- Ethereum Layer 2 scaling solutions and rollups are not entirely decentralized as these projects have multisig wallets controlled by developers.
- Buterin’s statement sparked a debate in the crypto community, raising concerns about Layer 2 projects facing regulation.
- Chris Blec refers to Layer 2 projects as banking 2.0, believes protocols like Arbitrum and Optimism can never be sufficiently decentralized.
Vitalik Buterin, the Ethereum co-founder, made headlines as he explained that all Layer 2 projects and rollups like Arbitrum and Optimism have a backdoor on Ethereum. Scaling solutions are, therefore, unlikely to be sufficiently decentralized.
Buterin’s statements support Chris Blec, a crypto and DeFi analyst, whose argument that Layer 2 projects are banking 2.0 and thus likely to face regulation soon.
Vitalik Buterin sparks debate in Layer 2 community, says all projects have backdoor
Ethereum Layer 2 solutions Arbitrum and Optimism have catalyzed an increase in the total volume of assets locked in the ETH ecosystem. While Layer 2 projects have gained popularity for their efficiency and lower transaction costs, Ethereum’s Vitalik Buterin revealed that these projects have a backdoor.
All Layer 2 projects and rollups have a backdoor on the Ethereum blockchain, and this revelation by Buterin sparked a debate in the crypto community. Ethereum scaling solutions are, therefore, not sufficiently decentralized as some in the crypto community originally thought. This is because developers and project owners have access to multisig wallets through which they can make changes to the protocol.
Developers can enter changes when needed, and the backdoor can be considered “training wheels” on the Ethereum blockchain. There are two different schools of thought: one that is accepting of the "backdoor" mechanism and the other that demands immutable and 100% decentralized protocols.
Backdoor opens Layer 2 protocols to regulation
Chris Blec has drawn support from Vitalik’s statement and argued that Layer 2 protocols are not sufficiently decentralized. Blec refers to such projects as “banking 2.0” and argues that these protocols are likely to be subject to regulation in the future.
Vitalik acknowledges that all Ethereum L2s have “backdoors”.— Chris Blec (@ChrisBlec) August 14, 2023
I’ve obviously been saying this for years.
These L2s are run by large corps and they’ll eventually face regulation.
They’ll never be sufficiently decentralized.
It’s big banking 2.0.
Layer 2 projects like Arbitrum and Optimism are focused on becoming 100% decentralized, however, this remains unlikely with the presence of a backdoor on the ETH blockchain. Interestingly, the largest stablecoins in the ecosystem, USD Tether (USDT) and USD Coin (USDC), are not 100% decentralized either. The teams behind these stablecoins can freeze assets to tackle exploits or major security incidents. The developers of the project, therefore, have access to make changes in the future, and this is an argument for “centralization for security.”
Removing the backdoor for Layer 2 projects could be risky, while the existence of it violates the principle of decentralization.
What is Ethereum?
Ethereum is a decentralized open-source blockchain with smart contracts functionality. Serving as the basal network for the Ether (ETH) cryptocurrency, it is the second largest crypto and largest altcoin by market capitalization. The Ethereum network is tailored for scalability, programmability, security, and decentralization, attributes that make it popular among developers.
What blockchain technology does Ethereum use?
Ethereum uses decentralized blockchain technology, where developers can build and deploy applications that are independent of the central authority. To make this easier, the network has a programming language in place, which helps users create self-executing smart contracts. A smart contract is basically a code that can be verified and allows inter-user transactions.
What is staking?
Staking is a process where investors grow their portfolios by locking their assets for a specified duration instead of selling them. It is used by most blockchains, especially the ones that employ Proof-of-Stake (PoS) mechanism, with users earning rewards as an incentive for committing their tokens. For most long-term cryptocurrency holders, staking is a strategy to make passive income from your assets, putting them to work in exchange for reward generation.
Why did Ethereum shift from Proof-of-Work to Proof-of-Stake?
Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) mechanism in an event christened “The Merge.” The transformation came as the network wanted to achieve more security, cut down on energy consumption by 99.95%, and execute new scaling solutions with a possible threshold of 100,000 transactions per second. With PoS, there are less entry barriers for miners considering the reduced energy demands.
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