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Navigating the Future with Ethereum Layer 2 Scaling Solutions

Zainab Saberi

Apr 10, 2023 • 12 min read

In the rapidly evolving world of blockchain technology, Ethereum Layer 2 scaling solutions are emerging as a pivotal development. These solutions are designed to enhance the efficiency and performance of Ethereum, making transactions faster and more cost-effective. As the Ethereum network continues to grow, Ethereum Layer 2 solutions are becoming increasingly vital for users and developers alike. In this guide, we will delve into the intricacies of Ethereum Layer 2 and explore why it is a game-changer for the global crypto community.

What is Ethereum Layer 2?

Layer 2 scaling solutions make using Ethereum cheaper and faster for everyone. Understanding how they work is easy when you define the Ethereum blockchain as Layer 1. Let's unpack this idea below.

The Ethereum network is the main or primary chain, meaning all transactions happening on the network are on-chain. As the primary chain, Ethereum doesn't have unlimited network capacity. Instead, its transaction throughput is limited to about 15 transactions per second. Ethereum’s performance ceiling is why transactions become expensive and delayed when too many people use the network. Just like a freeway, too much traffic makes Ethereum congested and an overall pain to use.

To put Ethereum's scaling limits in perspective, consider that Visa handles around 2,000 transactions per second. The comparison isn't exactly fair since Visa is centralized and Ethereum is decentralized. However, viewing Ethereum's limitations versus centralized networks is important for understanding how scalable Ethereum needs to be for widespread use.

Why is Ethereum Layer 2 important?

There is no doubt that despite the scalability and speed handicaps of layer-1 blockchains, their rising popularity and the ensuing ample liquidity have led to the birth of layer-2 blockchain solutions like Ethereum-based Polygon blockchain or the Bitcoin-based Lightning Network.

These layer-2, or L2 blockchain, solutions enable thousands of low-value transactions to be processed after validation on parallel blockchains, with records then being transferred to the main blockchain, or mainnet, to ensure that they are immutably recorded.

Originally coined as a collective term to describe a specific set of Ethereum scaling solutions, layer-2 solutions were intended to cater to demand exceeding the blockchain’s 1+ million transactions per day capacity.

Today, these secondary blockchains are expanding use cases to provide a more superlative end-user experience by virtue of higher transactions per second, lower gas fees and the assurance that all transactions, once completed, are irreversibly recorded on the mainnet. By ensuring that the mainnet handles critical aspects of decentralization, data availability and security, L2 blockchain solutions are effectively diverting the transactional burden onto their parallel network and de-congesting the mainnet in the process.

This solves the scaling problem plaguing layer-1 blockchains like Bitcoin and Ethereum while ensuring robust decentralized security standards are accessible to a wide range of decentralized applications (DApps) that are getting pervasive today.

Types of Ethereum Layer 2 solutions

Channels:

Channels are analogous to how the Lightning Network works for Bitcoin. Essentially, channels allow a person to make an unlimited amount of transactions with another person, but only the first and last transaction are submitted to the blockchain. Since all other transactions are handled off chain, they are incredibly fast with very low transaction fees.

The downsides are similar to Bitcoin’s Lightning Network: You must have a connection to the person you wish to transact with, digital assets must be allocated for a channel and cannot be withdrawn for the duration of the channel, and there are many potential security vulnerabilities associated with transacting off-chain. Raiden is often called Ethereum’s Lightning Network.

Plasma:

Plasma is a framework that allows for the creation of child chains that use the Ethereum main chain as a layer of trust and arbitration. Child chains provide fast and low cost transactions, but they only support a limited number of transaction types, such as basic token transfers and swaps. General computation is not supported.

Another drawback is that withdrawals from the child chain back to the Ethereum mainnet are subject to long wait times, and someone must watch the network to ensure digital assets are secured. Plasma is a relatively mature technology, so there are several prominent deployed projects. The most widely used project implementing the Plasma framework is Polygon (MATIC).

Independent sidechains:

What constitutes a sidechain can be a hotly debated topic in the crypto community. It could be argued that all layer-2 solutions are sidechains, but for this section, we are talking specifically about two independent blockchains. They connect through a 2-way peg and both chains are compatible with the Ethereum Virtual Machine (EVM).

