With Ethereum layer 2, anyone can create decentralized applications, launch tokens, and digital exchange currency. Because of its wide range of capabilities, Ethereum is a highly usable virtual computer, which accounts for the fact that it processes more than 1 million transactions daily.
Layer 1 consists of the Ethereum mainnet, which includes all its nodes, infrastructure components, miners, processing for smart contracts, add-ons, etc. As the primary transaction processor, the mainnet is susceptible to request overload. Transaction processing speeds decrease, and prices increase due to its limited computational capacity.
To address the scalability issue, which is the main driver for the need for L2 solutions. This issue, known as “The Scalability Trilemma,” has plagued blockchains regularly ever since they were invented. This states that any updates or modifications made to improve scalability shouldn’t come at the expense of security or decentralization. A problem arises if the network is not as secure as Visa’s, even though it might be possible to process 45,000 transactions. A fair and well-run network cannot exist without this issue being resolved. For instance, gas costs on Ethereum can soar when there is a lot of congestion; a basic swap on Uniswap can cost US$50. For the average user, this may render dApps useless.
Different Types of Ethereum Layer 2 Solutions
There are numerous possible L2 solutions, each with particular advantages and disadvantages. Each L2 solution is defined below, with examples of how it might be used.
State channels are the method by which users conduct transactions with one another directly off the blockchain, or “off-chain,” and significantly reduce the amount of time they use “on-chain” operations. One of the most exciting scaling options for Ethereum is being worked on at the moment, and it is the one that is nearing being ready for use in production.
State channels are very similar to the idea behind payment channels in the Lightning Network of Bitcoin, except that they also support broader “state updates” instead of just payments. As an illustration, votes cast using the District Registry could be updated in a state channel and broadcast to the Ethereum network only after all votes have been tallied. Developers can now move a greater number of computations off-chain as a result.
Participants in State Channels rely on mutual agreements verified by their blockchain encryption signatures. Before going off-chain, the participants develop a smart contract outlining the state of their transactions.
Participants can execute as many transactions as they like off-chain without relying on miners’ verifications. Additionally, they don’t need to create new blocks for each transaction.
All parties mutually sign a close-out transaction after the transactions are finished. The way that close-out transactions are recorded in a new block on the blockchain makes them special. Following a close-out transaction, participants in the state channel must reopen the state channel with a unique to carry on transacting.
Plasma is a layer2 solution for Ethereum that offers a framework for creating ‘off-chain’ decentralized applications that are safe, scalable, and quick. There are many Plasma implementations, including:
- Minimal Viable Plasma (MVP): Minimal Viable Plasma (MVP) is a UTXO-based chain that satisfies the fundamental security requirements and increases Ethereum transactions’ throughput.
- More Viable Plasma (MoreVP): By reducing the steps needed to complete a transaction, More Viable Plasma (MoreVP) enhances the MVP user experience.
- Plasma Snapp: Plasma Snapp is a proof-of-concept that aims to simplify Plasma and open the door for more complex protocols than just token transfers.
- Plasma Cash: A system called Plasma Cash uses non-fungible tokens to represent fixed quantities of fungible ones. For instance, if I put 5 ETH into the Plasma Cash chain, I get a single, immutable token with a value of 5 ETH. Games with collectibles and supply chain and logistics management are examples of practical applications.
- Plasma Debit: Plasma Debit is a version that is very similar to Plasma Cash but allows for partial payments. The most useful use would be for any size of payment, but especially for micropayments.
Roll-ups are solutions that combine sidechain transactions into a single transaction. Hence the name “roll up,” which creates a cryptographic proof. In its most basic form, this means that sidechains handle all state and execution, with the Ethereum L1 serving only as a repository for transaction data. They help lower costs, foster open participation, and foster rapid transaction throughput. For instance, they can boost the blockchain’s throughput from 15 tps to over 1,000.
Roll-ups are a potent new layer-2 scaling paradigm that is anticipated to be a pillar of Ethereum scaling in the near and mid-term (and possibly long-term) future. Since they can support general-purpose EVM (Ethereum Virtual Machine) code, unlike earlier attempts at layer-2 scaling, they have attracted much interest from the Ethereum community and made it simple to migrate existing applications. They achieve this by striking a crucial compromise: instead of attempting to completely abandon the blockchain, they decide to leave a small amount of data per transaction on it. — Vitalik Buterin, creator of Ethereum.
The two L2 roll-up types are zero-knowledge (or “ZK”) roll-ups and optimistic roll-ups, each with a unique security model.
ZK roll-ups, or zero-knowledge roll-ups, are a type of Ethereum layer 2 scaling solution for blockchain networks. They use zero-knowledge proofs to enable off-chain computation and transaction batching while maintaining the security guarantees of the underlying blockchain.
