Ethereum is one of the biggest blockchain networks in the crypto world. In fact, it is the technology behind innovations like decentralized applications (dApps), smart contracts, decentralized finance (DeFi), and non-fungible tokens (NFTs). However, Ethereum has struggled with scalability problems, which has led to high gas fees and slow transactions.
To solve these issues, Ethereum Layer 2 (L2) solutions were introduced. But how do these Layer 2 solutions work? And can they truly solve Ethereum’s scalability problems? Follow me closely as we explore this conversation together.
Let’s get right into it!
KEY TAKEAWAYS:
- Ethereum is the technology behind innovations like decentralized applications (dApps), smart contracts, decentralized finance (DeFi), and non-fungible tokens (NFTs).
- Ethereum Layer 2 was introduced to deal with scalability issues like slow transaction speed, high gas fees, and network congestion.
- Types of Layer 2 solutions are rollups, state channels, plasma, and sidechains.
- Some challenges of Layer 2 solutions include fragmentation, withdrawal delays, and liquidity and adoption challenges.
An Overview Of Ethereum’s Scalability Problem
Ethereum operates as a Layer 1 blockchain, meaning that all transactions and smart contract executions happen directly on Ethereum’s main network. While this method allows for security and decentralization, it has led to the following issues:
- Slow transaction speeds: Ethereum typically handles 15 – 30 transactions per second (TPS), which is ridiculously low to support global financial applications. For comparison’s sake, Visa processes about 24,000 TPS, and Solana can handle approximately 65,000 TPS.
- High gas fees: Every Ethereum transaction has a gas fee, and it increases when the network is congested. For example, when NFTs and DeFi hype was at its peak in 2021, gas fees rose to hundreds of dollars per transaction.
- Network congestion: The Ethereum network slows down when too many users are trying to make transactions at the same time. This, by implication, affects NFT buyers, DeFi traders, and smart contract users.
So, What Exactly Is Ethereum Layer 2?
Ethereum Layer 2 refers to scaling solutions that operate on top of Ethereum’s main blockchain (Layer 1) to improve transaction speed and reduce costs. Instead of processing transactions directly on Ethereum, layer 2 handles them off-chain, bundles them together, and submits them back to Ethereum in batches. This ultimately reduces the load on the main network while keeping the security and decentralization of Ethereum.
Read Also – Proof-of-Stake (PoS) Explained
Types of Ethereum Layer 2 Solutions
Now that you understand what Ethereum Layer 2 is let’s explore the different types that exist and how they work:
- Rollups
This works by bundling hundreds or thousands of transactions together, processing them off-chain, and submitting the final result to Ethereum’s mainnet. Rollups are of two main types:
- Optimistic rollups: Optimistic rollups work with the “assume good, challenge bad” model, meaning that transactions are valid by default. Instead of checking each transaction immediately, users can dispute fraudulent transactions within a set period, usually 7 days. If a transaction is proven to be fraudulent, it gets reversed.
- ZK-Rollups/zero-knowledge rollups: This type uses cryptographic proofs (ZK-proofs) to instantly verify the validity of all transactions before posting them on Ethereum.
- State Channels
State channels work like a private tab between two users. As such, transactions happen off-chain between participants and are only recorded on Ethereum when the final state of the transaction needs to be settled. With state channels, there are zero gas fees once the channel is open.
- Plasma
Plasma creates child chains or independent blockchains that process transactions separately from Ethereum and report back to the mainnet only when necessary. This solution reduces congestion and fees, making it excellent for high-volume transaction
- Sidechains
Sidechains are separate blockchains that run parallel to Ethereum but use their own consensus mechanisms (like proof-of-stake). They allow developers to create customized blockchain environments while still being linked to Ethereum for security and asset transfers.
Challenges and Risks of Layer 2
Indeed, Layer 2 solutions have greatly improved Ethereum’s scalability. However, they are not perfect. Here is a highlight of the challenges of Ethereum’s Layer 2.
- Fragmentation and interoperability issues: Each Layer 2 solution operates differently, making it difficult for all of them to work together.
- Security concerns: Not all Layer 2 solutions inherit Ethereum’s security. Sidechains, for example, have their own validators, making them vulnerable to 51% attacks.
- Liquidity and adoption challenges: Ethereum Layer 2 networks need liquidity to be useful. If users don’t migrate to Layer 2, DeFi applications could struggle with low trading volumes and fragmented assets.
- Withdrawal delays: Some solutions, like Optimistic Rollups and Plasma, require withdrawal waiting periods of several days, which can be inconvenient for users.
Conclusion
Ethereum is truly a robust and decentralized network. However, improving scalability is the only way it can handle its global demand. Layer 2 solutions are a vital way forward for Ethereum to preserve its place as a leading blockchain platform, not just today but for decades to come!
References
- ledger.com – What Are Ethereum Layer 2 Blockchains and How Do They Work?
- investopedia.com – Layer 1 vs. Layer 2: The Difference Between Blockchain Scaling Solutions
