Ethereum Developers Shut Down Linea: Can Layer-2 Networks Be Trusted?

Using an exploit, attackers had withdrawn $2.3 million worth of ETH from a decentralized exchange running on Linea called Velocore. Unable to reach the Velocore team, Linea leadership made the decisive call to freeze all transactions over the network in an effort to prevent further crimes. The plan worked: Linea users were protected from additional losses.

Then the problems started.

Crypto users immediately denounced Linea’s actions on social media, arguing that the company had violated the industry’s core principle of decentralization. If a few people could stop Linea in their pajamas, how could the network be considered better than Wells Fargo?

Linea immediately turned around, to post on Twitter that the network was still in the “training wheels” phase of decentralization, but that it planned to eventually move to a completely trustless structure. (Disclosure: Linea is owned by Consensys, one of 22 investors in Declutter).

The incident, according to some developers, has exposed a contradiction that extends beyond just one blockchain. Instead, it exposed flaws in the entire, rapidly growing layer 2 ecosystem — a collection of privately owned networks often touted as Ethereum’s platform. path forward.

“So you’re saying you’ve intervened here on behalf of the users, but if you work really hard, hopefully in the future you won’t be able to intervene and your users will lose all their money?” Tom Lehman, co-founder of several Ethereum projects including Layer-1 alternative Facet and Eththeses, narrated Declutter. “There is no point.”

According to Lehman, the contradictions exposed by Linea’s public relations troubles this week are not isolated; they are endemic to layer-2 networks.

“Having a layer 2 that is centrally controlled is not a problem,” he said. “The only problem is that they are all centrally controlled.”

Almost all large-scale networks – such as Optimism, Arbitrum, Base and Polygon – are created by private, for-profit companies. Most rely on sequencers, controlled by the network’s team, that bundle transactions and submit them to the Ethereum mainnet. In such cases, like Linea’s, project teams have the power to effectively shut down a network by stopping said sequencers.

Why do most Tier 2s exercise such centralized control over their transactions? Linea, which was not responded to Declutter‘s questions at the time of publication, asserted in statements this week that the issue is a technical one that requires long-term finesse.

But financial incentives can also play a role. By controlling the one bottleneck through which all transactions must pass, layer 2 teams also control the profit that comes from processing each network transaction. Such fees are the lifeblood of tier 2 companies, which often employ dozens of people, and such Ethereum networks collectively rake in millions of dollars in monthly, on-chain profits.

“L2s can be very profitable to operate,” Lehman said. “But that profit depends on how much control you have.”

Some tier 2 teams say they are ahead of the rest and have taken clear steps toward decentralization. For example, Arbitrum features a backup path that allows users to post their transactions directly to Ethereum, in case any issues arise within the Arbitrum ecosystem. However, submitting transactions through this delayed inbox is not ideal and can take up to 24 hours.

Steven Goldfeder, the CEO of Arbitrum core developer Offchain Labs, said Declutter that the company is currently in the process of decentralizing its sequencer, but has argued that it poses less of a centralization threat than other layer 2 systems, as the Arbitrum Foundation cannot single-handedly prevent users from posting trades.

“On Arbitrum the problem is a lot smaller than on other networks,” says Goldfeder.

Goldfeder welcomes vocal criticism of centralization risks in the layer 2 ecosystem. He believes such dissent puts crucial pressure on companies that would otherwise focus on other priorities.

“Otherwise you have the wrong incentives: first growth and at some point decentralization,” he said. “If we just take one centralized system and replace it with another centralized system with the vague claim of ultimately decentralization – often without technical details – then I think it is very dangerous.”

Some developers like Arjun Bhuptani, the founder of the inter-blockchain bridge Always brightHowever, we believe that even Arbitrum’s solution to the current centralization problems at layer 2 is insufficient.

“It’s better, but it’s still not censorship resistance,” he said Declutter from Arbitrum.

Moreover, Arbitrum itself has suffered network-wide disruptions repeatedly in the last year.

According to Bhuptani, the issue of centralization is so pervasive at the second tier simply because the private networks are currently facing other, bigger problems.

“A lot of it comes down to prioritization,” he says. “Projects today face greater threats to their survival in areas other than censorship, and so building decentralization is a lower priority than issues like security, custody risk and market traction.”

It is true that the issue of censorship on layer 2 networks is still largely theoretical. For example, the Linea team has never used its power to block transactions on behalf of a sovereign government.

But such a scenario is by no means fanciful. The US government did that blacklisted Ethereum wallet addresses multiple occasions. Centralized crypto exchanges have done just that cooperated with the Israeli government to ban flagged accounts. Last month a Dutch court convicted a developer of Tornado Cash, an Ethereum coin mixer designed to keep transactions private, to more than five years in prison.

Even those within the layer 2 ecosystem are concerned about what might happen if the private teams behind so many networks – which thanks to their incredibly low transaction fees, have recently positioned as the best way to safely introduce the masses to crypto – are legally required to obey the wishes of governments around the world.

“Something that I might think is legitimate,” Goldfeder said, “an oppressive regime somewhere might think is illegal behavior that should be censored.”

However, some Ethereum developers believe that the entire debate this week about Linea and the future of crypto has been blown out of proportion.

“It’s easy for people who haven’t been affected by hacks to complain,” Joseph Schiarizzi, developer of the Arbitrum-based stablecoin OpenDollar, told me. Declutter. “But if you have ever been a victim, you will understand that the Linea team took the right step.”

“I don’t expect every piece of infrastructure to be decentralized,” he continued. “I care much more about honesty and transparency, which Linea was great at.”

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 the future of crypto if it becomes ubiquitous.

“The problem comes when you say, ‘L2s are the future, this is how we scale, that’s it,’” Lehman said. “And gradually [you] handing the keys to gigantic multi-billion dollar entities and supporting them with insecure systems.”

Edited by Andrew Hayward