Scroll, an Ethereum L2 network, recently completed its “Euclid” upgrade, a major step in its journey to becoming more decentralized and performant. Rather, this upgrade implemented a new snarky 7-layer proving system, with the intention of increasing network throughput and security. With this upgrade comes the addition of a 6th Layer, RecursionCircuit. Under the hood, it aggregates BatchCircuit SNARKs recursively. Besides those, it composes an additional 7th Layer called CompressionCircuit, which compresses the RecursionCircuit SNARK itself and produces an EVM-verifiable validity proof. These changes are expected to save up to 90% in batch commitment costs. In addition, Euclid creates an environment that future improvements, such as EIP-7702 and RIP-7212, can build upon.

This encouraging news comes just as Scroll’s Total Value Locked (TVL) has seen a significant downturn. The situation presents a seeming paradox: an upgrade designed to improve the network's fundamentals occurring alongside a decline in user deposits. To get a picture of Scroll’s future trajectory, it’s important to understand the reasons behind this TVL drop.

One of the biggest factors behind the TVL plummet is almost certainly the success of such airdrop farming strategies. These approaches encourage demand by incentivizing users to place deposits. To claim free tokens, people must use the protocol and interact with it on a regular basis. While airdrops can attract significant capital and boost initial TVL, they often lead to a sharp decline once the airdrop concludes, as users withdraw their funds to pursue other opportunities. Airdrop farming strategies often need artificial lockups to inflate Total Value Locked (TVL). These strategies further require volume thresholds for activity and require days of unique activity that can create a TVL metric that creates a temporary spike. Airdrop farming is becoming an increasingly popular trend. If they ever hope to defend their TVL from the inevitable waves of capital and competition, projects should build incentive structures that promote long-term commitment and protect against vicious, short-term speculators.

Decoding the TVL Drop

Ethereum co-founder Vitalik Buterin has similarly highlighted the need for decentralization when it comes to Layer-2 solutions. He plans to focus only on L2s that reach a reasonable degree of decentralization in at least his “stage 1+” sense, maybe with an exception for Arbitrum. This puts into striking perspective the importance of Scroll’s work to improve decentralization with the Euclid upgrade.

  • Airdrop Farming: The end of airdrop campaigns often leads to a mass exodus of capital.
  • Broader Market Volatility: Fluctuations in the overall crypto market can impact investor sentiment and TVL across various platforms.
  • Capital Reallocation: Investors might be temporarily shifting funds to other emerging opportunities within the crypto space.
  • Reduced Risk Appetite: A general decrease in risk tolerance among investors can lead to withdrawals from DeFi platforms.

Stage 1 Rollup: A Meaningful Milestone?

In order for a rollup to be deemed “stage 1+”, Buterin places several conditions. To override the proof system, the council needs a three-fourths consensus. Furthermore, the majority, or at least 26%, of the council members must be independent of the rollup team. To utilize Stage 1 rollups, we need a strong fraud proof system. This system needs to allow at least four external stakeholder groups to independently verify the correctness of proposed state roots and contest them if needed. Players require at least 7 days to leave if subjected to undesirable improvements, except ones involving the Security Council and governance. For upgrades started by a DAO, users should need a minimum of 30 days to be able to exit. Though it doesn’t explicitly reach “stage 1+” status right away, Scroll’s Euclid upgrade is clearly a move towards it.

Only time will tell if Scroll’s long-term gains from the recent Euclid upgrade will eclipse the short-term shortfall in TVL. To be fair, a lower TVL does provide cause for mild alarm. The improvements in performance, security, and decentralization can eventually attract more users and developers in the long run.

The Trade-Off: Long-Term Gains vs. Short-Term Losses

Scroll's commitment to decentralization, as evidenced by the Euclid upgrade, aligns with Vitalik Buterin's vision and the broader Ethereum community's values. Prioritizing long-term sustainability will position Scroll for success well beyond greater. Adopting this proactive approach could mean accepting an initial dip in TVL. Only time will tell if Scroll’s gamble pays off, but the project’s commitment to fundamentals provides a hopeful outlook.

Scroll's commitment to decentralization, as evidenced by the Euclid upgrade, aligns with Vitalik Buterin's vision and the broader Ethereum community's values. This focus on long-term sustainability could ultimately position Scroll for greater success, even if it means weathering a temporary TVL decline. Only time will tell if Scroll's gamble pays off, but the project's focus on fundamentals suggests a promising future.