Posted September 3, 2024 at 7:18 pm EST.
Solana community members have long criticized Ethereum’s modular approach in using layer 2 networks to enable more transactions, arguing these L2s come at the expense of Ethereum itself. However, this past week, those in the Solana camp seem to be gearing up to embrace modularity—even if they won’t use the same terminology.
After long having mocked Ethereum’s modular structure, in which scaling of the blockchain occurs by delegating some functions to other chains that connect to the original one, some Solana community members have opted to call L2 technologies on Solana “network extensions,” igniting controversy and derision, especially among Ethereum proponents.
On Monday, Solana’s co-founder Anatoly Yakovenko said on X that “[L2s] are parasitic when they take more priority [transactions] from the base layer than they add.” On the same day, Kyle Samani, the managing partner of Multicoin Capital wrote, “Anything that doesn’t happen on L1 that could’ve happened on L1 is by definition parasitic.” The argument of whether L2s are “parasitic” boils down to an L2’s function having near-complete overlap with the L1 by virtue of running the same applications as the L1, while at the same time taking revenue and users from the L1 itself.
Yakovenko added, “If the Solana ecosystem were to cripple L1 execution optimizations in favor of ‘ARB/OP’ general purpose L2 stack to handle all the user [transactions], it would be parasitic to Solana’s mainnet.”
Typically, layer 2 networks refer to auxiliary blockchains built on Ethereum’s base layer aimed at making transactions faster and cheaper, while maintaining the roughly same level of security. In pragmatic terms, if a user wanted to be on an L2, they would click several buttons to bridge their assets from Ethereum’s base layer and into an L2.
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Solana supporters calling Ethereum’s L2s “parasitic” incited several people to debate definitions and point out that Solana also has L2s. For example, Ethereum investor Ryan Berckmans said on Tuesday, “Nobody denies that L2s are literally competitive with the L1.”
“What we don’t like is the intentional emotional conjugation of the word ‘parasitic’ to imply that Eth’s L2 model sucks. L2s are symbiotic and complementary with the L1,” Berckmans noted.
Two examples of Solana L2s include Zeta and Code. Zeta, a crypto perpetual exchange built on Solana, has branded itself a “Trustless Layer 2 for Decentralized Derivatives Trading,” according to its documentation which also refers to the project as an “optimistic rollup on Solana.” “Rollups” are used synonymously with “L2s.”
Ted Livingston, the founder and CEO of Solana-based payments platform Code, also described his project as an L2, saying on X in Feb. 2024, “The Code L2 does a lot of things, but one of the things it does is create the ability to securely queue up transactions even when Solana is down.”
In 2023, Multicoin Capital’s Samani conducted a poll on X that had 2,200 votes asking whether L2s are parasitic to L1s, and in it, 60.1% of respondents voted “No,” while 22.8% voted “Yes,” with the remaining respondents voting just to see the results.
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‘Network Extensions,’ Not L2s
The Solana Foundation’s head of strategy Austin Federa chimed in, calling what people consider to be L2s on Solana are really “network extensions.”
“Most of the L2-ish things on Solana are better thought of as Network Extensions. While the underlying tech stack might resemble Bitcoin or Ethereum L2s, the function and role is so radically different I think founders would best be served by Network Extensions,” said Federa on Monday.
Nick White, the chief operating officer at Celestia, called out Federa for trying to call layer 2s on Solana by a different name. “Monoliths are capitulating to modular… Now they have to come up with new words for everything, so rollups = “network extensions.” It’s cute,” said White.
https://t.co/Xv7CUWDnE1 pic.twitter.com/kvb5QmfgCK
— Owocki.Ξth (🍄,🟢) (@owocki) September 2, 2024
Are Network Extensions Really Different From L2s?
On X, Federa further explained, “Network Extensions extend the Solana network to new places, or bring new execution environment, specialized processing, etc to the Solana network.” Rather than a general-purpose layer 2 blockchain network that has the same design as its base layer, network extensions are specialized to handle different things like privacy or faster signature verification, according to Federa.
Not even all Solana supporters were sold on the terminology. While Livingston agrees that the phrase “Network Extensions” is a better name than an “L2,” given certain technical features, he isn’t “sure that the technical branding matters that much.”
In a similar vein, Mert Mumtaz, the CEO of Solana-based developer firm Helius, doesn’t believe in referring to “Solana L2s” as “network extensions,” adding that “anyone who spends hundreds of hours strawmanning semantics from 2 people instead of shipping something people want is a fundamentally unserious person.”
“Basically network extensions are L2s but L2s are not network extensions. It’s a rectangle and a square, one definition fits the other. We may not agree there either but that’s how I’m seeing it,” said @AyyyeAndy on X, the host of The Rollup podcast.
The bigger trend is that the modular idea is winning, according to @AyyyeAndy who said, “People realize they can’t defy physics and scaling a single-state machine for *the world’s population* is impossible. We can fight on semantics all day but the reality is where we’re headed, every high TPS L1 will be faced with the question of centralizing more by increasing hardware requirements for nodes or scaling with rollups.”
L2s Eating Into Market Share of Ethereum L1
As for whether L2s have been “parasitic” to Ethereum, fees and onchain activity on its base layer declined after the Dencun upgrade in March, which increased the scalability properties of Ethereum’s layer 2s.
In the week before the completion of the Dencun upgrade, Ethereum accrued roughly $30 million in fees every day, per blockchain analytics firm Token Terminal. On Monday, Token Terminal noted, “Ethereum L1 revenue is down 99% in the past 6 months.”
Also, before the Dencun upgrade, decentralized exchanges on Ethereum’s base layer were responsible for about 50% to 65% of the total Ethereum ecosystem DEX trading volume, per onchain data provider Artemis. Ethereum L1’s share of the total has since dropped to 46%, as the volume on L2s such as Coinbase’s incubated network Base, has seen an increase in its market share.
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