Looking at all the cryptocurrency on tracking sites like Coinmarketcap.com, most beginners may be confused about the number of tokens offered to the public. Layer 1, layer 2, metaverse, DeFi, gaming, liquid staking, real-world assets, memes and the like are like the toys in a big toy store. Each has its own separate world.
One of the more recent types of tokens to hit the market are called layer 2 scaling solutions. Examples of these tokens include Optimism, Arbitrum, zkSync, Polygon zkEVM, Consensys Linea, Coinbase Base, Starkware and a few that are not yet well known.
Ethereum founder Vitalik Buterin said something called the Blockchain Trilemma. A blockchain tries to be secure, fast and decentralized. But according to Buterin it is very difficult to achieve all three. Ethereum, for example, is secure and decentralized, but quite slow. Transactions can sometimes take up to an hour to complete if the network is congested. It is secure and decentralized because more than 500,000 independent validator nodes now secure the network and approve transactions by consensus. That’s also why it’s slow compared to a blockchain that only has a handful of nodes that validate transactions based on consensus.
The early blockchains like Ethereum, Solana, Cardano, Binance Smart Chain and others tried to basically do all the work of a blockchain themselves. This is somewhat similar to a restaurant manager who is also the one who takes orders, cooks the food, chops the vegetables, mans the cash register, pours the drinks, and cleans the tables and floors. The next customer would have to wait until the one-man crew was ready to take their order. That’s why a long line forms outside the restaurant.
The new layer 2 scaling solutions basically take over some of the blockchain functions and only do the final settlement of the Ethereum chain. For the user, they may not notice and may be surprised that Ethereum is still behind the scenes as the one that records the last transaction. But the front-end part of the transactions is handled by the layer 2 chains.
Some time ago, Ethereum underwent an upgrade called Shapella. This upgrade allowed those who had staked their ETH for validator nodes to withdraw it. Another upgrade that was done previously was the shift from Proof of Work (like Bitcoin) to Proof of Stake.
The problem is that Ethereum transactions are still slow and gas (transaction) fees are still expensive. This is actually what the layer 2 scaling solutions aim to address. For example, someone looking to purchase an NFT may not want to pay $50 in transaction fees for a $200 NFT. On the other hand, the buyer might be more accommodating if the transaction fee were only $5, but the transaction is carried out on a layer 2 scaling solution which in turn is completed on Ethereum.
Conversely, if you’re transacting something worth a million dollars, having the security of Ethereum could be worth a $20 gas fee just for your own peace of mind.
The way the layer 2 solutions work is a bit like dealing with the waiter and server in a restaurant, in terms of ordering, serving and paying. But you don’t really see the chef who cooked your food. That’s how a layer 2 scaling solution works. It still works on top of Ethereum, but you only see the cost and speed of the scaling solution.
One problem that arises when you have a lot of Ethereum layer-2 tokens is that when you use one distributed application (dApp), you need one kind of layer-2; then you need another layer 2 for another dApp. That’s somewhat like having non-interchangeable poker chips from one casino to another. Although at this point you can build a bridge between these different assets, but every time you do that you will pay gas costs.
Whether this strategy, running most functions at layer-2 on top of Ethereum, will dominate other monolithic layer-1 blockchains remains to be guessed. But it looks like the upcoming wave of layer 2 tokens will try to do just that.
Zain Jaffer is the CEO of Zain Ventures focused on Web3 and real estate investing.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. The opinions expressed do not necessarily reflect those of Cointelegraph.