Ethereum can be used to create decentralized apps, launch tokens and spend digital currency. Because of its extensive capabilities, Ethereum is a highly accessible virtual machine. This is likely why Ethereum conducts more 1,000,000 transactions per day.
Although mass adoption of Ethereum is good for blockchain, it is detrimental for the user experience. Why? You know why?
Layer 2 scaling solutions will make Ethereum more usable. An Ethereum transaction can take up to 10 minutes, and cost gas costs. L2 transactions are instant and have almost-free fees.
What are Ethereum Layer-2 Scaling Solutions
Ethereum has been an engine for tremendous growth in the blockchain industry ever since its inception in 2013.
Like many blockchains, Ethereum is now facing the challenge to scalability. In summer 2022, Ethereum processed an estimated 500,000 transactions per hour, which translates to 30 transactions per minute. Compared to Ethereum, Visa’s payment system can process up to 150,000,000 transactions per day and 65,000 transaction per second — a vast improvement on Ethereum.
In practice, exceeding the blockchain’s limits can lead to network congestion. This could cause delays of up to hours and high gas costs.
Layer-2 is sometimes called the Data Link Layer (DLL). This solution aims to address the problem of blockchain scaling by processing transactions on third party networks (Layer-1). It not only reduces the load on the mainnet but also preserves the security and decentralisation standards that are maintained by the underlying blockchain.
Layer 2 protocols are solutions built on top of a base network to help scale transactions and data. L2 serves as an extension or a secondary framework for their respective main networks.
So how does it work? Layer 2 networks process transactions in large bundles on their own before submitting proof of the transactions to the base layer. This process is commonly referred to as “off-chain” scaling, and it takes a massive load off the base network.
L1 focuses on security, decentralization, and data availability, while L2 handles scalability. This makes the entire blockchain ecosystem more scalable since the base network is less congested. So basically, it’s teamwork.
Layer-1 vs. Layer-2 Blockchains
Layer-1 is the distributed database — the network that combines all of the blockchain’s Nodes into one system with its underlying Consensus Mechanisms. Layer-1 in Bitcoin is the Bitcoin network. Layer-1 in Ethereum is the Ethereum network. Both use the Proof of Work (PoW), consensus mechanism.
Layer-2 is an overlaying network that sits over the blockchain. The Layer-2 solution to Bitcoin is the Lightning Network. Plasma , Polygon Optimism and Arbitrum all are Layer-2 networks that have been built on Ethereum.
Why are They Important?
Ethereum is currently one of the most advanced blockchains in terms network security and stability. This blockchain is used by the majority of companies and individuals for both transactions and building projects. The network gets more congested as transactions increase.
Miners have made it a priority to confirm transactions at higher gas prices in order to combat this. These higher costs are passed on to the user by raising the minimum gas charge, which can sometimes exceed the transaction’s value.
Layer-2 allows the underlying network (mainnet), to send large amounts of data to multiple processing channels (third parties) without the need to process them all. Only the Layer-1 blockchain records the final result.
Benefits of layer 2 Solution
Scalability: Speed refers to transaction throughput and speed. It ensures that transactions are processed faster and have higher throughput. Many base networks will sacrifice scalability to decentralize or secure their network, which can lead to congestion when there is high network usage.
This problem is solved by Layer 2 networks, which allow blockchain ecosystems to scale without compromising security and decentralization.
Lower fees As mentioned previously, L2 bundles multiple transactions into one transaction and submits them all to the mainnet. This reduces transaction fees and makes the base layer more affordable and quicker.
Maintain Security. Security is the main focus of layer 1 networks. Users can take advantage of layer 2 chains built on top of the primary blockchain to benefit from its security.
Drawbacks to Layer 2 Solution
Liquidity Reduction. liquidity is an important aspect to the crypto market. Layer 2 networks can decrease the liquidity of primary blockchains. This is a good thing as it will ensure that they are always liquid and robust.
Multiple accounts may be required If multiple L2 solutions are constructed on top of a network then the L1 and the different applications will need more bridges to ensure smooth communication. End-users may need multiple accounts in order to transfer funds between different protocols. This can be a daunting task, especially as users must track their assets’ movements at all times.
Security Concerns : Although this is an issue of implementation, it has been a year that multiple bridging solutions were hacked leading to the compromise of hundreds of millions of dollars worth of cryptocurrency.
The Best Ethereum of Layer-2 Scaling Solutions
Ethereum closed more than $1.5 trillion in transactions during Q1 2021. Let’s take a moment to think about it. Visa often settles $2 Trillion every quarter.
It is even more remarkable that Ethereum managed all its financial activities without any real scaling. This shows how eager people are to use Ethereum , even though it is slow, inconvenient and expensive.
You can now imagine what it would be like to use Ethereum when it is easy, cheap, fast, and convenient. This is what Ethereum-connected Layer 2 sidechains provide. An effective Layer 2 sidechain can be more efficient than Visa’s financial activity, given the number of settlements on Ethereum.
Which are the most powerful contenders in Layer 2 scaling? Below are the top Layer 2 scaling solutions, ranked by network activity.
Polygon Network, a Layer 2 Blockchain project, was originally known as Matic. The project was known for its Matic status and received financial investment by Coinbase Ventures.
Matic’s popularity grew only after the NFT boom. The floodgates opened once Matic was rebranded as Polygon Network. Polygon has deployed most major DeFi protocols, including Aave and Curve.
The Aave Polygon Market helped drive the total value of Polygon to nearly 9 billion. QuickSwap is a Uniswap-like, decentralized exchange on Polygon. It launched into the deep liquidity reserves of the network to offer users a cheaper alternative to Ethereum DEXes.
The transaction fees on Polygon are almost free. This is a welcome break from the $100 per transaction fees on Ethereum. Polygon gives you MATIC tokens for free when you bridge your assets. This is enough to cover multiple transactions.
Optimism was long rumored as the best Ethereum scaling solution. Optimism was not able to make it onto the market due to delays in development.
The mainnet for the project, Optimistic Ethereum(OKs), has already been live and hosts Uniswap V3. The $6.5 Billion in total value locked has been collected by Uniswap Optimism Market — a significant sum that points to the early success and potential for Ethereum L2s.
You might be interested in trying Optimism. To see how much gas you can save compared to using Ethereum, visit this nifty gasoline fee calculator.
Arbitrum, which is similar to Polygon and Optimism for scaling Ethereum smart contract contracts, is an Optimistic Rolleup. Arbitrum speeds up and makes Ethereum easier to use , for developers.
Layer 2 protocols are easy to think of as only applicable for end-users such as crypto traders or yield farmers. Decentralized app developers using Ethereum spend little on smart contract executions in the test phase alone. Arbitrum was created to help developers get their Ethereum-based projects off of the ground quickly and at a low cost.
Arbitrum one is the mainnet beta release of the protocol. It’s currently only available for developers of Ethereum apps, but it will soon be made public.
Numerous big names are early Arbitrum collaborators. Uniswap and Sushi were all launched or tested on the protocol.