Layer 2 solutions: Complete Guide to Ethereum Layer 2 Solutions Updated 2023

Layer 2 solutions

Layer 2 solutions

They still benefit from the exact same levels of security as the Ethereum main chain. Data aggregators will compute merkle roots to achieve increased transaction speeds. A Layer 2 is a scaling solution that sits on top of a layer 1 blockchain like Bitcoin or Ethereum.

Layer 2 solutions

When they choose to close the channel, the most recent state update is sent to the on-chain multisig or smart contract as a single transaction, and the state deposit is withdrawn to the participants according to the final state. A state channel, aka a payment channel, refers to a process where multiple transactions can take place between participants off-chain but only the opening and closing transactions will be recorded on the main chain. Layer 2 solutions don’t just benefit their users, but also the crypto ecosystem as a whole. With large segments of the network activity handled off-chain, congested mainnets are relieved of much of their traffic. This means a faster, more efficient system for transactions still hosted on that network – and lower transaction fees for its users. Layer 1 applications and smart contracts interact directly with the native chain.

What is Layer 2 and How Does it Work?

When a new block generates on-chain, it’s added to each network node’s ledger and usesdistributed ledger technology . The blockchain is a database that stores information from transactional records in a universal ledger. Assets are traded and tracked on the blockchain, reducing risk and cutting costs for everyone involved.

Rollups are a source of excitement within the Ethereum community given several highly anticipated milestones set to be hit in 2022. Because of this feature, dapps can support rollups seamlessly, enabling users to interact with dapps at a fraction of a cost of layer 1. Some have their own security measures, and some inherit their security from layer 1.

Each individual solution has its own pros and cons to consider such as throughput, gas fees, security, scalability, and of course functionality. However, there are layer 2 scaling solutions that aim to improve all these aspects; these solutions are called rollups. It is the base network and underlying infrastructure of a blockchain platform. The main network is responsible for validating and finalizing all on-chain transactions without depending on another network. L1 protocols also have native tokens used for transaction fees or gas fees. The solution to this network congestion problem is simple—layer 2 networks attaching to Ethereum’s core, layer 1 chain.

Ethereum uses smart contracts for all transactions so that the same thing can be applied to these chains. Since blockchain excels in both decentralization and security, scalability becomes an issue. The Bitcoin blockchain can process up to 7 transactions per second , but there weren’t too many users back then, so this wasn’t a huge deal. Nowadays, when we compare that to Visa’s speed, which is about 1,700 TPS, it’s laughable. Zero-knowledge rollups – aka ZK-Rollups – are bundles of data that are collateralized by a smart contract on the main chain while they are transported off-chain for processing and computing.

They are able to produce a block in around a minute, with the ability to process 2,000 TPS. Zero-knowledge means that all verifiers can know they have the same information without it actually being disclosed. However, layer 1 solutions aren’t the only avenue available to scale blockchains. Layer 2 solutions to scaling establish an additional protocol that is built on top of blockchains like those of Ethereum and Bitcoin. Layer-2 blockchain projects and solutions on the Ethereum blockchain have become one of the most common answers to blockchain scalability issues.

No one scaling solution alone is sufficient to fulfill the secure, decentralized, and scalable vision of Ethereum 2.0, avoiding the problem of high fees and bottlenecks. Layer 2 networks solve this problem as they help blockchain ecosystems to scale without compromising security or decentralization. Harmony’s interoperability also extends beyond Ethereum with its Horizen bridge to Binance Smart Chain, opening up access to the broader defi ecosystem. Blockchain’s moon race is on as the ecosystem grapples with developing scalability solutions to meet demand without sacrificing security or decentralization – the classic blockchain trilemma. Without going into cryptography minutia, this means that transactions are verified without other parties revealing their identity. The ZK approach also results in greater data throughput because its type of rollup significantly reduces transaction volume.

An example using state channels is the Lightning Network, which is a Layer 2 protocol that operates on top of the Bitcoin blockchain. Sidechains improve interoperability by allowing assets to be transferred between different blockchains. As you read this guide, you might find it helpful to refer to our Web3 protocol tracker, which will provide you with key data on some of the main Layer 1 and Layer 2 blockchain protocols.

Layer 2 solutions

Ethereum layer 2 scaling solutions could serve different functions such as off-chain computation and scalability of payments. Validium uses validity proofs like ZK-rollups, but instead, data is not stored on Ethereum layer 1, allowing for scalability of up to 10,000 transactions per second per Validium chain, of which multiple can run in parallel. State channels can manage more complex interactions like a game, whereas payment channels are simplified state channels that only deal with payments between two participants. State channels allow for extremely high transaction throughput at a very low cost, making them ideal for micropayments. However, the time and cost to set up and settle channels are not ideal for one-off payments, liveliness is required, and funds have to be locked up in open payment channels.

