The following report was written by Messari Hub Analyst(s) and commissioned by Metis, a member of Messari Hub. For additional information, please see the disclaimers following the article
Ethereum has become increasingly expensive to use. Over the last 18 months, the average Ethereum transaction fee has risen by roughly 50x from around $0.10 to $5. And this $5 price tag is a welcomed sight after the average fee spiked to almost $70 during the latest speculative rush in Q2.
High fees aren’t all bad from a macro perspective. They represent user demand for block space. An increase in transaction costs, therefore, suggests that the network is providing greater utility and value in return. Many also accept that high gas fees are a necessary cost to secure high-value transactions. But fees eventually add up, and increasing costs will price out some users and use cases. With new apps launching on Ethereum daily, network utilization rates at near-capacity, and Eth2 scaling upgrades still in development, there doesn’t appear to be any short-term relief in sight for Ethereum’s base layer.
That’s where layer two scaling solutions come in. They aim to solve Ethereum’s congestion problem with vastly reduced fees yet with minimal compromises on security. One such solution, optimistic rollups, bundles and sequences a series of transactions on a layer above Ethereum, and then sends them as one transaction to the Ethereum layer 1 main chain. By running computation a layer above Ethereum (hence “layer 2”), they areexpected to have roughly 100x more throughput than their underlying chain.
While Optimistic Ethereum and Arbitrum’s Arbitrum One gather the most headlines and excitement as they gear up for public launch, they are just two of several rollup solutions nearing completion.
Metis is one of these solutions. It is a fork of Optimism that aims to improve upon its currently more popular competitors. Metis seeks to offer the standard benefits of optimistic rollups like low fees (<$1), speed (less than one second), and Ethereum-level economic security. But it plans to differentiate its platform by providing native data storage, faster withdrawals to the Ethereum layer 1 main chain, and improved usability for DApp providers.
Rollups and Side Chains
The scaling wars have been dominated by side chains and other layer 1s to date, with Polygon gaining the most traction among the biggest names in DeFi and the Metaverse. Sushiswap, Aave, and Curve have all expanded to Polygon, with SushiSwap deploying on several other chains as well. Axie Infinity now runs on a custom-built sidechain called Ronin to insulate the popular play-to-earn game from Ethereum’s costly fee fluctuations. NBA Top Shot and Crypto Kitties developer Dapper Labs launched an independent layer 1 to escape Ethereum’s notorious fees. DeFi ecosystems have also sprouted on newer networks like Solana, Terra, Binance Smart Chain (BSC), and Avalanche.
Each has benefited directly from rising Ethereum fees, as indicated by their recent increase in on-chain activity and total value locked (TVL).
The biggest issue with side chains and some layer 1s is that they may have different attack surfaces (often related to their perceived lower levels of decentralization) and lower economic security guarantees than Ethereum. As a result, scaling solutions that minimize any security and decentralization tradeoffs have been a core focus within the Ethereum community.
Ethereum founder Vitalik Buterin began favoring “rollups” as the way to scale Ethereum and its security into its next growth cycle in September 2018. Rollups are execution layers that exist a layer above a layer 1 network. They batch and sequence transactions in this off-chain environment before pushing them to their underlying blockchain. Since the base layer serves as the arbiter of truth, rollups “inherit the security properties of the blockchain they’re built on.”
Rollups come in two forms: zero-knowledge (ZK) rollups and optimistic rollups.
ZK rollups use complex proofs to near-instantly confirm the final state on the layer 2 to Ethereum layer 1. A few application-specific ZK rollups have already launched, including Loopring DEX, Immutable X (Gods Unchained), and derivatives protocol dYdX.
Optimistic rollups assume “optimistically” that all transactions are valid. But transaction confirmations on the main chain are subject to a challenge period as a fraud prevention mechanism. Withdrawing tokens from an Optimistic Ethereum DApp generally requires some latency (relative to ZK rollups) to allow for any challenges. Where optimistic rollups have historically differed from their zero-knowledge counterparts is their ability to readily support EVM-compatible application environments. EVM compatibility enables developers to port over their existing Solidity contracts from Ethereum with minimal alterations. But the gap between optimistic and ZK rollup programmability appears to be narrowing with the Matter Labs’ ZKSync and Starkware closing in on the ability to perform EVM-like computation in ZK rollups.
Metis Layer 2
Metis will be one of the family of EVM-compatible optimistic rollups to launch within the coming months. It uses a fork of Optimism’s Optimism Virtual Machine (OVM) that it calls the Metis Virtual Machine (MVM). The MVM mirrors the OVM in function and code execution.
