Author: Paul Brody

Article compiled by: Block unicorn

EY's global blockchain leader says history shows that all layer 2 solutions will gradually migrate to Ethereum. Ethereum is devouring all blockchains, and there is no question about it.

If history is any indication, then Ethereum will consume the entire blockchain space, and rather than a part of Ethereum becoming a layer 2 solution, Ethereum will ultimately become the first layer solution for all blockchains. I believe the recent decision by CELO stakeholders to transition their operations to Ethereum's layer 2 solution is just the beginning of a process of integration and transformation that will lead us to Ethereum becoming the endpoint state for all blockchains.

In the tech industry, there are ample precedents for this kind of integration. One of my favorite examples is the gradual convergence of a highly diverse network world into a single global standard over about 15 years.

The network story goes like this: a long time ago, back in the dawn of human civilization (the 1970s), we had a lot of different data networks. Various network services from various companies and governments, ranging from the Advanced Research Projects Agency Network (ARPANET, the precursor to the internet) to IBM's Systems Network Architecture (SNA), Xerox's Internet Datagram Protocol (IDP), and many others. The result was a mishmash of incompatible networks that made it extremely difficult to connect business and government systems.

From Connecting Links to Global Standards

Starting in the 1970s, people began working on a protocol that could work across multiple networks and handle interruptions and changes in network operations smoothly. This eventually led to TCP/IP, short for Transmission Control Protocol/Internet Protocol. In the early days, TCP/IP did exactly what it was supposed to do: connect all these different networks.

Initially, TCP/IP was just used to connect different network standards, and it did this very well. However, over time, the unstoppable logic of standardization and scaling turned TCP/IP from a connecting link into a global standard. IP networks devoured network businesses, and today there are almost no non-IP networks in existence.

Given the tech industry's love of standardization, it should come as no surprise that if the same thing were to happen to blockchain networks, we shouldn't be surprised. Since the value of any network grows with interconnection, this approach is likely to become the lifeline for those who were recently boasting about being the "Ethereum killers" in the predicament of being a first-layer solution.

L2 Specialized Networks

Not all L2 (layer 2 networks) solutions and sidechains are the same, and recently I have been thinking about how this second-layer ecosystem might develop in different ways. Many highly specialized sub-ecosystems may emerge. For example, at EY, we view industrial companies as users of our OpsChain solution, helping them manage inventory and track carbon emissions. As we plan for expansion, we are discussing very large transaction volumes. For example, one of our clients asked us to consider how to handle 500,000 units of a single product line every day (each one unique and serialized).

For these 500,000 units moving every day, averaging 3 to 4 movements between production and final consumption, we could consider an average of 2 million NFT transactions per day for a single product line. For such clients, privacy (keeping detailed business operational data confidential and out of the hands of competitors) and scalability are top priorities—they need reliable high throughput and low transaction costs. It's no surprise that the L2 network Nightfall, developed and contributed to the public domain by EY, is designed to achieve this goal.

Say goodbye to those cool specialized blockchains we use today.

Financial transactions will have very different L2 solution requirements. Some transactions, like exchange transactions, may just be looking for a high-volume, low-cost roll-up solution, while complex DeFi (decentralized finance) smart contracts will need a network that supports full Ethereum Virtual Machine (EVM) compatibility so that smart contracts can run on the blockchain.

And I wouldn't be surprised to see the emergence of highly specialized networks for countries, regions, or identity verification, where all participants are not only known but also identified and subject to the same regulatory constraints. Imagine a second-layer solution open only to "persons" (citizens or residents) of the United States. This would allow all these people to engage in a wide variety of asset transactions with minimal additional verification checks, and they could soon appear within the European Union or other major jurisdictions.

Value of Interconnection

With the emergence of all these specialized networks, you might wonder if it's necessary to connect them all through Ethereum. Beyond pure EVM compatibility, the value of interconnection lies in the ability to flow products and services from one ecosystem to another. There is no truly modern economy that is truly isolated. Every business contract ends with a payment, and various types of financial services support all these contracts, and financial flows between nations and ecosystems underpin all trade and investment.

And we may never be able to build a single network that can support all different types of transactions and global transaction volumes. Therefore, there will always be multiple networks, and even when connecting only between the first and second layers, there will be friction between networks. Even so, using Ethereum as the first layer to connect multiple specialized networks will bring enormous benefits. For example, industrial product tokens can leave a specialized manufacturing network to be exchanged for payments from a finance-oriented second layer, but with continuous digital records between two second-layer networks and connected by Ethereum as the first layer, it's an order of magnitude higher than any integration existing in today's business world.

A downside to Ethereum devouring the entire world is that, similar to the networking industry today, some available network features will change little. To achieve interoperability, tokens and smart contracts must essentially be the same everywhere, and every chain must be an EVM chain. While you can have cross-chain development systems that can run on diverse ecosystems, it's not very useful because your tokens and smart contracts become unusable, and the unique and special features of specific networks will never actually be used.

A key lesson from the tech field is that time and time again, general infrastructure is more successful than specialized infrastructure, even if specialized infrastructure is actually better suited for specific tasks. Before TCP/IP devoured the entire network world, there were specialized networks for voice calls. They were called circuit-switched networks, and they could guarantee the quality of phone calls. No delays, no interruptions, no lost data packets, just a continuous circuit between two phones. In contrast, VoIP phone calls were a big step back in quality, but they now occupy over 99% of the phone call market share.

So, let's bid farewell to those cool specialized blockchains we use today, I bet they will soon become history.

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