The battle between Ethereum Layer 2 chains and Cosmos

At the moment we see a battle between Layer 2 chains and multi-chain ecosystems like Cosmos. I’d like to explain:

Layer 2 is the term of separate blockchains (or “side chains”) which are running next to Ethereum to bring in more scalabolity and cheaper transaction costs without losing the security guarantees that Ethereum provides thanks to its decentalized nature and its battle tested protocol.

Layer 2 blockchains settle their transactions on Ethereum Mainnet using so-called Rollups (e.g. Zero Knowledge Rollups or Optimistic Rollups). Most of them even allow assets from Ethereum to be bridged over and used on their sidechain. They run in parallel with Ethereum and interact with Ethereum through bridges.

Rollups bundle (or ’roll up’) hundreds of transactions into a single transaction on layer 1. This distributes the L1 transaction fees across everyone in the rollup, making it cheaper for each transaction and thus each user.

However. What most people are not yet aware of is, that most (or even all) current existing Layer-2-Solutions for Ethereum come with a centralization vector that L2s currently have in their sequencers. Also, Polygon for instance uses a Root-SmartContract on Ethereum MainNet which is managed by a MultiSig-Wallet, where only the half of all 6 participants are known to the public. This is an known issue and heavily discussed in the community.

Other L2 like StarkWare go some steps further and even contain undisclosed Software in their rollups and sequencers, which means a strict vendor-lockin for everybody building on StarkWare L2. The latter is one of the majure reasons why DyDx is considering to switch from Ethereum to Cosmos: to build DyDx fully decentralized without vendor-lockins and without middle men that control rollups and bridges.

As a side note, Cosmos is the underlying blockchain framework that Terra Luna was built on, and a really important aspect of the collapse of UST and Terra is that Cosmos never had scalability issues or congestion on the chain when people were very active in the last days of Luna and UST.

Nevertheless, critics of Cosmos always claim that it is not fully decentralized like Ethereum. But that’s not that easy. Cosmos is rather an ecosystem providing a decentralized network of independent parallel blockchains, each powered by Byzantine Fault-Tolerance consensus algorithms. Which basically means: it’s up to the actual blockchains which have been built on top of Cosmos which consensus they rely on.

The future will show who wins. The projects that leave Ethereum might come back once sharding is fully implemented (that will take a few more years). But have you ever seen a project return to its previous system after tons of development hours have been invested in migrating to another system?