L2 is, in my view, some of the most interesting research happening in computer science right now. The article above is not a great explanation--in particular, L2s are not off-chain as the article presents. The point of L2 is that it on-chain, inheriting the security and censorship resistance guarantees of L1.
To simplify: L2 is about creating a fast, high throughput state machine whose state transitions are verifiable on a blockchain. Blockchains, in turn, are about creating a uncensorable state machine that reaches global consensus.
So L1 achieves security, and L2 adds speed.
So why not just make L1 fast to begin with?
The strong guarantees of L1 rely on a lot of validators (on the order of ~10k+, worldwide, often on home internet connections) verifying each state transition. This puts a fairly low practical ceiling on how fast L1 can go.
L2 uses centralized sequencers to run transactions much faster, but uses a mechanism that runs on L1 to ensure the sequencer can't cheat.
The main mechanisms are 1. optimistic rollups and 2. ZK rollups. The latter, in particular, are fascinating. If you care about distributed systems even a little bit, it pays to suppress your skepticism and learn about how they work.
agree, ZKProofs are really interesting and i'm sure they will come to be used across lots of areas of the web and not just blockchain, though their use and development is most active in the blockchain space for how useful they are for privacy+scalability.
Proving knowledge without revealing information allows us to prove computations (validating them is a lot quicker than repeating the computation) and "use things" without sacrificing privacy.
You can combine the two and have private transactions which are then rolled up in a computation, and then post the proof of the computation to mainnet. You get both cheap and private transactions and infra on top of the base chain.
But this goes beyond blockchain: we can hand code to other people to run and then have proof they haven't altered what we agreed upon running, so we can trust the results of someone else running something. That is useful in all sorts of research for replicability in science/engineering.
> i'm sure they will come to be used across lots of areas of the web and not just blockchain
Totally agree with this. After working closely with zk I noticed that it boosts your thinking about decentralized protocols in the same way as knowing about signatures or hashes.
Right now infrastructure for doing zk is in “alpha” stage and different proving systems and optimizations are fairly new and not widely used. I believe it will grow bigger It’s very exciting field.
(I worked on zk rollup called zksync but zk rollups are only one of the use cases for zk proofs)
The primary function of finance is to enable economic agents to trade future consumption for present consumption, by means of debt. And debt requires a trusted third-party that has the capacity to re-allocate assets. Otherwise the borrower can simply walk away with the money, and never repay the debt. Now, blockchains, not only lack a trusted third-party that can re-allocate assets, but they are designed with the explicit goal of preventing such re-allocations. Therefore my question is how can this technology be the "future of finance" when it's designed from the ground up to be incompatible with finance?
There is no reason that the third-party cant be a contract with globally accessible permissionless apis, that let you borrow peer2peer or peer2protocol against your assets, and that upon you not repaying your debt liquidates your position (by other people/protocols bidding for the assets that are out of position, usually over-collateralized at 150% min).
Most of defi is structured in this way and it is working fine, it works because it IS being integrated and made compatible with existing finance.
This is "futuristic" because anyone in the world has opportunity to lend/borrow to anyone else in the world, to write code that automates savings accounts by rotating these positions, to write business logic of their startup to borrow money when they need and pay it back when its the best time for them - scaling their finance on demand like spinning up an ec2 instance.
A system where you have more voice and opportunity for your work/savings/co-op/club, compared with whatever the state of banking is in wherever you happen to be born in the world.
Concrete example: I asked my bank to borrow some money and showed them my bitcoin, they predictably said no because their system cant handle it. I wrapped it onto ethereum, deposited it in aave, borrowed usdc, withdrew to my bank account and carried on with my life without needing the banks permissions. The people lending that usdc to aave to lend out to me know it is safe and I cant run off never paying back my debts and interest (otherwise they get my over-collateralized btc).
permissionless global p2p lending and borrowing. it isn't futuristic, it is the present. ill never understand why "hacker"news doesnt find that amazing.
You don't seem to get it. If the borrower has to put up 100% collateral it means that their buying power remains the same. Borrowers borrow money in order to increase their present buying power (at the expense of future buying power). You can't do that with overcollateralised loans, smart contracts, or blockchain technology.
No, you are only describing a part of what borrowing is about. Your use case is valid, but it is just one of many use cases. Consider the following:
I own a a long-term retirement account, but I need to pay an emergency medical bill and don't have cash at hand. Obviously I don't want to liquidate my savings account, but I can put it up as collateral to go to a bank and get a cash loan. If I'm unable to pay the account may be liquidated. That's an overcolleralized loan. It's useful. The same is happening when you put up your house as collateral, or arguably even your reputation.
The blockchain equivalent of this is the same. You put up one asset as collateral e.g. Bitcoin, and you can get another more liquid asset.
Another use case for this is simply market exposure and hedging. You can put up Bitcoin as collateral, still having exposure, and then use the loan to buy another asset to get exposure to, creating a more complex structured exposure. This has nothing to do with blockchain, it's the same in traditional finance.
An overcollateralised loan is equivalent to a swap (a type of derivative). Swaps have their uses, and are used in finance, but they don't provide financing. The point is if blockchain technology can't be used to do financing, and it definitely can't, just don't call it the "future of finance", because it is not. It can't perform the basic function of finance, which is financing.
How is a mortgage not financing, and how is a mortgage not just another over-collateralized loan?
Every loan has some form of collateral. Even credit cards do, it's just less tangible: you are staking your credit score, which they'll start chipping away at as soon as you start defaulting.
