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Okay, now let’s dive into today's topics. This is what we have for you today:

• Proposal to transform Celo L1 to An Ethereum L2

• 🔢 Metric of the Week

• 💎 Gem of the Week

TL;DR

• The development team behind Celo, a standalone L1 blockchain, has proposed a plan to transition it into an Ethereum L2 solution.

• The proposed solution combines a decentralized sequencer, using Celo’s existing validator set running BFT consensus, with an off-chain data availability layer, powered by EigenLayer and EigenDA, operated by Ethereum node operators, and protected by restaked ETH.

• This proposal could establish a precedent for numerous L1 EVM-compatible blockchains, like BSC or Fantom, given the competition they are currently facing from Ethereum L2s.

The Journey From An L1 To L2

Ok, let’s dive in👇

What is Celo?

Celo is a blockchain protocol that aims to make financial tools accessible to anyone with a mobile phone. It is designed to work with a suite of stablecoins, which are digital assets pegged to the value of real-world currencies, to provide fast, affordable transactions.

EVM Compatibility

Celo is compatible with the Ethereum Virtual Machine (EVM). This means that developers can use the same code, tools, and libraries they would use for creating dApps on Ethereum, but on Celo instead.

A mobile-first approach

Celo has a mobile-first approach which means that the platform is designed from the ground up to be easily accessible and usable on mobile devices.

Here are some key aspects :

• Lightweight: Celo uses a lightweight identity protocol that links phone numbers to wallet addresses, making it easy to send money to your phone's contacts. Celo uses a decentralized SMS verification protocol that allows users to confirm their phone numbers in a secure and decentralized manner.

• Stable Value Currencies: Celo has developed several stablecoins (like cUSD, cEUR, and cREAL) that are pegged to real-world currencies. This makes it easier for users to understand the value of their assets and transactions, which can be especially important for people in regions with high inflation.

On-Chain Governance

Celo employs a formal on-chain governance mechanism that is responsible for protocol management and upgrades

All proposed alterations require the consensus of CELO holders, with a specific quorum threshold defining the number of affirmative votes necessary for a proposal to be enacted.

Here’s the link to recent governance proposals: https://celo.stake.id/#/

Whitelisted ERC20 Tokens For Gas Fees

Celo has a unique feature that allows users to pay gas fees using whitelisted ERC20 tokens.

The Celo protocol maintains a whitelist of ERC20+ tokens that can be used to pay for gas, including cUSD and several other whitelisted ERC20 tokens.

This list is managed by the Celo Core Contracts that run on the Celo Blockchain

Current DeFi and TVL Profile of Celo

As per the latest data on DefiLlama, the total value locked (TVL) in Celo's DeFi ecosystem is approximately $91.08 million.

Celo has also seen significant growth in daily and monthly active wallets recently 👇

Now let's get into the details of the proposal to transition Celo from a Layer 1 blockchain to an Ethereum Layer 2.

Deep Dive into the proposed upgrade

The proposal for Celo to transition from an independent layer-1 blockchain to an Ethereum layer-2 solution comes from CLabs, the primary developer behind Celo.

According to the proposal, the motivation behind this transition is multi-faceted:

• Enhanced Compatibility and Developer Experience: Celo is already an EVM-compatible L1 blockchain. This transition aims to further enhance the alignment with Ethereum and improve the developer experience through increased EVM compatibility.

• Increased Security: Becoming a layer-2 solution on Ethereum would allow Celo to eventually leverage the more robust security infrastructure of the Ethereum network, thereby providing stronger security assurances than it could individually.

• Seamless Interoperability: The proposal aims to establish a trustless bridge to Ethereum, simplifying liquidity sharing between the two platforms, which could potentially lead to more collaboration and integrated applications.

Technical Details of The Proposed Transition

The proposed transition plan for Celo to become a Layer 2 (L2) solution involves several key steps and modifications to the current system:

1. The OP Stack is a set of open-source protocols and tools. It includes several components, such as the Optimistic Virtual Machine (OVM), which is a fully-featured EVM-compatible execution environment for Ethereum smart contracts, and the Optimistic Rollup (OR).

2. Decentralizing the Sequencer Role: The plan proposes to decentralize the sequencer role by using Celo’s existing pBFT consensus mechanism and validator set.

3. Reorg Resistance: One of the main features of Celo is its 1-block finality and absence of reorgs. To maintain this feature, the plan includes steps to provide reorg resistance with Celo’s security guarantees.