Like other optimistic rollup designs, Metis relies on network actors known as sequencers to order and batch transactions before submitting the final MVM state changes to Ethereum. Unlike the others, however, Metis intends to launch with multiple sequencers that will be pooled into on-chain entities called Decentralized Autonomous Companies (DACs). Each Metis block, the protocol will randomly select a new sequencer from the sequencer DAC to push any state changes to Ethereum. Metis’ sequencer pool and selection process contrast the single-sequencer approach that Arbitrum and Optimism will use initially. However, both Arbitrum and Optimism have discussed plans to shift towards a more democratized sequencer selection process.
DACs are essentially DAOs. Metis represents them as on-chain organizations that allow users to collaborate and perform certain network actions, like running a sequencer pool (as described above) or running a new application on the MVM. To be eligible to confirm a batch of transactions, sequencers must stake more METIS than the Dynamic Bond Threshold (DBT), which serves as a mechanism to disincentivize malicious behavior and sequencer apathy.
Users can also participate as “Ranger” to police sequencer activity. Rangers sample a range of blocks and validate the state roots in return for METIS token rewards. A successful challenge (known as a fraud proof) results in a slashing of the sequencer. These slashed assets are transferred to the Ranger who initiated the dispute process. Repeated failed challenges by a Ranger can result in a network ban.
The challenge process is critical to the function of optimistic rollups. Optimistic rollups are “optimistic” by design, assuming that no posted transaction is fraudulent. They essentially use an “innocent until proven guilty” approach that depends on a “checks and balances” system to discourage fraud and ensure Ethereum remains the arbiter of truth. All fraud detection on Metis occurs through Rangers surveilling sequencer activity and challenging any misbehavior.
While Metis uses a fork of Optimism’s OVM, it has a few characteristics that aim to improve the original design. These features include:
IPFS integration - A cheaper option for storing data than using a secondary solution
Faster validation when publishing state changes to Ethereum due to the use of Rangers
Polis Middleware - Provides templates and support for an improved development environment that targets developers that are new to crypto
Multiple Execution Layers - Metis will allow DACs to spin up new MVM execution environments to scale capacity as block space demand increases
Permissioned Environments - DACs can customize access controls to their MVM instances
IPFS Integration
Data storage on Ethereum and Bitcoin is costly due to their limited block space. Metis conserves on-chain space by allowing each DAC to run an separate MVM instance with a built-in storage layer that uses Interplanetary File Service (IPFS). Users and developers can access content from Metis through the IPFS resolver of the MVM.
Storing and accessing data in this way has two potential benefits. First, data could be encrypted within the Metis protocol, allowing users to store confidential information. Second, the IPFS Resolver enables Metis applications to access and link directly to stored data, such as an NFT’s underlying artwork or music.
Faster Validation with Rangers
The main weakness in optimistic rollups is the wait time to confirm a withdrawal back to the Ethereum layer 1 (or even another layer 2). This wait time is usually measured in days. Arbitrum anticipates that withdrawals could take around three days, while Optimism’s expected timeline is around one week. These wait times are essential to the fraud detection process, but they also may reduce flexibility for users and create friction when attempting to move funds to Ethereum or between different L2s.
Metis’ multi-party fraud detection system may allow it to shorten the time for state change confirmations from several days to several hours. As mentioned above, Metis randomly selects a new sequencer for each block and relies on a group of nodes (Rangers) to monitor sequencer activity. Sequencers are economically incentivized to avoid issuing fraudulent state changes (getting caught leads to the loss of staked METIS), and Rangers receive a financial reward for correctly reported fraud attempts. While single-party sequencer systems like Optimisms and Arbitrum (at launch) will require withdrawal times on the order of days, the Metis team says that its multiple layers of checks and balances enable Metis to lower withdrawal times to around six hours. Metis must ensure it has a robust set of sequencers and Rangers at launch to achieve its targeted six-hour wait time for withdrawals.
Polis
A critical factor that could impact the adoption of L2s is how challenging it will be to port existing contracts from Ethereum to a new layer. Platforms that require projects to adapt their existing contracts significantly may become application deserts, as projects will likely steer clear of development environments that require codebase overhauls. Instead, developers will target familiarity, which translates to maximizing EVM compatibility.
Metis has embraced an EVM-compatible design. It seeks to further ease the transition to layer 2 for existing Ethereum applications through its Polis middleware. The Metis team intends for Polis to help bridge the gap from Web2 to Web3 by offering developers “low-to-no-code” templates for deploying and managing new applications. The combination of low fees and a low development learning curve can create a fertile environment for experiments and innovations, which are critical elements for cultivating an application ecosystem from scratch.
