Ethereum is an open-source platform to build decentralized apps (DApps), create tokenized assets, and spend cryptocurrency. As Ethereum grows in popularity, handling over 1 million transactions daily could lead to congestion and slow transaction times. Luckily, several Layer 2 scaling solutions can help address this issue.
This article will explore some of these solutions, how they work, and their benefits.
What is Layer 2 scaling?
Regarding Ethereum, Layer 2 (L2) scaling refers to any solution that takes some transactions and processing off Ethereum’s main network. Using L2 scaling solutions, Ethereum can handle more transactions and increase its overall throughput without overhauling or clogging up the main network. These solutions are like a “sidechain,” where activity on the sidechain is not reflected on the main Ethereum network.
Why is Layer 2 scaling necessary?
Ethereum’s widespread use is a triumph for blockchain, but it has some downsides. If you used Ethereum in 2021, your experience would’ve been sluggish and pricey. The reason is high gas fees that can reach $50-$80 during peak volumes! Thus, Ethereum was becoming more prohibitively expensive for large-scale adoption.
The solution to bringing Ethereum into widespread use is to make it quick and cheap. How? Through Layer 2 solutions that take the pressure off the Ethereum mainnet and make it congestion-free. Whereas an Ethereum transaction may take 10 minutes and cost a considerable amount of ETH in gas fees, L2 transactions happen rapidly and with almost no fees.
How do Layer 2 protocols work?
The Ethereum network is the main chain, which handles all transactions on the network. The transaction capacity is limited to 15 transactions per second, roughly over 1 million transactions per day. Imagine what happens when it is stretched to its capacity. Yes, correct. The network becomes painfully slow, and the gas fee goes through the roof.
Hopes are pinned on Ethereum 2.0 – the much-anticipated upgrade that will dramatically improve the network’s scaling performance. However, it won’t be available until 2023.
As an alternative, Layer 2 scaling solutions have begun to emerge. So, if Ethereum is Layer 1, think of an additional chain connected to the main chain. This is the L2 sidechain.
In a larger sense, these protocols establish a supplementary framework in which blockchain transactions and operations can occur independently of the layer 1 framework (main chain). As a result, these strategies are often known as “off-chain” scaling solutions.
The way L2s work their magic is as follows:
- L2s process transactions on an Ethereum-connected blockchain (i.e., a sidechain.)
- They then incorporate them into more significant purchases (or roll-up blocks.)
- L2s deliver roll-up blocks to Ethereum in a single transaction rather than many transactions.
Click here to read more about rollups.
Examples of Layer 2 scaling
Who are the front-runners in the Layer 2 scaling battle? Below are the most acceptable options:
Polygon network
Polygon is a protocol that helps Ethereum handle more transactions per second by moving some transactions to a different blockchain or the sidechain. It can handle up to 65,000 transactions per second, much more than Ethereum’s current limit of 15-17 transactions per second. Plus, Polygon charges users minimal fees for these transactions.
Most significant DeFi protocols deployed to Polygon, including names like Aave, Curve, and Sushi.
Optimism
Optimism is significantly cheaper than Ethereum, and it is gaining popularity. It is driven by Optimistic rollups, a method that bundles massive quantities of transaction data into manageable chunks.
As per Defi Llama, Optimism is the second-largest Ethereum Layer 2, with a total of $914.92m million locked inside its smart contracts as of this writing.
Arbitrum
Arbitrum is a Layer-2 project that aims to improve the performance and scalability of Ethereum smart contracts. The solution makes it simple for developers to run unmodified Ethereum Virtual Machine (EVM) contracts and Ethereum transactions at Layer 2 while reaping the benefits of Ethereum’s superior Layer-1 security.
The project aimed to overcome some drawbacks of existing Ethereum-based smart contracts, such as lengthy transactions and hefty execution costs. The network logs batches of transactions submitted on the Ethereum main chain and executes them on cheap, scalable Layer-2 sidechains using a mechanism known as transaction rollup.
Arbitrum is the largest Ethereum Layer 2, with $2.36 billion locked in TVL at the time of writing.
What’s next for L2 blockchains after Ethereum Merge
The Merge, Ethereum’s widely anticipated transition from proof-of-work to proof-of-stake consensus, was accomplished on September 14.
The biggest win from a technology perspective is that Ethereum dramatically reduces energy consumption. Besides that, the Merge has no effect yet on the gas fee or transaction speed. The Ethereum foundation emphasizes the need for employing Layer 2 blockchains for scaling, citing Ethereum’s present capacity restrictions.
Consequently, Polygon and other Layer 2 blockchains will continue to provide significant cost reductions compared to Ethereum’s transaction architecture. These benefits will be boosted even more with the release of Polygon’s zkEVM, the first zero-knowledge proof-based, fully compatible Ethereum Virtual Machine.
Watch this space for more crypto insights!