When we explore how Ethereum works, we come across two important terms: “Layer 1” (L1) and “Layer 2” (L2). These terms are key to dealing with the challenge of making Ethereum handle more transactions smoothly. Layer 1 is like the main foundation, the basic blockchain where everything starts. Examples of Layer 1 blockchains are Ethereum and Bitcoin. On the flip side, Layer 2 involves separate blockchains that build on Ethereum, keeping its safety features.
These additional frameworks or protocols sit on top of the main Ethereum blockchain. They’re designed to make transactions faster and cheaper while keeping things safe and decentralized.
In this article, we’ll talk about the newest and most promising solutions for making Ethereum work better, known as Layer 2 solutions.
Ethereum’s Role as Layer 1 and the Need for Layer 2 Solutions
Ethereum, functioning as Layer 1, forms a network involving node operators, block producers, the blockchain itself, transaction data history, and a consensus mechanism. Additionally, it acts as a data availability layer for Layer 2 projects. These Layer 2s rely on Ethereum’s strong infrastructure, posting their transaction data onto it. This setup enables users to understand the state of Layer 2 and dispute transactions when needed.
Considering the challenge posed by the blockchain trilemma — the difficulty of achieving decentralization, security, and scalability all at once — Ethereum, processing over a million transactions daily, faces congestion during peak demand, resulting in high transaction fees. Layer 2 solutions emerge as a response to this challenge, aiming to improve scalability without compromising decentralization or security.
How Layer 2 Works
Layer 2 encompasses various scaling solutions that handle transactions off Ethereum Layer 1 while leveraging its decentralized security. These solutions operate as separate blockchains extending Ethereum. Notable types of Layer 2 solutions include Rollups, which bundle multiple transactions into a single transaction on Layer 1.
- Optimistic Rollups
Optimistic Rollups assume transaction validity, challenging invalid transactions if suspicion arises. A fault proof is then executed to verify transaction legitimacy.
- Zero-Knowledge Rollups
Zero-Knowledge Rollups utilize validity proofs, where transactions are computed off-chain, and compressed data is submitted to Ethereum Layer 1 as proof of their validity.
Embracing Layer 2: Projects and Platforms
Generalized Layer 2s
Arbitrum is a Layer 2 solution that uses a roll-up mechanism similar to Optimism, focusing on improving the scalability and cost-effectiveness of the Ethereum network
It allows for faster transaction processing times and lower transaction costs compared to the main Ethereum network. Arbitrum support will be officially announced on Bitpowr in the near future.
Optimism is another Layer 2 solution that aims to address Ethereum’s scalability issues by implementing a rollup mechanism, which groups multiple transactions into a single batch and reduces the amount of data stored on the main chain
This allows for faster and cheaper transactions compared to the main Ethereum network. This amazing Layer 2 solution will also be announced soon on Bitpowr.
Polygon is a Layer 2 solution that focuses on improving the efficiency and scalability of the Ethereum network by enabling off-chain computation and scalability of payments
It allows developers to create and manage their own side chains, reducing the complexity and cost of scaling the main network
- Boba Network
Boba, an Optimistic Rollup, aims to cut gas fees, improve throughput, and extend smart contract capabilities.
Starknet, a Validity Rollup Layer 2, provides high throughput, and low gas costs, and retains Ethereum Layer 1’s security levels.
- XDai Chain
XDai Chain is a Layer 2 solution that focuses on providing a decentralized and permissionless platform for smart contracts and decentralized applications
It uses a combination of staking and proof-of-stake mechanisms to ensure security and scalability
- Immutable X
Immutable X is a Layer 2 solution that aims to provide a decentralized platform for digital assets and non-fungible tokens (NFTs)
It uses a combination of Ethereum and Polygon to enable faster and more secure transactions compared to the main Ethereum network
Skale is an open-source Layer 2 scaling solution that aims to address the scaling problem on Ethereum-compatible blockchains by creating a network of parallel chains
This allows for increased transaction throughput and improved scalability
Application-Specific Layer 2s
Loopring’s zkRollup L2 solution boosts throughput by 1000x and reduces costs to 0.1% of Layer 1, offering security akin to Ethereum mainnet.
zkSync is a Layer 2 solution that uses zk-SNARKs (zero-knowledge Succinct Non-Interactive Arguments of Knowledge) to enable off-chain transactions while maintaining the security guarantees of the main Ethereum network
This allows for faster and more secure transactions compared to the main Ethereum network
ZKSpace, utilizing ZK-Rollups, comprises an AMM DEX, payment service, and NFT marketplace for enhanced performance.
Aztec Network, the first private zk-rollup on Ethereum, provides privacy and scalability for decentralized applications.
Sidechains, Validiums, and Alternative Blockchains
Sidechains and validiums allow bridging assets from Ethereum to another blockchain, operating parallel to Ethereum. These alternatives offer scalability but with different trust assumptions. Some Layer 1 blockchains report higher throughput and lower transaction fees than Ethereum, albeit with trade-offs.
Transitioning to Layer 2: Bridging and Withdrawal
To get assets onto Layer 2, users can bridge funds from Ethereum via a smart contract or withdraw funds on an exchange directly onto the Layer 2 network.
Tools for Effective Layer 2 Navigation
- L2BEAT: A resource for technical risk assessments of Layer 2 projects.
- L2 Fees: Displays the current cost of transactions on different Layer 2s in USD.
- Chainlist: Imports network RPCs into supporting wallets, aiding connectivity to Layer 2 projects.
- Zapper: Manages the entire web3 portfolio from DeFi to NFTs.
- Zerion: Builds and manages DeFi portfolios from one platform.
- DeBank: Keeps users updated on significant developments in the web3 world.
Benefits of Layer 2 Solutions
1. Lower Fees
Layer 2 solutions consolidate multiple off-chain transactions into a single Layer 1 transaction, drastically reducing transaction fees. This accessibility boost makes Ethereum more inclusive for a broader user base.
2. Maintain Security
Layer 2 blockchains settle transactions on Ethereum Layer 1, ensuring users benefit from the security provided by the Ethereum network.
3. Expand Use Cases
Higher TPS, lower fees, and innovative technology empower projects to explore new applications, enriching user experiences across diverse domains.
Layer 2 solutions bring numerous advantages, including enhanced transaction capacity, reduced transaction costs, and maintained security. Nevertheless, they present challenges such as centralization and the risk of congestion on Layer 1.
As the development and adoption of Layer 2 solutions progress, there is significant potential to revolutionize the Ethereum ecosystem, opening doors for broader acceptance in the cryptocurrency space.
Eager to explore the full potential of Layer 2 solutions? Look forward to the upcoming addition of Arbitrum, Base, Optimism, and Avalanche on Bitpowr. These additions will provide you with greater flexibility to scale Ethereum solutions on our platform.