The technology behind independent sidechains is well understood. Due to this, many projects have moved to independent sidechains as a quick and pragmatic way to improve transaction speed and reduce transaction costs. Independent sidechains are responsible for their own security, which means sidechains are inevitably less secure than Ethereum, because they’re smaller. Also, a smaller number of miners/validators on a sidechain means it’s more feasible for them to coordinate and steal digital assets.

xDAI is a prominent example of an Ethereum independent sidechain. Also, the popular game Axie Infinity is a good example of a layer-1 project that pivoted to an independent sidechain for fast and cost effective transactions.

Rollups:

Rollups work by processing transactions on layer 2, but sending data to layer 1. This allows transactions to be much faster and cheaper, but still benefit from the security of the Ethereum mainnet. There are two types of rollups: optimistic rollups and zero-knowledge (ZK) rollups.

Optimistic rollups: Layer 1 assumes transactions are valid by default, and the validity of the transaction is computed only when challenged. ZK rollups: Proof of the validity of transactions is computed on layer 2 and submitted to layer 1.

The biggest differentiator between Optimistic and ZK rollups is that Optimistic rollups use standard cryptographic technology. There already is a live public network that implements Optimistic rollups. Optimistic rollups are EVM-compatible, so anything possible on layer 1 is possible on layer 2. The biggest drawback is that due to a long challenge period, there are long wait times to move digital assets between layers 1 and 2 (seven days or more). The previously mentioned Polygon (MATIC) currently implements an Optimistic rollup

ZK rollups: ZK rollups are not EVM-compatible, so they are not a general-purpose solution. However, they are a great solution for specific use cases. For example, Loopring is a decentralized exchange that uses ZK rollups to process trades. ZK rollups are also a great solution for privacy because the zero-knowledge proof technology used to validate transactions can also be used to obfuscate transaction details.

Validium:

Validium is a type of rollup that processes transactions on layer 2, but does not send data to layer 1. Instead, data is sent to a separate data availability committee. This allows for even faster and cheaper transactions than rollups, but at the cost of some security. Validium is a relatively new technology, so there are not many live projects implementing it. zkSync is a prominent example of a Validium project.

Hybrid solutions:

Some projects are using a combination of the above technologies to create a hybrid solution. For example, Hermez is a project that uses ZK rollups for fast and cheap transactions, but also has a separate data availability committee for additional security. This allows Hermez to offer the best of both worlds: fast and cheap transactions with the security of the Ethereum mainnet.

Ethereum Layer 1 vs Layer 2

Despite layer-1 scaling solutions like consensus protocol changes and sharding attempting to make blockchains like Bitcoin and Ethereum more scalable, they remain a work in progress, with multiple projects currently striving to bring user-friendly solutions to market. Both methods are aimed at solving the “scalability trilemma,” a term coined by Ethereum founder Vitalik Buterin. This trilemma refers to the unsolved challenge in distributed ledger technology-based networks, where every node validating transactions cannot simultaneously achieve decentralization, security, and scalability.

While the effectiveness of these solutions remains to be seen, layer-2 solutions are already enabling transaction speeds and fees that are ideal for scaling the blockchain ecosystem, thereby unlocking the full potential of this revolutionary technology.

Numerous DApps are leveraging these solutions to offer previously unimaginable experiences in gaming, Decentralized Finance (DeFi), and the Metaverse, while also transforming traditional sectors like finance, corporate governance, auditing, and many more.

Despite these advantages, the method these blockchains use to validate transactions must be assessed based on the use case, and the potential for validators on the layer-2 blockchain to commit fraud must be scrutinized. Nevertheless, new layer-2 scaling solutions are continually emerging, and this space will persist in drawing attention, praise, and critique.

Limitations of Ethereum Layer 2 solutions

The drawback to L2 scaling is that different sidechains are not interoperable with each other, at least not yet. Here's why this is problematic:

Imagine you're a liquidity provider for Uniswap on the Ethereum main chain, weary of paying high gas fees every time you add/remove liquidity and claim rewards. Suddenly, Uniswap opens markets on two different Ethereum sidechains — fantastic!

But wait; it's not so fantastic. Because these sidechains can't communicate, you must treat them as separate markets. This means either splitting your liquidity between L2s or choosing one over the other.

What if sidechain A flourishes (attracting more users) while sidechain B languishes? You might miss out on lucrative transaction fee rewards, necessitating prudent liquidity allocation.

