Meta Description: Layer 2 is all the rage, making once-expensive and slow crypto like Bitcoin and Ethereum fast and cheap. Here are three most promising Layer 2 solutions in 2023.
Stats: Vitalik Buterin, the co-founder of Ethereum once said that the Ethereum ecosystem is likely to be all-in-one roll-ups as a scaling strategy.
Before explaining Layer 2, we should go back to basics and understand the term Layer 1. Interestingly, the term Layer 1 was created and defined retroactively due to the need to define and explain Layer 2.
Layer 1 wasn’t defined as a first layer before because it simply refers to the main blockchain framework and the blockchain network’s underlying protocol. Within blockchain technology, protocols present a bunch of different solutions created to enhance the design of base protocols. Such solutions were mainly used to increase scalability.
Layer 2 presents a set of off-chain solutions that are built on top of Layer 1 as separate blockchains. For example, imagine the kitchen of a restaurant. If every single order had to be made by one person from early in the morning till evening, it would be a very slow process that could only finish a few orders.
Therefore, that person or Layer 1 needs help. So, we introduce Layer 2 protocols. Layer 2s are similar to prep stations when working in a busy kitchen – there are prep stations for cutting food, cleaning, cooking, assembling the dishes, and so on.
Now that every person at each station can focus on one task, the whole work is more efficient and faster. When the time comes, one person from the beginning can match each meal with the order, confirm it and deliver it to the customer.
Layer 2 was designed to solve problems that plague most blockchain networks such as Ethereum such as scalability, transaction speed, and throughput while maintaining a high degree of security. To ensure such functionality, transactions are processed off-chain and then passed back to the main chain for settlement.
A great portion of the work that could be performed by the main chain can be moved to the second layer. So, while the main blockchain (layer 1) provides security, the second layer brings high transaction throughput to the table, being able to perform hundreds, or even thousands, of transactions per second.
It strikes a resemblance to some traditional payment platforms such as Visa. Instead of separately managing a broad number of daily microtransactions from a particular vendor, Visa groups them into batches to be settled in the banking system at regular intervals. Banks store and sort transactions through their internal equivalent of a settlement layer. In this example, Visa presents Layer 2 and the broader network of financial institutions presents Layer 1.
When compared to blockchain, you can notice that the Ethereum network uses a similar method of multiple off-chain transactions through features such as zero-knowledge (ZK) rollups to unload the burden of managing transactions from the Ethereum mainnet.
In contrast to these traditional financial methods, blockchain-based Layer 2 is associated with removing the middleman from the picture. Even with the use of innovative technology, our banking system still works on a trust model.
Most Layer 2 scaling solutions are not really well-known to the general public. There are already a few examples in the crypto market. Layer 2 includes a number of different types.
As the name suggests, sidechains are separate networks that are able to effectively process transactions and obtain full interoperability with their blockchain. Being a separate blockchain network, a sidechain communicates with Layer 1 blockchain it supports, such as Ethereum or Bitcoin.
Transaction data is relayed between these two layers as a ‘peg’. A peg can be illustrated as a bridge with a two-way communication channel. It is the underlying technology that aids in maintaining communication between the sidechain and Layer 1.
Another interesting thing about sidechains is that there is a need for an intermediary to keep the communication flowing between the sidechain and the main blockchain. It is known as a federation and refers to a group of developers or smart contracts that enforce rules to ensure a balance of funds is maintained between two layers.
Plasma combines smart contracts and cryptographic verification to allow fast transactions on Layer 1 networks. Faster and cheaper transactions can be achieved by unloading transactions to side chains known as plasma or child chains.
The Plasma Layer 2 solution can be illustrated as a tree because it typically encompasses a lot of child chains. Each child chain has its own purpose and can be built on top of the other.
The problem with Plasma is that it includes a number of disadvantages such as long withdrawal time frames. Due to issues, it is not a very popular scaling solution.
State Channels are another type of Layer 2 scaling solution that enables end-users to execute off-chain transactions without the involvement of the main blockchain.
