L3T: Scaling Ethereum with Native Liquidity Staking Tokens for High-Efficiency EVM Performance

[iamcapote]

For a detailed Ethereum Improvement Proposal (EIP) formatted version of this proposal, please refer to the LaTeX document available here.

ETH Liquidity Staking Tokens (LST) and Layer 3 Temporary (L3T) Chains: Enhancing Ethereum’s Scalability and Efficiency

Introduction

Ethereum has rapidly evolved into a cornerstone of the blockchain ecosystem, supporting a vast array of decentralized applications (dApps), decentralized finance (DeFi) platforms, and non-fungible tokens (NFTs). This growth has propelled Ethereum to the forefront of innovation but has also introduced significant challenges related to scalability, network congestion, and resource management. As transaction volumes surge, the network often struggles to maintain efficiency, leading to higher gas fees and slower transaction times.

Layer 2 (L2) solutions, such as zk-rollups and optimistic rollups, have emerged as promising avenues to alleviate some of these pressures by processing transactions off-chain and reducing the load on the Ethereum mainnet (Layer 1 or L1). However, these solutions are not without limitations. Issues related to validator incentives, effective distribution of computational power, and liquidity management persist, hindering the optimal performance of the network.

To address these critical challenges, we introduce ETH Liquidity Staking Tokens (LST)—a native L2 mechanism designed to enhance validator incentives and liquidity within L2 networks. Alongside LSTs, we propose Layer 3 Temporary (L3T) chains, which are event-driven chains intended to manage short-term, high-demand computational tasks without overburdening L2 networks. By integrating native LSTs and L3T chains into the Ethereum L2 ecosystem, we aim to provide a scalable, efficient, and flexible framework that meets the growing demands of users and developers alike.

The Challenges of Ethereum’s Scalability

As the Ethereum network experiences increased adoption, it frequently encounters periods of intense activity that strain its capacity. High-traffic events—such as DeFi token launches, NFT drops, and in-game asset transfers—can lead to network congestion. This congestion manifests as elevated gas fees, making transactions prohibitively expensive for many users, and results in slower transaction processing times, adversely affecting user experience and dApp functionality.

Furthermore, the current ecosystem lacks a unified mechanism for efficiently managing validator incentives across L2 networks. Validators play a crucial role in maintaining network security and processing transactions, but attracting and retaining them requires effective incentive structures that align with network performance goals. Without adequate incentives, validators may be disincentivized to participate in L2 networks, compromising security and efficiency.

Efficient allocation of computational resources is another significant concern. Directing computational power to areas with the highest demand is essential for maintaining network responsiveness. However, existing mechanisms do not adequately direct resources where they are most needed, leading to inefficiencies during peak usage times.

Liquidity management within L2 networks also presents challenges. Ensuring sufficient liquidity is vital for smooth transaction processing and supporting DeFi activities. Fragmented liquidity can hinder user participation and limit the effectiveness of DeFi protocols.

These interconnected challenges highlight the need for a comprehensive solution that enhances validator participation, optimizes resource allocation, and manages liquidity effectively across L2 networks.

Native ETH Liquidity Staking Tokens (LST) for L2 Scaling

** Native ETH Liquidity Staking Tokens (LST)** could be designed to address these challenges by providing a native L2 staking mechanism that enhances liquidity and validator incentives within L2 networks. Unlike Lido’s stETH—which is a staking derivative representing staked ETH on L1—our proposed LSTs are native to the L2 network and integrate seamlessly with its operations.

How Native L2 LSTs Work in the Proposed System

The functionality of LSTs in this proposed system involves a multi-step process that optimizes liquidity and usability within L2 networks:

