Key Takeaways

• Ethereum’s popularity with DeFi, dApps, and NFTs has led to network congestion.
• Layer 2 blockchains are built on top of Ethereum to handle most transactions. This frees up space on the main Ethereum chain, making it faster and cheaper for everyone.
• By enabling faster and cheaper transactions, Layer 2 solutions make various blockchain applications more accessible.

Ethereum’s ecosystem, fueled by DeFi, dApps, NFTs, and more, has grown in usage in recent years. However, this growth threatens to overwhelm the underlying blockchain’s capacity. The result? Slow transactions, network congestion, and sky-high fees, especially during peak activity. The answer? Layer 2 scaling solutions—secondary blockchains that take the processing load off Ethereum’s main chain.

What is Ethereum?

Ethereum is an open-source, decentralized network that empowers developers to build and deploy smart contracts and decentralized applications (dApps). Smart contracts are self-executing agreements that automate tasks, while dApps are applications that run on the Ethereum network without a central authority controlling them. Launched in 2015, Ethereum initially relied on a proof-of-work system for security. However, a recent upgrade transitioned it to a more energy-efficient proof-of-stake system.

Ethereum and its Scalability Issues

Ethereum, a major player in blockchain development, faces a challenge: scaling. The features that fueled its growth, smart contracts and dApps, now expose a limitation: handling high transaction volume.

Ethereum, prioritizing decentralization and security, currently processes 15-30 transactions per second (TPS) compared to Visa’s lightning-fast 1,700 TPS. Imagine waiting minutes or hours for a simple transaction to confirm, contrasting with Visa’s near-instant processing.

Understanding Layer 2 Protocols

Layer 2 protocols are secondary blockchains built on top of existing blockchains like Ethereum. They handle most transactions off the side, keeping the leading Ethereum network less crowded and faster for everyone. 

By leveraging the security of the underlying blockchain, Layer 2 solutions can handle thousands of transactions per second, resulting in faster and cheaper transactions overall. A layer 2 solution operates in two parts:

• The protocol to which transaction processing is delegated;
• A smart contract on the main chain.

What are Ethereum Layer 2 Blockchains for?

Ethereum Layer 2 blockchains address a fundamental challenge in blockchains: balancing decentralization, security, and scalability. Blockchains typically fulfill three core functions:

• Data Availability ensures that every participant can access the network’s state, transaction data, and other data required to verify a block. In simpler terms, all participants have a copy of the entire ledger.
• Execution refers to the computations needed to perform network state changes and confirm transactions. It’s essentially processing transactions and throughput, measured by transactions per second (TPS).
• Consensus: This guarantees all validators and network nodes agree on the network’s state, transaction ordering, and validity. It’s crucial for security and integrity, often measured by decentralization and the time to reach a consensus on a state change.

Blockchains like Ethereum are secure and decentralized but slow and expensive for everyday use. This is because they rely on all users to agree on every transaction (consensus).

Layer 2 solutions fix this by moving most transactions off the main chain (Layer 1) to faster, cheaper side chains (Layer 2). These sidechains have Ethereum’s security and eventually ensure everyone agrees on transactions.

Types of Ethereum Layer 2 Protocols

• Sidechains: Transactions happen on the sidechain, but their value is secured by the main Ethereum blockchain.
• Rollups: Rollups bundle transactions together and send them to the main Ethereum blockchain as a single package for validation. There are two main types of rollups:

• Optimistic Rollups: These assume transactions are valid by default. If someone disagrees, they can challenge it within a specific timeframe.
• Zk-rollups prove the validity of transactions before submitting them, similar to showing receipts before entering the main highway.
• Channels: Channels are like private tunnels between two users. They only need to contact the main Ethereum blockchain when they open or close the tunnel, making transactions faster and cheaper.

• Plasma: Plasma is a framework for creating separate blockchains (child chains) that rely on the Ethereum mainnet for security. While transactions are faster and cheaper, they can be limited in functionality and have longer withdrawal times.
• Validium: Similar to zk-rollups, Validium uses proofs to verify transactions. However, it doesn’t store all transaction data on the main chain, allowing for faster processing (potentially over 9,000 transactions per second).**

Layer-2 in Ethereum’s Future

Layer 2 solutions (L2s) are the secret weapon fueling Ethereum’s progress towards becoming a global payment system. These innovative add-ons operate on top of the Ethereum mainnet. Whether playing Web3 games, swapping tokens or sending some ETH, L2s make these activities significantly faster and cheaper. 

As Ethereum’s user base explodes, L2s ensure the network remains efficient and accessible for a wide range of applications, paving the way for a future filled with seamless transactions.

Final Thoughts

Layer 2 solutions become the answer for Ethereum’s future as a global payment system. These innovative add-ons address the network’s congestion, making transactions faster and cheaper for activities like playing Web3 games or swapping tokens. As Ethereum’s user base explodes, Layer 2 solutions ensure the network stays efficient and accessible for many applications, making way for a future filled with seamless transactions.