Lido & Dencun: A Layer 2 Roadmap

TLDR:

EIP-4844 Introduction: The Dencun hardfork signals the beginning of Ethereum's "The Surge" phase, introducing EIP-4844, which brings Proto-Danksharding to Ethereum, reducing fees for L2 rollups.
Expansion of wstETH Presence: A Network Expansion Workgroup was established to facilitate the expansion of wstETH across seven L2 networks and develop a bridging guide for settling stETH on Layer 2 networks.
Prioritizing Security and Risk Isolation: Security is prioritized in L2 network expansion, utilizing canonical bridges and isolating tokens in separate bridge contracts to minimize cross-domain risks.
Bridging Architecture: The proposed bridging architecture involves dedicated bridge endpoint contracts on L1 and L2, governed by Lido DAO, offering capabilities like passing arbitrary data and future-proofing the token.
Deployment Considerations for New L2 Networks: Proposals for deploying wstETH on new L2 networks such as Scroll, Starknet, and Lisk are outlined.
Ongoing Research for Rebaseable stETH on L2: Rebaseable stETH on L2 networks offers benefits, including accurate staking/withdrawal requests, gas payments in stETH, and consistent user experience across Layer 1 and Layer 2 environments.

What is Ethereum’s Dencun Hardfork?

The Ethereum Dencun hardfork combines two simultaneous upgrades - Deneb and Cancun - affecting both the Consensus Layer and the Execution Layer.

The main purpose of the hardfork is to substantially lower fees for scaling solutions built on top of Ethereum, collectively known as Layer 2 (L2) solutions. The main goal of L2s is to increase Ethereum transaction throughput without compromising network security or decentralization.

More specifically, it is the activation of Ethereum Improvement Proposal (EIP) 4844, introducing something known as Proto-Danksharding, which aims to bring about these L2 improvements.

What is EIP 4844?

Signaling the start of The Surge phase within Ethereum's rollup-centric roadmap, the upcoming Dencun hardfork enables the much-anticipated EIP-4844.

EIP-4844 introduces Proto-Danksharding to Ethereum, a sharding technique that divides the network into independent shards for parallel transaction processing. It utilizes "blob transactions" attached to existing blocks, providing time-constrained storage for L2 rollups and reducing operational costs.

Consequently, EIP-4844 holds the potential for a substantial reduction in fees for L2 rollups by an order of magnitude, bringing about a new era for Ethereum L2 networks.

Lido & Dencun: Expanding the wstETH L2 Presence

In anticipation of Ethereum’s Dencun hardfork, Lido DAO contributors have made a number of the following advancements over the previous year to improve the presence of Lido on L2:

Over the past two years, the presence of wstETH has been extended to encompass seven L2 networks: Arbitrum, Optimism, Polygon, Base, Linea, zkSync & Mantle. At the time of writing, more than 140,000 wstETH have been bridged to Ethereum L2s.

Support for wstETH has been expanded to numerous DApps across these L2 ecosystems, significantly lowering barriers to entry for users keen on engaging in DeFi activities across these networks to benefit from higher speeds and lower networks fees.
A dedicated Network Expansion Workgroup has been established to facilitate the expansion of wstETH across L2 networks. This initiative has furthermore seen the development of a bridging guide for networks and DAOs interested in bridging Lido's wstETH on Ethereum L2 networks.

Prioritizing Security & Risk Isolation

When it comes to the expansion of L2 networks and token bridging, a key principle revolves around prioritizing security and implementing a strategy that isolates cross-domain risks.

To achieve this, the following two assumptions are taken into consideration:

The canonical bridge is regarded as the optimal solution for linking any wstETH on a given L2 network with the security framework of the bridge itself. This ensures that the security model and trust assumptions of the bridge are seamlessly integrated with those of the rollup (not introducing new 3rd-parties and actors).
To mitigate risks across different L2 networks, it is proposed to isolate tokens by escrowing them in separate, disentangled bridge contracts. Each of these contracts maintains a 1:1 correspondence with their respective bridged counterparts. This strategy aims to minimize the impact of cross-domain risks. Otherwise, pooling liquidity across different L2 networks, while potentially beneficial in terms of economic efficiency, would jeopardize security isolation for all token holders except those who haven't participated in bridging activities. This conflicts with the notion of deliberately opting in for explicitly outlined risks.

