In a thought-provoking series of tweets, Anatoly Yakovenko, co-founder of Solana Labs, recently antiquities Discussions about the possibility of Ethereum serving as a layer 2 (L2) solution for the Solana blockchain. This proposal raises interesting questions about the potential benefits and challenges associated with such integration. In this article, we dive into considerations put forth by Yakovenko, exploring the concept of Ethereum as Solana’s L2 protocol and its implications for the decentralized finance (DeFi) ecosystem.
Ethereum could be Solana’s L2
Yakovenko suggests that Ethereum can act as L2. This is “more likely than you might think at first glance,” according to him, adding that L2s are bridge protocols that provide one-way security.
Under this setup, owners of SOL assets on Ethereum will have a final collateral, ensuring they can exit safely to the Solana blockchain. Even in the event of a double spend or invalid state transition on Ethereum, users may turn to securely recover their SOL assets. However, there are three essential components that are necessary to make Ethereum an L2 protocol:
Send Ethereum Transactions to Solana: To enable secure interoperability, all Ethereum transactions must be submitted in the SOL blockchain. This process ensures that critical transactional data is accessible to the Solana network.
Resulting state root SPV: The simple payment verification (SPV) root, which stands for the agreed state root, must be submitted as proof of which Ethereum consensus signatures are compatible with a given state root. This allows the validators to reach a consensus on the state of Ethereum.
Bridge timeout for error resolution: The bridge timeout mechanism will be required to identify and handle errors within the bridge protocol. Examples of conflicting errors include root SPV, incorrect root account, and oversight. The time-out mechanism enables efficient debugging and troubleshooting.
Security and restrictions
While the proposal provides a way to secure Solana’s assets on Ethereum, it is critical to understand the potential limitations and risks associated with this integration. Yakovenko maintains that it will be safe to hold assets on Ethereum, but it would not be advisable to lend or hold positions against them.
In the event of a fault on Ethereum, Solana assets held on Ethereum are decoupled from the Ethereum social consensus fork. Thus, representations of these assets on Ethereum will become worthless.
For example, if someone lends Solana USDC on Ethereum, the borrower will be able to withdraw real USDC on Solana, while the lender on Ethereum will get junk token. This situation is similar to experiencing a USDC contract on Ethereum’s Proof of Work (EthPow) chain.
Furthermore, Yakovenko points out that while central limit order books (CLOBs) will still work in this setup, automated market makers (AMMs) and non-quick lending and borrowing protocols will face limitations.
In response to a question about considering Ethereum becoming L2, Yakovenko suggests that this is an unauthorized bridging protocol, which means that Ethereum does not need to explicitly consider such integration:
This is a permissionless bridge protocol. Eth you don’t need to think about anything.
Remarkably, Yakovenko’s thinking of Ethereum as an L2 protocol has ignited discussions about the possibilities and challenges of such an integration. While the proposal provides a way to secure Solana’s assets on Ethereum and enhance interoperability, it does come with some limitations and risks.
SOL price about to crash?
At press time, SOL price is showing bullish momentum. SOL was trading below the 32.8% Fibonacci retracement level. A rally above this level could open up the possibility of a renewed attack on the 200-day exponential moving average, a level that SOL price has not been able to overcome since April 2022. If successful, SOL will return to bullish territory and could climb to The Fibonacci 61.5 retracement level at $27.11, which is also the highest level throughout the year.
Featured image from Markets Insider, chart from TradingView.com