A mortgage is indeed a form of financing because the lender does not keep the collateral until the debt is paid off in full. If they did, there would be no financing going on. It would be equivalent to saving for 30 years and then buying the house.
Credit cards are loans based on future income streams (which can be securitised in fact with crypto technology -- think a defi bank automatically getting 20% of your future income until it is repaid)
The problem isn't overcollateralisation itself but the inability to seize the collateral in particular, and assets in general. A mortgage depends crucially on the bank's ability to seize the collateral in the event of default, and the same applies to credit cards. The problem is blockchain assets are unconfiscatable, which means any form of financing involving such assets is unworkable.
No, blockchain assets can be confiscated. Maker, Aave, confiscate and liquidated billions of assets in the past few days.
Smart contracts are Turing complete and you can build anything with it. You can even build an opt-in judiciary system with the power to reverse transactions.
I think you'll be pleasantly surprised if you look at how DeFi actually works.
No, Maker & Aave haven't confiscated anything in the past few days. Either you don't know what 'confiscate' means or you don't know how Maker & Aave, and DeFi lending in general, work.
You could use existing trusted lending Institutions, no? Investors can loan their excess Bitcoin to a lending institution that pools Bitcoin from multiple investors and loans it out to borrowers? In return, the investor receives interest on the loaned amount when it is paid back in full? If the loan isn’t repaid, the courts get involved to seize other physical assets from the borrower (cars, homes, etc.).
In some sense, we would be back to having banks with the exception that the bank now exists solely as an investment vehicle.
I guess I’m struggling to see what barriers prevent crypto currencies from being used in traditional financing?
Nothing prevents crypto-currency denominated loans in traditional finance. That was not the claim. The claim is that financing operations are not possible in so-called "decentralised finance".
Loans are an important concept, that's true. Do blockchains inherently prevent loans? I'm not sure, I think Ethereum smart contracts enable the concept of loans. The 3rd party here is the contract itself, as I understand it.
Blockchain "loans" are fully collateralised and sometimes even require upto 4x the collateral than the loan itself. This is not useful in the vast majority of cases
If I lend you 1 ETH, I have no means to make you pay me back. Smart contracts can't do that either. A smart contract cannot seize 1 ETH from your wallet and send it back to my wallet. Blockchains are designed specifically to prevent that.
That's not true, you can definitely do this with a smart contract blockchain like Ethereum, and there are plenty of loan protocols already that do this in production with $ billions in assets transacted.
No one can steal your ETH from your wallet, but they can liquidate your staked collateral held by the smart contract.
There's no reason why Blockchains can't also incorporate their own trust model to facilitate lending that isn't fully collateralized. There are already projects working towards this. Pseudonymous p2p lending isn't some impossible thing.
The current frothy state of crypto, unsustainable as it may be, is evidence that people are willing to trust crypto projects enough to give them money if there's a chance of getting some amount of more money. Much of this looks like equity financing. Debt financing isn't inherently off limits though it just is harder.
Debt financing is definitely not simply harder but entirely impossible. If you think otherwise, please explain how the borrower can be made to repay the debt with this technology.
Borrowers cannot be "made" to repay debt in traditional finance either. Lenders must make decisions based on some measure of the credit worthiness of potential borrowers. The same mechanisms could be replicated on blockchains. See:
What? Of course borrowers can be made to repay the debt in traditional finance. Get a loan from your bank, and refuse to pay it back. See what happens. If don't understand the basic mechanisms behind a loan agreement, there's no point in continuing this conversation.
> Get a loan from your bank, and refuse to pay it back.
I don't even know where to begin when it comes to examples of just that happening. Defaulting on debt is something that happens with every single form of credit. It's extremely fundamental to the idea of debt.
Nobody says defaults don't happen. Defaults happen all the time. When they happen the creditor will initiate legal action against the borrower. If the borrower continues to refuse to pay or is unable to do so, the court will seize the borrower's assets and will liquidate them in order to pay the debt to the extent possible. This is process is impossible to replicate with a "smart contract" because smart contracts lack the ability to seize assets.
The mechanism for "making" repayment mandatory is the state. Credit worthiness (or any other information) is useless if the debtor cannot be made to repay
Yes, ZK is cool. I expect to hear about it on other chains too. One of the lower visibility projects I follow, Symbol, has a similar concept of subchains and is already working towards applications on them.
L2 is, in my view, some of the most interesting research happening in computer science right now. The article above is not a great explanation--in particular, L2s are not off-chain as the article presents. The point of L2 is that it on-chain, inheriting the security and censorship resistance guarantees of L1.
To simplify: L2 is about creating a fast, high throughput state machine whose state transitions are verifiable on a blockchain. Blockchains, in turn, are about creating a uncensorable state machine that reaches global consensus.
So L1 achieves security, and L2 adds speed.
So why not just make L1 fast to begin with?
The strong guarantees of L1 rely on a lot of validators (on the order of ~10k+, worldwide, often on home internet connections) verifying each state transition. This puts a fairly low practical ceiling on how fast L1 can go.
L2 uses centralized sequencers to run transactions much faster, but uses a mechanism that runs on L1 to ensure the sequencer can't cheat.
The main mechanisms are 1. optimistic rollups and 2. ZK rollups. The latter, in particular, are fascinating. If you care about distributed systems even a little bit, it pays to suppress your skepticism and learn about how they work.
Good starting point: https://vitalik.ca/general/2021/01/05/rollup.html
Alternatively if you believe this is all just a ponzi scheme involving ape jpegs, bookmark this comment and come back in 3 years.