What the Ethereum Merge means for the blockchain’s layer-2 solutions

Ethereum is just over a week away from officially moving to a proof-of-stake (PoS) blockchain with the Merge slated for completion around Sept. 13–15. With the transition, Ethereum would abandon its current proof-of-work (PoW) chain, eliminating miners from the ecosystem. 

Ethereum is a vast ecosystem with thousands of decentralized applications and decentralized finance protocols working on top of it. Additionally, there are several layer-2 solutions, i.e., solutions built on top of the blockchain itself, the layer 1, to facilitate faster transactions and make Ethereum more scalable.

The Merge would mark the completion of the second phase of the three-phase transition process. The upcoming event will only see the official change of consensus, where the Ethereum blockchain would start processing transactions on the PoS chain. However, there won’t be much impact on scalability or gas fees.

The scalability fixes are meant to arrive after the completion of the third phase, which would introduce sharding, a form of parallel processing that Ethereum founders and developers have claimed would increase Ethereum’s transaction throughput exponentially.

Will layer-2 solutions like Polygon, Arbitrum One, Boba Network and Loopering be viable after the Merge? Cointelegraph got in touch with industry insiders for insight into how these L2 ecosystems will be impacted by the Merge.

Bitfinex chief technology officer Paolo Ardoino believes the Merge won’t have any impact on L2s as the Merge won’t solve the scalability solutions immediately. He told Cointelegraph that even after the completion of the third phase of the Ethereum transition, when it becomes monumentally scalable, L2s will still find a place in the ecosystem. He explained:

“It will be business as usual for L2s. These solutions still have key value for short, medium and long-term scalability. L2s will still be needed to fulfill the growing demand and usage of blockchains across the globe. Even 100,000 transactions per second would not be sufficient to meet true global demand and adoption.”

Anton Gulin, global business director at AAX Exchange, told Cointelegraph that L2s wouldn’t face many issues or see a need for great technical changes as the translation is two years in the making, so L2 chains are already prepared. 

“The more significant point is how successful the Merge would be and whether it can meet the momentum. With the more significant investments flowing into space, we can expect even more performing solutions, regardless of what will happen after the Merge. The rest of the L2s would either adapt or seize to exist,” he explained.

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It’s a general misconception that the Ethereum scaling solutions would eventually make L2 solutions redundant or of no use, but a majority of L2 solutions such as Polygon have said that the change of consensus for Ethereum won’t really cut down the need for such L2 scaling solutions. In an official blog post, the protocol said:

“While the merge does pave the way for sharding, this future upgrade will not be enough to scale Ethereum. In fact, Polygon will benefit from it, and it will boost the performance of our scaling solution.”

Looking at the short-term and long-term role of L2s post Merge

Many people are wondering how L2 ecosystems fit into the picture, given that Ethereum is leveraging the Merge to build its infrastructure. L2 integrations have boosted Ethereum’s performance for a while now. But experts have claimed that the Merge will not just improve the Ethereum ecosystem, but that L2s are set to become more efficient as well. 

Vlad Totia, a research analyst at L1 blockchain platform Zilliqa, told Cointelegraph that L2 will improve in tandem with L1. He explained:

“Every L2 that is built to help Ethereum scale moves together with Ethereum. Meaning that if, for example, we take that Arbitrum is faster than Ethereum before the Merge and the L1 itself becomes faster, then Arbitrum essentially scales in speed as well. User and developer experience with L2s will improve in tandem with how Ethereum improves over time.”

The Merge is also expected to make L2s more environmentally friendly with the likes of Polygon claiming it would eventually cut their carbon emission by 60,000 metric tons, or 99.91% of their current value.

The Merge will be erasing 60,000 Tonnes of #Polygon’s Carbon Footprint. Ethereum’s transition to the PoS consensus will reverberate throughout the broader ecosystem in many ways, but it will have a singular impact on the carbon emissions profile of Polygon’s network.[1/11] pic.twitter.com/RNkxvRQ1EL

— Polygon - MATIC (@0xPolygon) September 7, 2022

Experts believe the environmental aspect of the PoS transition could pave the way for better adoption via L2s. Pat White, CEO, and co-founder of enterprise digital asset platform Bitwave, told Cointelegraph that the shift to proof-of-stake would be key to legitimizing the Ethereum network and bringing more enterprises to the blockchain. He said that a “substantial number of businesses have been sitting on the sidelines of digital assets because of environmental concerns. The Merge might be the catalyst to bring enterprise into the fold.”

Apart from efficiency and environmental benefits, the transition is expected to enhance the network’s security against coordinated attacks. White explained that PoW blockchains are vulnerable to reorg attacks, “while similar attacks are much more difficult to occur on a PoS blockchain since the attacker would have to burn two-thirds of the supply of ETH.”

This de-risking of ETH will open floodgates of institutional capital as the network is more secure and friendly to corporate environmental, social and governance goals, White added.

The Merge would mark the completion of the second phase of the three-phase process. A significant chunk of scalability features such as sharding and high transaction throughput will be achieved after the completion of the third and final phase, slated for the end of 2023.

Daniel Nagy, chief scientist at decentralized storage and communication system provider Swarm Foundation, shed light on a different aspect of the Merge and its long-term impact on L2s. He told Cointelegraph that with the introduction of long-term scalability solutions, many projects, especially nonfungible token (NFT) projects, might opt for L1 rather than L2s. 

He said that in more advanced L2 transaction systems, the rollups will be significantly helped by the Merge and might also eat into the current market share of side-chains. Nagy added that rollups, both the optimistic and the zero-knowledge kind, will vastly benefit from sharding, even in its most primitive form, where it is only useful for storing guaranteed-availability data.

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This will also not materialize immediately with the Merge but can be expected soon thereafter. He explained, “rollups will probably gain adoption, while side chains can be expected to lose popularity both to rollups and to the more scalable L1 enabled by the Merge.”

Many industry insiders have indicated that L2s will continue to thrive and gain traction on the Ethereum blockchain irrespective of how scalable the network becomes, predicting that even though the Ethereum mainnet might see some traction after the completion of all phases, L2s will continue to be the execution layer.