OKX's L2 Raises Questions About Scaling Ecosystem

Exchange giant OKX has announced plans to launch its own Layer-2 blockchain network, called X1, joining an increasingly crowded space of major players in the scaling arena. OKX's native token, OKB, will be used to pay transaction fees on the platform.

Big Name CeFi Chains

Layer-2 networks have been a priority in the blockchain space ever since 2017, when a surge in transaction volumes prompted by the release of the CryptoKitties collectibles game brought Ethereum to a standstill. Since then, a number of solutions have been launched, with Polygon, Arbitrum, Optimism, and others gaining significant traction. While these use different mechanisms, the aim in every case is the same: To reduce the burden on Ethereum mainnet by allowing users to make low-cost transactions on a separate but linked platform.

The latest development in the L2 space has been the launch of solutions by large exchanges and other key players in the crypto space—most notably Coinbase, which launched the Base network earlier this year. Kraken has also announced its plans to launch its own L2, and Consensys, the blockchain services provider responsible for MetaMask, has launched Linea. These companies have a natural market for their products, since they already have tens of millions of users.

OKX's platform is scheduled for launch early in 2024, and will leverage Polygon's zero-knowledge solutions. Coinbase has opted to use optimistic rollups, drawing on Optimism's technology stack. Linea employs zk rollups.

Implications And Criticism

While all of these different solutions are EVM-compatible—that is, dApps that can be run on Ethereum mainnet can also be run on the L2 networks—the proliferation of so many secondary blockchains poses a number of questions:

• Fragmentation. Taking activity off Ethereum mainnet is the goal of L2 adoption, but also risks siloing liquidity in different ecosystems. Fast, secure bridges, and frictionless interoperability, therefore become a priority—and at present, the necessary infrastructure does not exist.
• Centralization. Depending on the consensus model and approach, some L2 solutions have far worse security than mainnet, or rely on centralized infrastructure. Base, for example, depends on a sequencer run by Coinbase to validate transactions, meaning there is a significant single point of failure.
• Business model. While transactions are much cheaper on L2s than on mainnet, there are still costs to users. Where the organizations that launched the platforms play a major role in securing and maintaining them, these fees can be a substantial source of revenues. In some cases, however, it's unclear whether the benefits outweigh the costs to users.

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