Security is another concern. Generally, a main chain/Layer 1 blockchain like Ethereum is more secure than a smaller network because there is greater liquidity involved in the consensus process. An emerging Layer 2 sidechain like Polygon Network may lack equivalent security guarantees until its staked liquidity matches or surpasses Ethereum.

How to use Ethereum Layer 2 solutions?

To start using Ethereum Layer 2 solutions, you will typically need to move your assets from the Ethereum mainnet (Layer 1) to a Layer 2 solution. This process is often referred to as “bridging” your assets. Here’s a step-by-step guide on how to do it:

1. Choose a Layer 2 Solution: Research and decide which Layer 2 solution you want to use. Popular options include Polygon (MATIC), Optimism, zkSync, and Loopring.

2. Connect Your Wallet: Connect your Ethereum wallet (such as MetaMask) to the Layer 2 solution’s website or application.

3. Bridge Your Assets: Use the Layer 2 solution’s bridge or gateway to move your assets from Ethereum Layer 1 to Layer 2. This usually involves sending your assets to a specific contract on the Ethereum mainnet.

4. Confirm the Transaction: Wait for the transaction to be confirmed on the Ethereum mainnet. This can take anywhere from a few seconds to several minutes, depending on network congestion.

5. Use Your Layer 2 Assets: Once the transaction is confirmed, your assets will be available on the Layer 2 solution. You can now use them just like you would on the Ethereum mainnet, but with faster and cheaper transactions.

6. Moving Back to Layer 1: If you want to move your assets back to the Ethereum mainnet, you can use the Layer 2 solution’s bridge or gateway again. This process is usually similar to bridging your assets to Layer 2, but in reverse.

How to choose the right Ethereum Layer 2 solution for your needs?

Polygon:

Polygon, also known as Matic, is a burgeoning platform that empowers developers to craft optimized Ethereum instances. These instances are constructed using a toolkit designed to simplify the creation and management of blockchain networks. The platform also extends a range of security and flexibility features to developers.

With the delay in Ethereum 2.0's implementation, the Polygon network is gaining traction. Through its platform, Polygon has already fostered over 900 applications, encompassing various decentralized applications such as lending, blockchain gaming, and gambling.

In addition to its platform, Polygon has also forged partnerships with various entities, including Kambria Open Innovation, Mogul Productions, and Graphlink.

The fees on the Polygon network are nearly 10 times lower than the gas fees charged on Ethereum. To sweeten the deal further, the network also distributes free Matic tokens when you bridge your digital assets.

2. Optimism

One standout feature of this project is its capacity to enhance transaction efficiency and affordability. This development is favorable for the project as it enables developers to construct more effective and quicker smart contracts. Developers can also effortlessly create Solidity smart contracts compatible with Optimism.

The project's mainnet, known as Optimistic Ethereum, is currently hosting Uniswap V3.

Optimistic Ethereum is an EVM-compatible rollup chain designed to facilitate easy asset transfers and transactions. The network's primary benefits are its speed and security.

Essentially, it is an extensive list of transactions stored in an Ethereum smart contract. Each rolled-up block is housed on the Canonical Transaction Chain. It operates on the principle that users do not submit their transactions to the Canonical Transaction Chain; instead, new blocks are generated by a process known as a sequencer. This ensures the validity of all transactions and then executes them on the Optimism blockchain's layer 2, a blockchain situated atop the L1 blockchain.

3. Arbitrum

Arbitrum serves as an excellent starting point for those seeking to integrate layer 2 scaling into their Ethereum projects. Off-chain Labs has devised a robust and open-source platform that allows Solidity developers to effortlessly cross-compile their smart contracts with Ethereum. The platform encompasses various components, including the EthBridge, compiler, and validators.

The Arbitrum platform's compiler can assist in crafting diverse Solidity smart contracts compatible with various platforms, such as the AVM (Arbitrary Virtual Machine).

It is primarily utilized by the off-chain community for tasks like validating the AVM.

Although Arbitrum lacks a native token, it stands as one of the premier layer 2 platforms for crafting smart contracts on the Ethereum network. Another remarkable feature of the platform is its support for sidechain aggregation, a technology that enables third parties to conduct sidechain transactions.

One of the platform's most convenient features is its capability to import DApps from the AVM to EVM, streamlining the process for users to create and manage their smart contracts.

Several notable companies, such as Chainlink and Graph Protocol, are known to have partnered with the platform.