State Channels lay down a virtual channel between two layers, where the state of the channel is updated each time parties transact with each other.
Let’s start by explaining what a rollup is exactly; rollups are specialised Layer 2 systems that run a broad number of transactions outside Layer 1 and then fuse these pieces of compressed data into one piece and upload them to mainnet.
ZK-rollups can be defined as Layer 2 scaling solutions ideal for blockchains that use a cryptographic technique known as zero-knowledge proofs to confirm the validity of transactions.
When a user conducts a transaction on a ZK-rollup, this transaction is bundled with a bunch of other transactions to form a single transaction. That single transaction is sent to Layer 1 for final settlement, along with proof of validity.
Since transactions are mathematically proven as valid, they are not subject to any waiting periods or dispute resolutions. ZK-rollups are very private and secure but may be computationally expensive.
Optimistic rollup is a type of rollup that optimistically assumes all transaction data in the rollup is valid. This is a time-saving feature because transactions don’t have to be submitted with direct validity proofs.
The possibility of a fraudulent transaction can be assessed and disputed using fraud proofs. A fraud-proof is a claim that a transaction is certain invalid and that the entire batch should be reverted as a result. Validators in the rollup have a week to assess the entire rollup if they believe it includes fraudulent data.
Optimistic rollups provide many benefits such as scalability improvements without compromising overall network security and the trustless model. Setbacks are mainly associated with a lack of honest nodes that may increase the chances of fraud and possible misuse of power.
The crypto market has been through some dark phases, but a number of current crypto projects have the potential to perform well in the coming year, playing a role in boosting scalability for Ethereum and other blockchain networks.
We are going to examine a few promising 2023 Layer 2 solutions that could experience significant future growth.
In short, Polygon is an Ethereum Layer 2 scaling solution that achieves scale by using sidechains for off-chain computation and a decentralised network of Proof-of-Stake (PoS) validators.
Before rebranding as Polygon, this Layer 2 was known as the MATIC network. Founded back in 2017, Polygon started off with an ambitious goal of optimising Ethereum for wider adoption.
This scaling solution has partnered with many decentralised applications (dApps) across divergent categories, such as gaming, social media, collectibles, and decentralised finance (DeFi).
Polygon key features can be divided into three main categories.
- Polygon smart contracts: A series of Polygon smart contracts are implemented on the Ethereum blockchain. Smart contract technology handles staking for the Proof-of-Stake (PoS) layer, along with the delegation and validation of shares.
- Proof-of-Stake (PoS) layer: This layer is also known as Heimdall. It is the validator node of the Proof-of-Stake (PoS) that works in conjunction with the above-mentioned smart contracts on the Ethereum blockchain.
- Block producer layer: This feature also goes by the name Bor. Its main purpose is to group transactions into groups.
Polygon Layer 2 solution runs parallel to the Ethereum blockchain. The Ethereum network can handle approximately 14 transactions per second while Polygon can process nearly 65,000 per second. Ethereum also struggles with high network congestion which makes the blockchain slow and affects users who are interacting with smart contracts.
To solve such issues, Polygon processes transactions on sidechains with lower transaction fees in comparison to Ethereum’s fees. As it utilises a Proof-of-Stake (PoS) consensus mechanism to run the platform, users have to stake their MATIC tokens to validate transactions. Those who manage to successfully verify transactions are entitled to earn rewards.
Polygon also utilises a number of underlying protocols such as zero-knowledge rollups that bundle a bunch of transactions, process them off-chain, and create validity proofs, along with presenting them as a single transaction to the underlying blockchain.
To help solve the issues faced by Ethereum, this Ethereum Layer 2 scaling protocol processes transactions on sidechains with transaction fees costing a few cents in comparison to Ethereum’s fees which, on average, cost $15 per transaction.
Immutable X is a decentralised exchange platform intended for trading non-fungible tokens (NFTs). As a Layer 2 solution built on top of the Ethereum network, it offloads the processing of transactions from the main chain to a separate layer.
