Late Saturday, an Ethereum layer-2 network called Linea found itself stuck between a rock and a hard place.
Using an exploit, attackers had drained $2.3 million worth of ETH from a decentralized exchange that operates on Linea, called Velocore. Unable to reach the Velocore team, Linea’s leadership made the decisive call to freeze all transactions across the network in an effort to prevent further malfeasance. The plan worked: Linea users were insulated from additional losses.
That’s when the trouble started.
Crypto users immediately decried Linea’s actions across social media, arguing that the company had violated the industry’s core principle, decentralization. If a few people could halt Linea in their pajamas, then how could the network be considered any better than Wells Fargo?
I’m done with this crap. It’s 2024, and L2s are still spewing the same bullshit about their core values being “permissionless” and “censorship-resistant” after being live for over a year but are still running centralised sequencers. Give me a break. They act all high and mighty,… https://t.co/MykDJ9G3IF
— sudo rm -rf –no-preserve-root / (@pcaversaccio) June 2, 2024
Linea immediately pivoted, posting on Twitter that the network was still in the “training wheels” phase of decentralization, but that it planned to eventually transition to a completely trustless structure. (Disclosure: Linea is owned by Consensys, which is one of 22 investors in Decrypt).
Consensys’ L2 unilaterally turned off the chain yesterday
Reasonable given the circumstances but also a clear sign that this is not crypto pic.twitter.com/q8VaaEFOpN
— mert | helius | hSOL (@0xMert_) June 2, 2024
The incident laid bare a contradiction, some developers say, that doesn’t only pertain to just one blockchain. Rather, it exposed flaws in the entire, burgeoning layer-2 ecosystem—a collection of privately owned networks that has been frequently touted as Ethereum’s path forward.
“So you’re saying you intervened on behalf of users here, but in the future, hopefully, if you work really hard, you won’t be able to intervene and your users will lose all their money?” Tom Lehman, the co-founder of several Ethereum projects including layer-1 alternative Facet and Ethscriptions, told Decrypt. “It doesn’t make sense.”
To Lehman, the contradictions exposed by Linea’s public relations woes this week are not isolated—they are endemic to layer-2 networks.
“Having a layer-2 that’s centrally controlled is not a problem,” he said. “It’s just that every single one of them being centrally controlled is a problem.”
Nearly all major scaling networks—like Optimism, Arbitrum, Base, and Polygon—were created by private, for-profit companies. Most rely on sequencers, controlled by the network’s team, which batch transactions together and submit them to the Ethereum mainnet. In such cases, like Linea’s, project teams have the power to effectively shut off a network by halting said sequencers.
Why do most layer-2s exert such centralized control over their transactions? Linea, which did not respond to Decrypt’s questions by the time of publication, claimed in statements this week that the issue is a technical one that requires long-term finesse.
But financial incentives may also be at play. By controlling that single choke point through which all transactions must pass, layer-2 teams also control the profits derived from processing every network transaction. Such fees are the lifeblood of layer-2s, which often employ dozens of people, and such Ethereum networks are collectively raking in millions of dollars in monthly, on-chain profit.
“L2s can be very profitable to run,” Lehman said. “But that profit is tied to how much control you have.”
Some layer-2 teams say they are ahead of the pack, and have taken distinct steps towards decentralization. Arbitrum, for example, features a backup pathway that allows users to post their transactions to Ethereum directly, in case any issues emerge within the Arbitrum ecosystem. Submitting transactions via this delayed inbox is not ideal, however, and can take up to 24 hours.
Steven Goldfeder, the CEO of Arbitrum core developer Offchain Labs, told Decrypt that the company is currently working to decentralize its sequencer—but made a point of arguing that it poses less of a centralization threat than other layer-2s, given that the Arbitrum Foundation could not single-handedly prevent users from posting transactions.
“On Arbitrum, the problem is a lot smaller than on other networks,” said Goldfeder.
Goldfeder welcomes vocal criticism of centralization risks in the layer-2 ecosystem. He believes such dissent applies crucial pressure to companies that otherwise might focus on different priorities.
“Otherwise, you have the wrong incentives: growth first, and decentralization at some point,” he said. “If we just take one centralized system and replace it with another centralized system with a vague claim of eventually decentralizing—often without technical details—then I think it’s very dangerous.”
Some developers like Arjun Bhuptani, the founder of inter-blockchain bridge Everclear, however, feel that even Arbitrum’s solution to current centralization issues on layer-2s is insufficient.
“It is better, but is still not ‘censorship resistance,’” he told Decrypt of Arbitrum.
Further, Arbitrum itself has suffered network-wide outages repeatedly in the last year.
To Bhuptani, the issue of centralization is so pervasive on layer-2s simply because the privately owned networks are currently facing other, greater concerns.
“It largely just comes down to prioritization,” he said. “Projects are seeing bigger threats to their survival today on other axes than censorship, and so building decentralization is lower priority than things like security, custody risk, and market traction.”
It’s true that the matter of censorship on layer-2 networks is still largely theoretical. The Linea team, for example, has never used its power to block transactions on behalf of a sovereign government.
But such a scenario is by no means fanciful. The U.S. government has blacklisted Ethereum wallet addresses on multiple occasions. Centralized crypto exchanges have cooperated with the Israeli government to ban flagged accounts. Just last month, a Dutch court sentenced a developer of Tornado Cash, an Ethereum coin mixer designed to keep transactions private, to over five years in prison.
Even those within the layer-2 ecosystem worry about what might happen if the private teams behind so many networks—which, thanks to their incredibly low transaction fees, have recently been positioned as the best way to securely onboard the masses to crypto—are legally compelled to do the bidding of governments across the world.
“Something that I might think is legitimate,” Goldfeder said, “some oppressive regime somewhere might think is illegitimate behavior that should be censored.”
Some Ethereum developers feel, however, that the whole debate this week about Linea and crypto’s future has been blown out of proportion.
“It’s easy for people who were not affected by hacks to complain,” Joseph Schiarizzi, developer of Arbitrum-based stablecoin OpenDollar, told Decrypt. “But if you’ve ever been a victim, you understand the Linea team made the right move.”
“I do not expect every piece of infrastructure to be decentralized,” he continued. “I care much more about honesty and transparency, which Linea was great on.”
Lehman, who is currently developing a more decentralized alternative to networks like Arbitrum and Optimism, said he doesn’t want to demonize layer-2 networks or dismiss their usefulness. He only worries about crypto’s future if they become omnipresent.
“The problem comes when you say ‘L2s are the future, that’s how we scale, that’s it,’” Lehman said. “And in the process, [you] hand over the keys to giant billion-dollar entities and endorse them running insecure systems.”
Edited by Andrew Hayward