4. XDai chain

For those aiming to minimize their transactions on the Ethereum network, xDai presents a viable option. It is a sidechain based on ETH.

xDai is a stablecoin that can be employed to secure a network. Its proof-of-stake consensus allows users to earn rewards when other traders complete transactions on the network.

The xDAI chain employs a Proof-of-Stake consensus mechanism that enables users to stake native tokens on the network. In essence, users deposit their cryptocurrency into the blockchain to become validators. The more validators on the blockchain, the more secure it becomes. For this reason, the xDai STAKE token is a critical component of the platform. Undoubtedly, stablecoins are gaining immense popularity among the ecosystem's users.

The continuous growth of the xDAI ecosystem can be attributed to its various partnerships and integrations with other platforms. Currently, it has several prominent partners, such as Chainlink, Ankr, and Cardstack.

5. Immutable X

Immutable X is a leading L2TP network for non-fungible trading (NFT). It was established by James and Robbie Ferguson, two young Australian brothers. Unlike other platforms, it does not impose gas fees and offers a transaction speed of up to 9,000 transactions per second.

The Immutable X platform is constructed on a layer-2 protocol known as Zero-Knowledge Rollup. This enables it to perform advanced validations on the Ethereum blockchain. Immutable X employs a proprietary ZK proof model called ZK-STARK (Scalable Transparent Argument of Knowledge). A ZK-STARK is a proof-of-work system that uses a random function to encrypt data. This proof-of-work is more transparent and less complex than other methods and does not follow a set of instructions for the prover.

One of the primary features of Immutable X is its potent REST APIs, which allow developers to construct their applications on the platform. These APIs are designed to be user-friendly and straightforward, enabling developers to create and manage their applications with ease.

Immutable X has also partnered with various entities, including StarkWare, Gods Unchained, and OpenSea.

Conclusion

The Ethereum Layer 2 landscape is rapidly evolving, with various solutions offering unique advantages and trade-offs. Whether you are a developer looking to build a new DApp, a trader seeking lower fees, or an enterprise exploring blockchain for your operations, understanding the nuances of these Layer 2 solutions is essential. As Ethereum continues to grow, these Layer 2 solutions will play a crucial role in the network's scalability and adoption.

Frequently Asked Questions [FAQs]

Q: What is Layer 2 Ethereum?

A: Layer 2 (L2) Ethereum refers to a network or channel that operates on top of the Ethereum blockchain (Layer 1). L2 solutions are designed to enhance transaction speed and reduce costs, while still leveraging the security of the main Ethereum blockchain.

Q: What is the best Layer 2 solution for Ethereum?

A: The best Layer 2 solution for Ethereum depends on specific needs:

- Polygon (MATIC) is a popular mainstream choice.

- Arbitrum is highly regarded among developers.

- Optimism is known for its Ethereum compatibility.

- StarkEx offers high performance.

- zkSync is notable for its security.

Q: Can you provide an example of an Ethereum Layer 2 protocol?

A: Examples of Ethereum Layer 2 protocols include optimistic and zk rollups, state channels, and Plasma.

Q: Is Ethereum considered a Layer 1 or Layer 2 blockchain?

A: Ethereum is a Layer 1 blockchain. Layer 1 blockchains are the foundational networks upon which other protocols (Layer 2) can be built to enhance scalability and other features.

Q: What is the largest Ethereum Layer 2 solution?

A: As of now, Polygon is one of the largest Ethereum Layer 2 scaling solutions. It operates as a sidechain parallel to the Ethereum blockchain, offering faster transactions and lower costs.

Q: Which blockchains are considered Layer 2 solutions?

A: Layer 2 solutions are protocols that operate on top of a Layer 1 blockchain (like Bitcoin or Ethereum) to improve scalability and privacy. Common Layer 2 solutions include state channels, sidechains, optimistic rollups, and zero-knowledge rollups.

Q: Why is there a need for Layer 2 solutions on Ethereum?

A: Layer 2 solutions are needed to increase Ethereum's transaction speeds and scalability, while still benefiting from the security of the main chain. They are essential for wider adoption of Ethereum, as they can process thousands of transactions per second at a lower cost.

Q: Why are Layer 2 solutions faster than Layer 1 blockchains?

A: Layer 2 solutions are faster because they are designed for maximum scalability. They handle transactions off the main chain (Layer 1), which allows for quicker processing times without the need for every node in the network to validate each transaction, unlike Layer 1 chains where security and decentralization are prioritized.