine (OVM), which removes the compatibility issues that exist in Zk rollups. This is extremely critical as composability is paramount in the Ethereum ecosystem, especially in DeFi. One project working on optimistic rollups is Optimism.
Rollups can 100x Ethereum’s scaling without ETH 2. With ETH 2 + Rollups, which may be years away, scaling should theoretically reach 25k-100k transactions per second (TPS). There is increasing competition among various flavors in the rollup space with the trend being towards EVM compatibility and catering towards various needs of dApps.
A general list of Ethereum Layer 2 scaling solution projects includes:
Arbitrum, which is live to developers;
Aztec, which is live on the mainnet with privacy smart contracts platform will be released later in 2021;
StarkWare, which was released in 2021 and followed by an AMM, Caspian, in June 2021; and
Optimism, which is set to launch at an as-of-yet unannounced date in 2021.
Binance
Britain’s Financial Conduct Authority has banned the exchange from undertaking any regulated activity in the country. Additionally, Binance must remove all advertising and financial promotions as well as make clear on its website and social media channels that it is no longer legally permitted to operate in the UK.
Binance is also being investigated by several agencies in the US. Binance is currently under investigation by the US Internal Revenue Service, as well as the Department of Justice for money laundering. Additionally, Binance is dealing with inquiries from the Commodity Futures Trading Commission (CFTC) over whether Binance allowed US residents to trade on its exchange. It is important to note that as of Q2 2021, "[t]he federal agencies haven’t accused Binance of wrongdoing." However, over the course of 2021, Binance hired a slew of high-profile individuals to join its regulatory advisory team, including former US senator Max Baucus as a regulatory advisor and two former members of the Financial Action Task Force (FAFT) to its advisory team.
Binance also faces legal troubles in Japan, where the government stated it offered crypto services without registration. In 2020, Binance faced regulatory pushback in Europe for providing stock token trading on its exchange.
Binance has moved headquarters from country to country to avoid regulation, most recently seeming to indicate there is not a headquarters after Malta denied Binance under its jurisdiction, the last known location of Binance’s headquarters. This represents a regulatory risk as businesses must fall under some jurisdiction. It is unprecedented for a legitimate business to not submit to some regulation scheme and it seems that now the walls may be slowly closing in on the world’s largest exchange.
Polkadot
Polkadot’s latest update introduces the necessary features to enable the release of parachains through slot auctions or crowdloans. These will first take place on Kusama, then on the Polkadot main chain once a new audit is completed. Kusama is Polkadot’s canary/test network, but with real money involved. Parachain slot auctions are a free-market way of selecting which other parachains will be added to the Kusama relay-chain and have their functionality become a part of the Kusama network. In just the first day on the Kusama blockchain, the auctions attracted over $140M of KSM, with Acala's Karura network responsible for almost $100M alone.