1. Bridging ETH to Layer 2 (L2): Users begin by bridging their ETH from the Ethereum mainnet (L1) to an L2 network. This process transfers ETH into the L2 environment, making it available for staking and participation in network activities.
2. Staking ETH Natively in L2’s Staking Nodes: The bridged ETH is staked natively within the L2’s staking nodes. This staking process enhances the security and performance of the L2 network by supporting its transaction validation and consensus mechanisms.
3. Aggregated Staking Back to Layer 1 (L1): The L2 staking nodes aggregate the staked ETH and stake it back into the Ethereum mainnet (L1). This allows the L2 network to contribute to the overall security of Ethereum’s Proof of Stake (PoS) system while earning staking rewards.
4. Issuance and Utility of Native LST Tokens: In exchange for staking their ETH within the L2 network, users receive native LST tokens. These tokens represent their staked ETH and are fully liquid within the L2 environment. They can be unwrapped natively on-chain into the L2’s native gas token, providing immediate liquidity for users.
5. Active Participation in Network Activities: Users can trade, transfer, or utilize LST tokens within various dApps and DeFi protocols on the L2 network. This includes staking LST tokens in yield farming protocols, using them as collateral in lending platforms, or providing them to liquidity pools.

Benefits of Native LSTs

• Enhanced Liquidity and Usability: By enabling LST-to-gas unwrapping natively on-chain within the L2 network, users have immediate access to liquidity without the need to bridge assets back to L1. This liquidity facilitates active participation in network activities, including paying for gas fees and engaging with dApps and DeFi services on L2.
• Optimized Staking Rewards: Users earn staking rewards from both the L2 network (for supporting its operations) and the Ethereum mainnet’s PoS system (through the aggregated staking by L2 nodes). This dual-layer staking enhances the overall return on staked assets.
• Improved Network Performance: Native staking within L2 improves transaction validation and network security, leading to better performance and scalability. By staking ETH back into L1, the L2 network also contributes to the security and decentralization of the Ethereum mainnet.
• Seamless User Experience: Users can manage their staked assets and liquidity entirely within the L2 network, reducing complexity and transaction costs associated with moving assets between layers.

Distinction from Lido’s stETH and the BLAST Network

It’s important to clarify how our proposed native LSTs differ from Lido’s stETH and how networks like BLAST utilize existing staking derivatives:

Native to L2:

• Lido’s stETH: Represents staked ETH on L1 and can be bridged to L2, but it is inherently an L1 token.
• BLAST Network: Utilizes wrapped staked ETH (wstETH) from Lido within their L2 network to enhance scalability and liquidity. By integrating wstETH, BLAST allows users to benefit from Lido’s staking infrastructure without operating its own native liquidity staking token or node system.
• Our Proposal: Introduces native LSTs issued and managed within the L2 network, creating a direct staking mechanism that is integral to the L2’s operations.

Integrated Staking Mechanism:

• Lido’s Model: Staking is managed entirely on L1 through Lido’s staking nodes.
• BLAST Network: Does not have its own staking node system; it relies on Lido’s infrastructure and wstETH for staking rewards within their L2.
• Our Proposal: Staking occurs natively within the L2 network’s staking nodes, which then aggregate and stake ETH back to L1. This provides a more integrated and seamless staking experience within the L2 environment.

On-Chain Unwrapping to Gas Token:

• Lido’s stETH and wstETH: Do not offer native on-chain unwrapping to the L2’s gas token within L2 networks.
• BLAST Network: While using wstETH enhances liquidity, it does not provide native unwrapping to the L2’s gas token.
• Our Proposal: LST tokens can be unwrapped into the L2’s gas token directly on-chain, providing immediate liquidity within the L2 environment and facilitating easier participation in network activities.

Customized Incentive Structures:

• BLAST Network: Benefits from existing staking rewards through wstETH but does not have native LSTs to create tailored incentive structures for validators.
• Our Proposal: By issuing native LSTs, L2 networks can develop customized incentive structures and governance models that align closely with their specific performance goals and community interests. This includes incentivizing validation of L3T chains via native LSTs, which is not possible with external staking tokens like wstETH.

By comparing our proposal with Lido’s stETH and the BLAST Network’s approach, we highlight how native LSTs provide a more integrated, efficient, and customizable solution for L2 networks. Our model not only enhances liquidity and validator incentives within the L2 but also enables the incentivization of L3T chain validation through native mechanisms.