   This will be achieved by slashing validators who share divergent blocks on the peer-to-peer network versus on the Data Availability (DA) layer, providing reorg resistance to unsafe L2 blocks.

   Additionally, only deposited transactions from finalized L1 blocks will be read to minimize the effect of reorgs on Ethereum.

4. Use of EigenDA for Off-chain Data Availability (DA): EigenDA will be used for off-chain data availability to reduce transaction fees while providing increased security to Celo users and aligning more strongly with Ethereum.

5. Trustless Bridge to Ethereum: The proposal suggests using a trustless bridge to Ethereum to simplify liquidity sharing between Celo and Ethereum. This would allow Celo to benefit from Ethereum's liquidity and ecosystem while also retaining its own unique features and community

Why The Transition is Being Proposed Now

According to cLabs, two key advancements that have happened already could make this transition timely and feasible:

1. Off-chain data availability solutions like EigenDA: These solutions allow the transition to be achieved without necessitating steep increases in Celo’s transaction fees. They also contribute to Ethereum and Ethereum validators that opt into EigenLayer, thereby enhancing the overall ecosystem.

2. The OP stack's open reference architecture for optimistic rollups and chains: This architecture has significantly advanced the Ethereum-based L2 stack, making it an attractive option for Celo's migration.

According to cLabs these advancements have put the necessary pieces in place for a Celo L2 migration to significantly contribute to its mission.

What Could be The Real Reason For This Transition?

• Initially, EVM-compatible L1 chains offered better scalability and user experience than Ethereum, positioning themselves as superior alternatives.

• However, as Ethereum's L2 solutions provide faster transactions and lower fees, enhancing user and developer experiences.

• This development has turned Ethereum into more of a settlement layer, with most transactions occurring on L2 and then being settled on Ethereum's L1.

• This shift has put standalone L1 chains in direct competition with Ethereum's L2 solutions, challenging their key value proposition.

• To adapt, some L1 chains are considering becoming L2 solutions on Ethereum. This would allow them to leverage Ethereum's security and decentralization while benefiting from the efficiency of L2.

• By aligning more closely with Ethereum and transitioning to L2, these chains may have a better chance of surviving in the increasingly competitive blockchain space.

Risks Related to this Proposal

The proposal for Celo to transition from an EVM-compatible L1 to an Ethereum L2 brings with it several risks and challenges. Here are some of the key points:

• Decentralized Sequencer: The proposal suggests modifying the Optimism's sequencer role to leverage Celo’s existing PBFT consensus mechanism and validator set as a decentralized sequencer. This modification could introduce complexities and potential vulnerabilities in the system. This kind of transition has never been done before, which can cause unforseen complexities in the new system

• 1-Block Finality: The proposal aims to maintain Celo's 1-block finality, but this introduces challenges in terms of mitigating Ethereum reorgs that affect L1 deposited transactions to prevent reorgs on Celo L2.

• Off-chain Data Availability with EigenDA: The proposal suggests using off-chain data availability to keep transaction costs low. However, relying on off-chain data availability introduces a potential system liveness concern if the data availability nodes decide not to serve data.

The Future of EVM-Compatible Chains

The transition of Celo may be a sign of things to come for other EVM-compatible L1 blockchains, like BSC, Fantom etc..

They may have to make a similar choice: either transition to becoming an L2 solution on Ethereum or risk becoming less competitive and potentially fading away.

This is, of course, speculation, and the actual outcome will depend on a variety of factors, including the strategies adopted by these blockchains and the evolution of the broader crypto ecosystem.

However, it's clear that the rise of Ethereum L2 solutions is reshaping the blockchain landscape and forcing EVM-compatible chains to reconsider their position and strategy.

Conclusion

The proposal for Celo to transition from an EVM compatible L1 blockchain to an Ethereum L2 is a significant development in the blockchain ecosystem.

This transition is driven by the evolution of the Ethereum ecosystem and the rise of Ethereum L2 solutions like Optimism and Arbitrum.

However, this transition is not without its challenges and risks. The proposal suggests several modifications to the existing system, including the use of a decentralized sequencer, maintaining 1-block finality, off-chain data availability with EigenDA etc. Each of these modifications introduces complexities and potential vulnerabilities that need to be carefully managed.

The transition of Celo may be a sign of things to come for other EVM-compatible L1 blockchains.

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That's it for this week. See you next Sunday!

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