Sidechains are separate blockchains that are linked to a main chain, allowing specified assets to be transferred between them. This can enable different blockchains to interact and exchange assets, which can improve interoperability between different blockchain networks. State channels are a type of Layer 2 solution that allows two or more parties to conduct multiple transactions off-chain, without the need for each transaction to be broadcast to the entire network. This can significantly improve the scalability of a blockchain by decreasing the number of transactions that need to be processed by the network and reducing fees as well . Blockchain Layer 2 solutions are protocols that operate on top of a Layer 1 blockchain to improve scalability, privacy, and other characteristics of the underlying blockchain.

The two types of channels are currently state channels and payment channels. Sharding is the process of splitting a database horizontally to spread the load. The evolution and the continued increase in the number of applications and users on the Ethereum network is responsible for surge in the load on the network.

The Impact of Layer 2 Blockchains

The Cartesi Machine offers flexibility in the off-chain execution of decentralized logic in a Linux-based environment. Cartesi utilizes its native token CTSI to offer incentives to the node operators of the platform. As a result, it can encourage node operators for honest and transparent engagement with the network.

It’s worth noting, though, that Plasma Group ceased operating and donated the remaining of its funds to Gitcoin to be used on optimistic rollups. However, only basic transactions like token transfers and swaps are supported, there is a liveliness requirement, and chain withdrawals can be lengthy to allow for challenges. Lastly, for Ethereum traders wondering how to minimize simple transactions, such as token transfers, there is xDai, currently also known as the Gnosis chain due to an ongoing merger.

Optimistic Rollups Dominate the Layer 2 Landscape but ZK-rollups Are Here to Challenge

If the network wants to retain the same level of decentralization, it will have to look for new ways to structure use around the main blockchain. This is because despite the upgrade, Ethereum 2.0 may still not be able to handle the amount of transactions per second required for widespread adoption. The impressive capabilities of Layer 2 solutions could eradicate Ethereum’s scalability issues for good, allowing the network to improve other aspects and prevent congestion on the main chain. Because rollups use smart contracts that reside within Ethereum, they do not require a native token like Polygon, but instead use $ETH as their currency. Rollups seem to be the most sound scaling solution for Ethereum as it does not compromise the security and sovereignty of Layer 1.

These are some of the applications with which developers attempted to solve the Layer 1 problems. Despite their effort, blockchain scalability was still too low for the rising demand in cryptocurrency. The problem runs deeper than just speed, and it’s often referred to as the blockchain trilemma. Both PoW and PoS are considered consensus mechanisms that support Layer 1 blockchains. It is a second framework built on the blockchain that can process transactions at a much higher capacity. Imagine standing in line for a concert ticket, but there’s only one ticket booth.

A rollup is a technique used to transfer value between L2 networks and the Ethereum mainnet. With rollups, transactions from layer 2 networks are periodically batched together and transmitted back to the base layer 1 network, where they are validated by the layer 1 node as a single transaction. Layer 2’s are also seen as off-chain scaling solutions because the transaction execution process happens off of the layer 1 blockchain. Scalability is the ability of a system to handle increased load or traffic. In the context of blockchains, it is the ability to process more transactions per second in order to meet the growing demands of users, something that layer 1 networks really struggle with.

Understanding Layer 2 & Scaling Solutions: Arbitrum, Boba, Optimism, Polygon, Ethereum 2.0

We provide a comparison of the various Ethereum L2 systems available today. A Zero-Knowledge Proof, or ZKP, is a form of cryptography that enables one party in a transaction to prove that they have knowledge of a specific piece of information to another party without revealing what that information is. Say you go to the same supermarket every day, and want to pay your groceries in Bitcoin. You’d simply open a “channel” with that vendor using some Bitcoin, and from there you can make instant payments to the supermarket as you would with a debit card.

Scalability: A Dirty Word For Older Blockchains

In addition, the potential of Ethereum for boosting the DeFi space also indicates possibilities for a massive upsurge in the number of applications and users on the Ethereum network. Instead, optimistic rollups assume transactions are valid and only run computation if challenged via a fraud-proof. Optimistic rollups use a bonding system, and anyone proven responsible for a fraudulent transaction or challenge will forfeit their bond with some slashed and some used to incentivize the correct party. L1 focuses on security, decentralization, and data availability, while L2 handles scalability.

Sidechains also provide room for a lot of flexibility, allowing developers to experiment with new features or software updates before pushing them onto the main chain. Solving this problem is essential for creating a fair and well-run network. For example, when Ethereum is experiencing heavy congestion, gas fees can skyrocket—costing US$50 for a simple swap on Uniswap. This is because each block can only contain a certain amount of data, known as the block size. This means Ethereum is significantly restricted in the amount of transactions which can be verified, leading to significant congestion in the network in times of high demand.

The most common solutions are state channels, sidechains, optimistic Rollups and zero knowledge roll-ups. Blockchain technology has revolutionized the way we conduct transactions and transfer value, but with its increasing popularity, scalability has become a major concern. To address this issue, researchers and developers have come up with a solution known as Layer 2 blockchains. In this article, we will explore the different types of Layer 2 blockchains, their benefits, and drawbacks. Plasma is a type of nested blockchain, which works similarly to state channels. The slight difference here is that each channel can have its own set of rules.