Layer 3 Temporary (L3T) Chains: Enhancing Scalability and Utility

To fully realize the potential of ETH Liquidity Staking Tokens (LST) and address the challenges of high-demand events, we propose the implementation of Layer 3 Temporary (L3T) chains. L3T chains are designed as temporary, one-to-one replicas of the L2 chain augmented with event-specific data. They handle intensive computational tasks independently and, upon completion, summarize and integrate essential data back into the L2 chain before being dissolved. This approach not only mitigates congestion but also enhances the utility of LST tokens, aligning economic incentives across the network.

How L3T Chains Work

L3T chains function as ephemeral, event-driven layers that are dynamically created and integrated within the L2 ecosystem:

1. Initialization:

   • Event Trigger: An anticipated high-demand event—such as an NFT drop, token sale, or gaming tournament—triggers the creation of an L3T chain.
   • Chain Replication: The L3T chain is instantiated as an exact one-to-one copy of the current L2 chain state, ensuring consistency and compatibility.
   • Event Integration: Event-specific smart contracts and data are deployed on the L3T chain, tailoring it to the requirements of the event.

2. Independent Processing:

   • Isolation: The L3T chain operates independently, processing all transactions related to the event without impacting the L2 chain’s performance.
   • Validator Incentivization: Validators are incentivized with enhanced native LST rewards to allocate computational resources to the L3T chain, ensuring security and efficiency.

3. Summarization and Settlement:

   • Data Summarization: Upon event completion, the L3T chain summarizes the transactional data into a concise proof or state update.
   • Integration with L2: The summarized data is securely integrated back into the L2 chain, updating the main ledger with the outcomes of the event.

4. Dissolution:

   • Resource Release: After successful integration, the L3T chain is dissolved, freeing up computational resources.
   • Data Pruning: Non-essential data is discarded to prevent long-term storage burdens, maintaining network efficiency.

L3T Chains as Incentivized Computational Markets

L3T chains introduce a novel concept akin to the Solidly ve(3,3) token model, where developers and product makers can incentivize the creation and validation of temporary blockchains to handle specific computational demands:

• Developer Empowerment:

  • Developers can deploy L3T chains for their applications, customizing the chain environment to optimize performance for their specific use case.
  • By offering LST incentives, they can attract validators to allocate computational resources to their L3T chain, ensuring robust security and efficiency.

• Economic Alignment:

  • Settling L3T chain transactions in LST tokens enhances the utility of LSTs beyond representing staking power.
  • This mechanism creates a computational marketplace, where the demand for computational resources is matched with validator supply, governed by economic incentives.

• Utility Enhancement for LST Tokens:

  • Increased Demand: As L3T chains settle in LST tokens, the demand for LSTs rises, driving their value and utility.
  • Incentive Alignment: Validators and users are economically motivated to participate in the network, aligning their interests with network performance and scalability.

Advantages of L3T Chains

• Scalability and Flexibility:

  • L3T chains allow the network to scale dynamically in response to varying computational demands without overburdening the L2 chain.
  • They provide a flexible solution that can be tailored to a wide range of applications and events.

• Reduced Complexity and Enhanced Cohesion:

  • By summarizing event data back into the L2 chain, L3T chains avoid the pitfalls of increased complexity and fragmented economic cohesion seen in multi-chain ecosystems.
  • This approach maintains a unified economic model centered around LST tokens.

• Empowered Developers and Users:

  • Developers gain the ability to optimize performance for their applications without impacting the broader network.
  • Users benefit from improved transaction speeds and reduced fees during high-demand events.

Use Cases for L3T Chains

• High-Throughput DeFi Applications:

  • L3T chains can handle intensive DeFi operations like flash loans, arbitrage, and complex smart contract interactions efficiently.

• Mass-Participation Events:

  • Events that attract large numbers of participants, such as token launches or virtual concerts, can utilize L3T chains to ensure seamless user experiences.

• Customized Gaming Environments:

  • Game developers can deploy L3T chains to manage in-game economies and high-frequency transactions without affecting the main network.

Managing Liquidity and Token Dynamics

Effective liquidity and token dynamics are crucial for the success of the native LST and L3T model. By integrating L3T chains settled in LST tokens, we enhance the utility of LSTs and create a synergistic economic ecosystem.

Enhancing LST Utility through L3T Settlements

• Settlement in LST Tokens:

  • Transactions and fees within L3T chains are settled using LST tokens, increasing the demand and utility of LSTs.
  • This creates a direct link between network usage and LST value, incentivizing holders and validators.

