With so many types of Layer 2s promising to fix Ethereum (ETH) forever, the term Layer 2 scaling solution has become something of a trendy buzzword. These innovative blockchain networks resolve some of the most pressing issues faced by blockchain networks today – scalability and efficiency.
The crypto space is expanding every day, and the number of on-chain transactions is skyrocketing. Faster, more efficient Layer 1 blockchain networks are needed now more than ever.
Layer 2 solutions are designed to meet this demand, offering a new level of scalability without compromising the decentralization and security integral to cryptocurrency and blockchain technology.
Like peeling an onion, there are many different ways of scaling Bitcoin (BTC) and Ethereum. Because this is crypto, and we’d expect nothing less, they all have confusing names and are difficult to understand. But don’t let that discourage you; in this guide we’ll break down the different types of Layer 2s in the Web3 world.
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What Are Layer 2s?
Like the second floor of a house, a Layer 2 network is a secondary protocol built on top of an existing blockchain (Layer 1). This additional layer aims to increase the transaction speed and efficiency of the network by taking transactions off the mainnet and processing them separately.
By moving transactions off-chain to a separate network, Layer 2s can significantly increase the network’s capacity and reduce congestion. Basically, this dramatically improves the user experience by giving us faster blockchains and reduced gas fees, solving Vitalik Buterin’s iconic blockchain trilemma.
Most importantly, all application Layer 2 networks operate an EVM (Ethereum Virtual Machine), which makes it easy to deploy Ethereum-based smart contracts, algorithms, and dApps on faster networks.
If that wasn’t enough, Layer 2 solutions also enjoy the security and consensus of the underlying blockchain. Layer 2 networks offer a way to scale blockchain networks without compromising their core principles of security, decentralization, and trustlessness.
Why Do We Need Layer 2 Scaling Solutions?
Older Layer 1 blockchains, like Ethereum, have faced challenges in scaling their transaction throughput to meet the demands of a growing user base. As more users join the network and interact with DeFi apps like Uniswap and OpenSea, the strain on the blockchain’s capacity becomes evident.
Ethereum, for example, has experienced network congestion and high transaction fees during peak activity periods. Who could forget Yuga Labs’ catastrophic Otherside NFT mint when gas fees reportedly hit over $10,000 USD? Even the Bitcoin ecosystem isn’t immune to gas fee wars; recent Ordinal and BRC-20 mania has disrupted the world’s largest cryptocurrency network.
Layer 2 scaling solutions are needed to alleviate these scalability issues and unlock blockchain technology’s full potential and bandwidth. By offloading transactions and computations to secondary layers, Layer 2s can process a significantly higher number of transactions faster and more cost-effectively.
Top Layer 2 networks like Arbitrum and Polygon aim to enhance the crypto user experience, reduce transaction fees, and enable a broader range of use cases and applications to flourish on blockchain networks.
Types of Layer 2s
Several types of Layer 2 solutions have emerged to address the scalability challenges of blockchain networks. While most Layer 2s are designed to bring the Ethereum ecosystem to new heights, Bitcoin has a prominent secondary network layer of its own.
Optimistic Rollups are Layer 2 solutions that achieve scalability through Optimistic Execution. These solutions process transactions off-chain while relying on the underlying blockchain for security and finality.
Optimistic Rollups allow participants to submit transactions to a Layer 2 chain without immediate verification. Instead, they rely on a fraud-proof mechanism that ensures the correctness of transactions.
Okay, I hear you. What exactly is a fraud-proof mechanism? This mechanism assumes that most participants are honest and will not attempt to submit fraudulent transactions. If an invalid transaction is detected, a ‘challenge period’ allows other participants to present evidence and prove the fraud.
Essentially, Optimistic Rollups work on the belief that everyone is behaving themselves. If a node is found to submit fraudulent transactions, they are penalized.
Examples of Optimistic Rollups
- Optimism (irony not lost here).
zkRollups, or zero-knowledge rollups, use zero-knowledge proof systems to create faster, safer blockchains. In zkRollups, transaction data is compressed and submitted to the mainchain as a cryptographic proof rather than including every transaction detail.