Immutable X is already well-known due to its focus on the emerging GameFi sector. In terms of Web3 gaming, Immutable X provides a scaling solution for the increased demand for NFTs in gaming since it offers secure and fast trading.
GameFi is a fusion of words gaming and finance. If you are interested in finding out more about GameFi, why not read this article: ‘What is GameFi?’.
To provide a high throughput, improved user experience and efficiently perform blockchain operations, this underlying blockchain protocol encompasses certain features.
- Volition: Immutable X provides two divergent Layer 2 solutions for end-users to choose from when conducting transactions. These are ZK Rollups and Validium. Choosing between them is what the team behind Immutable X calls the process of Volition.
- Non-custodial layout: Non-custodial protocols are more secure than custodial networks because users never have to give away ownership of their digital assets.
- Carbon-neutral NFT trading: Shifting to a less energy-expending Layer 2 network is not the only energy-saving feature Immutable X offers. Additionally, they purchase carbon credits to ensure carbon-neutral NFT trading.
Immutable X partnered up with StarkWare to develop a ZK-Rollup scaling engine. It is one of the first Layer 2 solutions known to use ZK Rollups while focusing solely on non-fungible tokens (NFTs).
In fact, Immutable X provides two Layer 2 solutions, StarkEx, and Immutable zkEVM. StarkEx provides a service that batches certain types of transactions. This service is maintained by the StarkWare company.
Immutable zkEVM is A ZK Rollup for games. It provides a high degree of scalability, Ethereum security, low cost, and smart contract compatibility.
Arbitrum is a Layer 2 solution created to improve the capabilities of Ethereum smart contracts. Its main purpose is to boost their speed and scalability, along with adding in additional privacy safeguards.
Offchain Labs, the New York-based development team behind Arbitrum, was co-founded in 2018 by Ed Felton, a computer science and public affairs professor at Princeton, Steven Goldfeder, and Harry Kalodner.
Since its inception, Offchain Labs has already received broad investments. Arbitrum has the potential to become a very popular Layer 2 solution in the future since leading platforms such as Sushiswap and Uniswap joined this network.
Arbitrum is built to address particular setbacks of current Ethereum-based smart contract technology. Developers are enabled to easily run unmodified Ethereum Virtual Machine (EVM) contracts and transactions on the second layer while benefiting from the first layer’s security.
As stated above, Arbitrum has the potential to experience future growth and become a popular Layer 2 scaling option. There are several features that distinct Arbitrum from its competitors in the crypto market.
- High EVM compatibility: Arbitrum is considered as one of the most compatible rollups when it comes to the Ethereum Virtual Machine (EVM) compatibility. It is compatible with the EVM at the bytecode level. This basically means that it is easy to develop on. Arbitrum minimised barriers to entry when it came to building on the second layer.
- Well-developed ecosystem: Arbitrum is working with a broad variety of Ethereum decentralised applications (dApps) and infrastructure projects, such as Uniswap, Sushiswap, DODO, and others.
- Optimised dispute resolution in optimistic rollups: Arbitrum introduced a different way of how the technology of Optimistic Rollups resolves disputes on Layer 2. To avoid any sign of network congestion, Arbitrum continuously subdivides the disputed transaction until the disputed information is so small that it can be quickly sent to and resolved on Layer 1.
Arbitrum uses the Optimistic Rollup technology to enable Ethereum smart contracts to scale by passing messages between smart contracts on the main chain and those on Layer 2. Much of the transaction processing is completed on Layer 2 resulting in improved speed and efficiency.
As it is based on Optimistic Rollups, the validator is able to post a rollup block and confirm the validity of other blocks. Arbitrum’s underlying blockchain protocol ensures that code will run as intended as long as any validator is honest, helping the blockchain network resist many forms of attack.
Future versions are predicted to encompass two other modes: channels and AnyTrust sidechain. Currently, the execution environment for smart contracts is based on Arbitrum’s custom virtual machine.