In a ZK roll-up, multiple transactions are bundled together and submitted to the roll-up contract on the blockchain. The roll-up contract then verifies the validity of the transactions using zero-knowledge proofs, allowing the contract to verify that the transactions are correct without revealing sensitive information about them.
Once the transactions are verified, the roll-up contract updates the state of the blockchain to reflect the new transaction history. Because the computation and verification of the transactions are done off-chain, ZK roll-ups can greatly reduce the amount of on-chain activity required for a given set of transactions, which can help improve scalability and reduce transaction fees.
ZK roll-ups are particularly well-suited for applications that require frequent and high-volume transactions, such as decentralized exchanges and payment networks. They have been implemented on several blockchain networks, including Ethereum and Optimism.
Optimistic roll-ups are an Ethereum layer 2 scaling solution for blockchain networks that use a different approach than ZK roll-ups. Instead of using zero-knowledge proofs to verify transactions off-chain, optimistic roll-ups rely on fraud proofs to ensure the validity of transactions.
In an optimistic roll-up, transactions are submitted to a roll-up contract on the blockchain, just like in a ZK roll-up. However, instead of verifying transactions off-chain, the roll-up contract assumes that all transactions are valid by default. This allows the roll-up to process transactions quickly and with low fees without expensive computational resources.
If users detect an invalid transaction on the roll-up, they can submit fraud proof to the roll-up contract. The fraud-proof provides evidence that the transaction is invalid, which triggers a dispute process. During the dispute process, the validity of the transaction is re-evaluated. If it is found to be invalid, the roll-up contract updates the state of the blockchain to reflect the correct transaction history.
Because optimistic roll-ups assume the validity of transactions by default, they can process transactions much more quickly and with lower fees than on-chain transactions. They are particularly well-suited for applications that require high throughput and low latency, such as decentralized exchanges and gaming applications.
Optimistic roll-ups have been implemented on several blockchain networks, including Ethereum and Arbitrum. They are becoming an increasingly popular scaling solution for blockchain networks, offering a good balance between scalability, security, and decentralization.
Side roll-ups are a type of Ethereum layer 2 scaling solution for blockchain networks that combine the benefits of sidechains and roll-ups. Like sidechains, side roll-ups use a separate blockchain to conduct transactions off-chain. However, instead of periodically committing the transactions to the main chain, side roll-ups use a roll-up mechanism to bundle multiple transactions into a single transaction and commit it to the main chain.
In a side roll-up, transactions are conducted on a sidechain, which can have its own rules and consensus mechanism. The sidechain allows for fast and inexpensive transactions without overloading the main chain. The sidechain also provides flexibility to support different types of applications.
Periodically, the sidechain transactions are bundled into a single transaction and committed to the main chain using a roll-up mechanism. This allows for significant scalability improvements, as many transactions can be conducted off-chain and then committed to the main chain with a single transaction. Roll-ups can use different mechanisms to verify the validity of transactions, such as zero-knowledge proofs or fraud proofs, to ensure security and prevent fraud.
Side roll-ups offer a range of benefits for blockchain networks, including increased transaction throughput, lower fees, and improved user experience. They are particularly well-suited for applications that require high throughput and low latency, such as decentralized exchanges and payment networks. Side roll-ups have been implemented on several blockchain networks, including Ethereum, and are becoming an increasingly popular layer 2 scaling solution.
The Best Projects on Ethereum layer 2
Many exciting Ethereum layer 2 projects are being developed on Ethereum, each with unique advantages and use cases. Here are some of the most promising layer 2 projects:
Arbitrum is an optimistic roll-up solution that uses fraud proofs to ensure the validity of transactions. It is highly scalable and can support complex smart contracts. Many popular DeFi protocols, such as Uniswap and Aave, have already integrated with Arbitrum.
Optimism is another optimistic roll-up solution that aims to provide high scalability and low fees for Ethereum applications. It uses a unique fraud-proof system to settle disputes quickly and efficiently. Optimism is currently in the process of launching its mainnet.
zkSync is a ZK roll-up solution that uses zero-knowledge proofs to verify transactions off-chain. It can support up to 2,000 transactions per second and has low fees. Many popular DeFi protocols, such as Curve and SushiSwap, have already integrated with zkSync.
Polygon (formerly Matic Network) is an Ethereum layer 2 scaling solution that combines Plasma and PoS (Proof of Stake) to increase transaction throughput and reduce fees. It is highly scalable and can support various applications, including gaming and DeFi.
Loopring is a ZK roll-up solution that focuses on building a decentralized exchange (DEX) with high throughput and low fees. It uses a unique protocol that allows for order-matching off-chain, reducing gas fees for users. Many popular tokens, such as USDC and WBTC, are available to trade on the Loopring DEX.
6. Polygon Hermez
Polygon Hermez is an Ethereum layer 2 solution that aims to provide instant and low-cost transactions for Ethereum applications. It uses a unique sidechain architecture that can support complex smart contracts and decentralized applications (dApps).