• Economic Incentives for Validators:

  • Validators earn additional LST rewards by participating in L3T chains, motivating them to allocate resources efficiently.
  • The increased utility of LSTs makes staking more attractive, promoting network security and stability.

Maintaining Token Stability and Value

• Dynamic Supply Mechanisms:

  • Implementing supply adjustments, such as token burns or minting tied to network activity, helps maintain LST token value.
  • The settlement of L3T chains in LSTs introduces natural demand pressures that can stabilize token prices.

• Governance and Community Involvement:

  • Decentralized governance allows stakeholders to influence economic policies, ensuring that token dynamics align with the community’s best interests.
  • Adaptive mechanisms can be introduced to respond to market conditions and network performance metrics.

Aligning Economics and Incentives

By integrating LST tokens deeply into the operation of L3T chains, we align the economic incentives of all network participants:

• Developers:

  • Gain access to scalable computational resources by leveraging L3T chains.
  • Can incentivize validators using LSTs, ensuring their applications perform optimally.

• Validators:

  • Receive enhanced rewards for participating in both L2 and L3T chains.
  • Are economically motivated to allocate resources where they are most needed.

• Users:

  • Benefit from improved network performance and lower fees during high-demand events.
  • Can utilize LSTs across various applications, increasing the tokens’ utility.

Advantages of the Enhanced Native LST and L3T Model

Integrating L3T chains settled in LST tokens amplifies the benefits of our proposed model:

• Economic Cohesion:

  • Settling L3T chains in LSTs ensures that all layers of the network are economically interconnected.
  • This cohesion strengthens the network’s overall economic health and sustainability.

• Increased LST Demand and Utility:

  • As L3T chains become more prevalent, the demand for LST tokens rises, enhancing their value.
  • LST tokens evolve from mere representations of staked ETH to versatile assets integral to network operations.

• Scalable and Sustainable Growth:

  • The model supports scalable growth by efficiently managing computational resources and incentivizing network participation.
  • Sustainable economic incentives ensure long-term network viability.

Potential Challenges and Considerations

Implementing this enhanced model requires careful consideration of several factors:

Technical Complexity

• L3T Chain Deployment and Management:

  • Developing standardized protocols for the creation, operation, and dissolution of L3T chains is essential.
  • Tools and frameworks need to be user-friendly to encourage widespread adoption by developers.

Security Measures

• Smart Contract Robustness:

  • Comprehensive audits and security practices are vital to prevent vulnerabilities in LST and L3T chain contracts.
  • Ongoing security assessments can mitigate risks associated with complex smart contract interactions.

Economic Balancing

• Token Value Stability:

  • Mechanisms to prevent excessive volatility in LST token prices are necessary to maintain confidence.
  • Economic models must balance supply and demand effectively, considering the added utility from L3T chain settlements.

Community Governance

• Inclusive Decision-Making:

  • Effective governance structures that allow for broad participation can ensure that the network evolves in line with stakeholder interests.
  • Transparent processes and clear communication foster trust and collaboration.

Conclusion

The integration of native ETH Liquidity Staking Tokens (LST) and Layer 3 Temporary (L3T) chains, with L3T chains settled in LST tokens, presents a powerful solution to Ethereum’s scalability and resource management challenges. By:

• Enhancing LST Utility:

  • Transforming LSTs into versatile tokens integral to network operations and economic incentives.

• Creating Incentivized Computational Markets:

  • Allowing developers to deploy event-specific chains and incentivize validators, aligning computational resources with demand.

• Aligning Economic Interests:

  • Ensuring that developers, validators, and users are economically motivated to support network performance and scalability.

This model fosters a resilient and adaptable network capable of meeting diverse user needs and supporting innovative applications.

Implementing this vision will require collaborative efforts across the Ethereum community. By addressing technical, security, and economic challenges together, we can realize a network that not only meets current demands but is also poised for future growth and innovation.

---

Note: This proposal is intended for discussion and exploration within the Ethereum community. Your insights and feedback are invaluable in refining these ideas and bringing this vision to fruition. Let’s work together to make this a reality.