Introduction

In 2021, the Ethereum network experienced unprecedented congestion due to increased usage and adoption, resulting in extremely high fees. Simple transactions could cost 20-100 USD in fees alone. This made the whole network extremely expensive to use, resulting in a higher barrier to entry for new users and in many cases making it uneconomical to participate.

EVM networks allow users to use some decentralized applications (Dapps) for a fraction of the cost. However, for some EVM networks (such as sidechains), the cheaper fees come at the cost of decentralization, since there are fewer independent nodes validating the transactions on the EVM network compared to the Ethereum mainnet.

Virtually all DeFi services or Dapps have implemented an EVM network. In many cases, multiple networks are supported in one application. The support has clearly been welcomed by users. In September 2021, the Polygon network briefly overtook Ethereum in terms of active addresses.

What is the EVM?

The Ethereum Virtual Machine (EVM) is what runs smart contracts and executes instructions on the Ethereum network. Each Ethereum node runs an EVM instance which allows the network to agree they are running a particular smart contract with the same instructions, thus yielding the same results. All DeFi applications are a set of smart contracts that are typically written in higher-level languages, such as Solidity.

Why is being EVM compatible important?

EVM compatible networks are independent networks of Ethereum but run the Ethereum virtual machine (EVM). The main reason for a network to be EVM-compatible is so it can run Ethereum smart contracts easily. This way EVM networks have access to a large breadth of Dapps and DeFi services the Ethereum ecosystem has to offer. This also makes it easier for Ethereum developers to migrate their projects to an EVM compatible network. In addition, EVM networks make it easier to on-board Ethereum users, since users can continue to use their existing Ethereum wallet to interact with EVM networks instead of creating a new wallet.

What are the different types of EVM networks?

Each EVM network will have its own implementation depending on what they want to achieve. Some EVM networks are intended to be a layer 2 (L2) scaling solution for Ethereum whereas others are independent networks.

Regarding L2 networks, there are two main technologies that are employed depending on the network: sidechains and rollups.

What are sidechains?

A sidechain is a blockchain that runs in parallel with the Ethereum mainnet. It has its own consensus mechanism, which means it operates independently from the Ethereum mainnet. A two-way bridge is used to connect the sidechain to the Ethereum mainnet. The bridge is a smart contract which is used to transfer assets from the mainnet to the sidechain. When using the bridge, the assets are locked on one chain. This is also referred to as a two-way peg and ensures the assets cannot be liquid on both chains at the same time. However there are risks when using a bridge. The bridge is a smart contract, and therefore susceptible to bugs. There have been cases of bridge exploits resulting in stolen or lost coins.

Examples of sidechains: Polygon, Gnosis chain

What are rollups?

Much like sidechains, rollups are independent chains that run an EVM compatible virtual machine which allows them to run Ethereum smart contracts off the Ethereum mainnet. However, they intend on improving the security of sidechains by batching transaction data made off-chain (on the rollup) and then posting the batched data on the Ethereum mainnet. This is achieved by smart contracts deployed on the Ethereum network that are responsible for processing deposits, withdrawals, and verifying proofs.

There are two main implementations of rollups, optimistic rollups, and zk-rollups. The difference between the two is how proofs are used to validate the transactions. Optimistic rollups assume a transaction is valid unless a verifier disputes it by submitting a fraud proof. In contrast, zk-rollups provide proofs by default proving that the transaction is valid and therefore does not require a validator to dispute a transaction. Currently, optimistic rollup development is more mature than zk-rollups.

Examples of optimistic rollups: Arbitrum, Optimism
Examples of zk-rollups:  Starkware, zkSync, Loopring

What are independent EVM networks?

Independent EVM networks run the EVM, but are not intended to be a scaling solution for Ethereum. On a technical level, they work much like a sidechain. However, their main purpose of being EVM compatible is so Ethereum developers can easily deploy and/or migrate their projects on the EVM network. In other words, being EVM compatible gives you access to the talent and projects that already exist in the Ethereum ecosystem.

Examples of independent EVM networks: Binance smart chain, Fantom

Why do EVM users need hardware wallets?

Decentralized finance and applications remove the need for centralized institutions in order for users to access financial services. However, this means users are responsible for holding their own digital assets.

When interacting with a DeFi application, a wallet is required to sign transactions. The wallet holds your private keys, which is what gives you access to your digital assets. But this means anyone that obtains that private key has access to your assets.

If this wallet is a software wallet, such as Metamask, then your private keys are stored on your computer and thus susceptible to malware. If your computer is compromised, then potentially your digital assets are too.

This is why DeFi users will significantly benefit from using a hardware wallet. A hardware wallet is a specialized device that keeps your private key safely stored offline but still lets you sign transactions and broadcast it to the network. Hardware wallets can connect with third party applications, such as Metamask or Rabby, so you can interact with DeFi applications while keeping your private key safe. However, it is important to know that the hardware wallet cannot validate that the smart contract is not doing something malicious or has a bug. When you sign the transaction on your hardware wallet, you need to trust the smart contract and that the transaction data has not been manipulated (by malware for example). This is known as “blind signing”.

How does it work with the BitBox02?

BitBox02 users can interact with virtually any DeFi application via Rabby. Rabby is a browser extension wallet, like Metamask, which focuses on ease of use and multi-network support. It works with any application that supports Metamask.

Learn more about Rabby and how to use it with the BitBox02

MyEtherWallet also supports selected EVM networks such as BSC and Polygon.

Since firmware update 9.10.0, the BitBox02 supports multiple EVM networks, including BSC, Polygon, Arbitrum, Optimism, and Fantom. In addition to these networks, the BitBox02 can sign transactions on any EVM network. However, it will present you the chainID instead of the network name. The chainID differentiates one chain from another.

As mentioned previously, the BitBox02 cannot verify what the smart contract is doing exactly, so you need to trust the smart contract is doing what is expected and there isn't malware manipulating the transaction. A malicious or buggy smart contract can steal your coins or make them inaccessible.

Learn more about how to use Dapps with the BitBox02

Conclusion

EVM networks allow all Ethereum applications to scale exponentially. This means users will be able to interact with DeFi services without paying high fees for every transaction. This is achieved by offloading the usage of DeFi applications from the Ethereum mainnet to EVM chains which can process transactions with fewer resources since they compromise on decentralization for efficiency. However, there is progress being made to improve the security of EVM networks, such as the use of rollups.

Users of DeFi services are responsible for holding their own digital assets since by nature DeFi applications don’t involve a custodian. Therefore, it is imperative that users secure their private key through the use of a hardware wallet. This allows them to keep their private keys safely offline while still being able to interact with the DeFi ecosystem.


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Shift Crypto is a privately-held company based in Zurich, Switzerland. Our team of Bitcoin contributors, crypto experts, and security engineers builds products that enable customers to enjoy a stress-free journey from novice to mastery level of cryptocurrency management. The BitBox02, our second generation hardware wallet, lets users store, protect, and transact Bitcoin and other cryptocurrencies with ease - along with its software companion, the BitBoxApp.