While embracing the EVM is a great growth hack (and increasingly, necessary), this strategy also means that Metis will directly compete with every other EVM-compatible layer 1 network and layer 2 solution. Using a different VM is a gamble as generating developer interest in a new language and toolset is a large and often expensive endeavor. But it could be a gamble worth taking if the new VM gains traction since developers won’t be able to migrate to a newer, shinier solution as easily. Differentiating one’s product suite can create a stickiness that prevents developer or liquidity leakage to competing platforms.
Tokenomics
The METIS token was first distributed during an Initial DEX Offering (IDO) through PAID Network and an Initial Exchange Offering (IEO) with Gate.io on May 13, 2021. After launching at its IDO price of $5, METIS quickly ran up to $8. It then consolidated for three months around $5, before rising to new highs amid the recent market recovery.
The METIS token has three primary uses cases within Metis’ L2 platform:
Transaction Fees - Users pay for transaction fees in METIS
Staking for DACs - DAC contributors must stake METIS to become a sequencer, collaborate, or launch a new MVM layer
Incentives - DACs and Rangers get rewarded with METIS for contributing and winning fraud challenges, respectively. These participants can also lose METIS if they get caught acting outside of the rules of the protocol.
Metis allocated 49.3% (or 4.93 million METIS) to community initiatives (airdrop and community participation incentives), marketplaces like decentralized exchange for adequate trading liquidity, early contributors (public and private investors), the team, and the MetisLab Foundation. The team, foundation, and private investor allocations are subject to 12-18 month vesting schedules, giving METIS a relatively low float early on.
The project has earmarked the remaining 5.07 million tokens to a ten-year incentives program to reward network participants like sequencers, Rangers, and community members for processing transactions (a process Metis calls “Transaction Mining”).
METIS’ inflation schedule will serve as an incentive to provide security and avoid fraud. But an often overlooked aspect of a token is its impact on a project’s rate of innovation and adoption. Token incentives, even if inflationary, can bootstrap ecosystem and user growth, as shown with the rapid rise of Polygon. The Polygon team used its MATIC supply to reward validators and later liquidity providers on Aave and Curve.
The layer 2 landscape will be a highly-competitive one, and projects that may fall outside of the public eye could (and probably will) use every advantage at their disposal. Having a token could be a competitive advantage given that Arbitrum, Optimism, and StarkWare haven’t shared clear details about a native token (yet).
State of the Nation
With Optimistic Ethereum (OE) and Arbitrum close to full launches, where is Metis? Metis is planning for a public testnet in September and a mainnet release in October.
The layer 2 competitive landscape is rapidly evolving. Uniswap v3 is live on OE and will deploy to Aribitrum. Seasoned DeFi veteran Synthetix has been live on OE since late July. Arbitrum said it has given “over 400 projects mainnet access, and dozens of them have successfully completed their deployments.” With Optimism and Arbitrum off to headstarts in application adoption, Metis will need to populate its ecosystem quickly upon launch. MetisSwap, a fork of Uniswap v2, is live on Metis’ testnet, and WOWswap has committed to adding a leveraged token trading protocol. While every new network requires financial primitives, Metis’ market presence is a far cry from the development activity seen on Optimism and Arbitrum.
Metis is planning to spur its application ecosystem through its Ecosystem Development Program. Developers must have a working project, an established community, or a great idea and team to win an ecosystem grant. Metis will facilitate introductions to VCs, technical support, market and community building, and provide METIS rewards for successful applicants.
Roadmap
Along with the continued development of Polis middleware tools, Metis is focused on incentivizing ecosystem development for an eventual mainnet launch in October. Metis has established relationships with DeFi, infrastructure, and token launchpad partners, including Trustee Wallet,OroPocket OpenDeFi,PARSIQ,PAID Network, and many others.
Challenges Ahead
Network effects are the dominant driver of on-chain volume, and high-profile competitors such as Optimism and Arbitrum as well as layer 1s such as Solana and Terra have growing ecosystems, with large-scale DeFi and Metaverse projects established or on their way. ZK rollups are also rapidly evolving from the early DApp-specific solutions such as Loopring and dYdX. Immutable X plans to support a second game, bringing it closer to its goal of becoming a metaverse ecosystem. zkSync and StarkWare have EVM-compatible ZK-rollups in testnet.
The competition is only picking up, and Metis must deliver on its promise to improve the optimistic rollup experience through its proposed versatility and UX improvements. If Metis can foster an application ecosystem through its token incentives program, it might be able to generate the network effects that any layer 2 will need to survive.
The transfer of developers and users from web2 to web3 is already underway and will only accelerate from here, and the market might be large enough for every project to get their fill. But projects and infrastructure that create enough separation from their nearest competitors will become the leaders of the internet’s next frontier.
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