Lido's wstETH Bridging Architecture

The proposed bridging guide architecture entails the deployment of dedicated bridge endpoint contracts behind a proxy on both Layer 1 (L1) and Layer 2 (L2), alongside an upgradable token on L2. These components are designed to be governed by the Lido DAO on L1, facilitated through an Aragon Agent contract, and managed via a dedicated governance executor contract on L2. This executor acts as a forwarder of the Lido DAO vote decisions when necessary.

This architectural design is intended to offer the following capabilities:

Passing Arbitrary Data: This capability allows for the foundation of bridging rebaseable stETH in the future, including the necessity to pass the wstETH/stETH rate.
Revamping Token Logic: As (w)stETH is not a general-purpose token but rather an asset built on top of a living liquid staking middleware, the architecture allows for the necessary adjustments to the token logic.
Future-Proofing the Token: The upgradeable token design allows for seamless integration of new token standards like ERC-2612 and ERC-1271, minimizing the need for costly liquidity migration as Ethereum evolves.
Pausing and Resuming Bridging: In cases of emergencies or during upgrades, the architecture supports the ability to pause bridging activities via designated Emergency Breaks committee.

Staked ETH on L2: stETH or wstETH?

To date, Lido’s Layer 2 bridging strategy has been built around wstETH - the wrapped version of stETH - due to the simplified integration process for partnering networks. In the near future however, the Lido Network Expansion Group is aiming to further develop support for the unwrapped, rebaseable stETH across L2 networks.

The potential implementation of rebaseable stETH on L2 networks, atop the existing sophisticated wstETH bridging solution architecture, holds several significant benefits beyond merely updating account balances for stETH.

These hypothetical future use cases and scenarios for rebaseable tokens include:

Staking/Withdrawal Requests from L2s: Users originating staking or withdrawal requests from Layer 2 networks may have the capability to factor in stETH rebases that occurred during the bridging period. This ensures accuracy and integrity in staking and withdrawal activities.
Gas Payments in stETH: Enabling gas payments in stETH, particularly on rollups that support token gas payments (e.g., following the Account Abstraction), allows for seamless transaction settlement with amounts closely resembling ether. This enhances usability and efficiency within the ecosystem.
Cross-Domain stETH Deposits/Withdrawals: The ability to facilitate deposits and withdrawals of stETH across both Layer 1 (L1) and Layer 2 (L2) networks offers flexibility and interoperability for users, particularly beneficial for centralized exchanges (CEXes).
Direct Support for L2s by Custodians and Service Providers: Custodians and service providers can directly support Layer 2 networks, facilitating DeFi interactions, deposits, and withdrawals. They can charge fees with each rebase, ensuring sustainable revenue streams, while users experience transparent balance adjustments.
UX Consistency: As routine user activity transitions from Layer 1 to Layer 2, maintaining a consistent user experience, particularly with rebaseable tokens, is essential. Ensuring familiarity and usability for users across both environments enhances adoption and engagement.

For more information on stETH on L2, check out https://research.lido.fi/t/lip-22-steth-on-l2/6855.

What's Next for Lido on L2?

Over the coming months, plans are in place to expand the usability of Lido’s wstETH across many more L2 networks.

Ongoing discussions are taking place on the Lido Research Forum regarding proposals for the deployment and recognition of wstETH on new and prominent L2 networks:

Lido stands on solid ground to not only keep pace with Ethereum's expansion but also become an indispensable part of the thriving L2 ecosystem, bolstered by the growing presence of stETH.

The dedication to expanding Lido across further L2 networks remains, so stay tuned for further expansion proposals on the Lido research forum.

Till then, happy staking 🏝️