These authentication proofs allow the Ethereum mainnet to verify the correctness of the transaction batch without needing to process each transaction individually. ZkProofing also gives users greater privacy by letting them validate information without needing to share sensitive data. In a world of privacy breaches and hacks, protecting data transmission is vital for internet protocols.
This approach significantly reduces the computational overhead and storage requirements on the mainnet while maintaining high security and privacy. zkRollups provide a promising solution for scaling blockchain networks by bundling multiple transactions into a single proof, enabling faster and more cost-effective transaction processing.
Examples of zkRollups
- Polygon zkEVM.
Of all the different Layer 2 solutions, Sidechains are perhaps the easiest to understand. Sidechains are separate blockchains that operate parallel to the main blockchain, often called the mainnet.
These chains are connected to the mainnet through a two-way pegging mechanism, allowing assets to be transferred quickly between the mainchain and the sidechain. SideChains provide a scalable environment for executing transactions, smart contracts, and other operations that are settled on the base layer.
By moving transactions and computations to a sidechain, the mainchain’s capacity is relieved, enabling faster and cheaper transactions. SideChains can have their consensus mechanisms and rules, allowing greater flexibility in designing specific use-case-focused blockchains.
Examples of Layer 2 Sidechains
- Polygon PoS.
Bitcoin Lightning Network
The Bitcoin Lightning Network is a Layer 2 solution specifically designed for Bitcoin. It enables fast, low-cost transactions by creating direct, off-chain payment channels between users.
These channels can be kept open indefinitely, allowing for unlimited transactions between parties. The Lightning Network is handy for micropayments, where the high transaction fees of the main Bitcoin network could be considered problematic.
Comparing Different Types of Layer 2 Solutions
In the competitive race to scale Ethereum effectively, each Layer 2 network achieves different transaction speeds and gas efficiency. How do the different Layer 2 scaling solutions stack up against each other in terms of token swap fees and TVL (Total Value Locked)?
|Blockchain||Type of Layer 2||Average Token Swap Fee (in USD)||TVL (Total Value Locked in USD)|
Pros and Cons of Layer 2 Blockchains
Layer 2 solutions offer compelling advantages in terms of scalability and improved user experience. However, they also come with certain drawbacks that need to be considered. Let’s explore the pros and cons of Layer 2s.
- Scalability – Layer 2 solutions enable blockchain networks to process a significantly higher number of transactions per second, addressing the scalability limitations of the underlying blockchain.
- Faster Transactions – Offloading transactions to Layer 2s allows for faster confirmation times, meaning your trades are executed quickly.
- Lower Fees – Layer 2s reduce transaction fees by relieving congestion on the mainnet and eliminating gas wars.
- Improved User Experience – By enhancing scalability and reducing fees, Layer 2 solutions make decentralized applications more accessible and user-friendly.
- Security – While Layer 2 solutions are designed to maintain the security of the main chain, they are not immune to attacks. The security of these networks depends largely on their specific design and implementation.
- Complexity – Implementing different types of Layer 2 networks adds complexity to the blockchain architecture, leading to new challenges and potential vulnerabilities like we often see with cross-chain bridges.
- Interoperability – Layer 2 solutions are often specific to a particular blockchain, like Ethereum, which can limit interoperability between different blockchains.
On the Flipside
- Newer Layer 1 blockchains like Solana (SOL) and Avalanche (AVAX) don’t need to rely on Layer 2 scaling solutions because their base layer is already efficiently scalable to support their users.
Why This Matters
The Layer 2 race is one of the most competitive battles in the entire crypto space. While Arbitrum is a clear leader at the moment, staying on top of updates and challenges will help you to make informed decisions in one of the most hotly discussed areas of the crypto market.
Popular Layer 2 blockchains include Arbitrum, Optimism, ZkSync, and Polygon.
While any Layer 1 blockchain can technically have a Layer 2 built on top of it, Ethereum needs Layer 2 scaling solutions more than any other blockchain. For this reason, most Layer 2s are Ethereum based.
Smart contracts are a feature and utility available on both Layer 1 and Layer 2 blockchains.
Solana is a Layer 1 blockchain.
The three most common types of Layer 2 blockchains are Optimistic Rollups, zkRollups and Sidechains.