The Need for Layer-2
Ethereum has a lot of things going for it. The blockchain has a rich and powerful ecosystem. There is no shortage of developers and dApps. The competitive advantage is tough to beat. There’s only one problem—scalability.
Due to Ethereum’s rising popularity, more dApps and users continue to join in on the excitement. Unfortunately, this leads to things like network congestion. This is due to the miner’s inability to process transit actions. As a result, users experience outrageously high gas fees. The threat of Ethereum becoming a “whale chain” is looming.
What about scaling the Layer-1 blockchain? It’s not a long-term solution. Integrating things like sharding, an increased block size, and PoS are only a band-aid. The dApps and users will only increase over time.
So what’re the possible Layer-2 solutions to prevent congestion and clogging of the main chain? Let’s dive in to find out…
Sidechains aren’t technically Layer-2, but we included them since they are one possible solution to Ethereum’s scaling issue. A sidechain is an independent blockchain running alongside the main chain via the Ethereum Virtual Machine (EVM) with its own set of security properties, consensus mechanisms, and nodes.
This poses security concerns since it is not as robust as Ethereum. The plus side is that the cost of transactions is significantly reduced. One example of a sidechain is xDAI.
Moving assets onto the sidechain require a smart contract. Your assets are locked in the smart contract and then minted on the sidechain and visa versa.
Would you like to conduct off-chain transactions an unlimited number of times? On top of that, you would only need to submit two transactions to the main chain. This can all be done with one of the first Layer-2 solutions—State Channels.
Let’s say two people (Alice and Bob) wish to send transactions back and forth daily. The first transaction would be both parties locking their assets in a multi-sig contract. An off-chain transaction is signed whenever a transaction is made with one another. The second and final transaction comes from if Alice wanted to withdraw her assets from the channel, thus unlocking them from the smart contract.
Plasma chains are yet another Layer-2 solution. A Plasma chain takes advantage of Merkle Trees and smart contracts. This enables smaller versions of the Ethereum blockchain (the Plasma chain) and allows them to communicate with the parent chain (Ethereum blockchain). A tree-like structure is formed when the child Plasma chains are built on top of each other.
Periodically these child Plasma chains interact with the parent Ethereum chain by reporting dishonest nodes via Fraud Proofs and settling disputes.
The positives of Plasma chains are that fees and data are reduced. Plasmas are also compatible with other scaling solutions such as sharding. The downside is that withdrawal waits are slow averaging around 7-14 days. For an example of a Plasma chain, check out the OMG Network.
For a younger Layer-2 solution, Rollups will compress transactions by rolling them up into a single batch and submitting them to the main chain. The old state root switches to the new state when a user publishes a new batch. Inside the Rollup’s smart contract includes the processed transactions, contract code, and account balances.
Two types of Rollups exist—ZK-Rollups and Optimistic Rollups.
Zk-Rollups and Optimistic Rollups
After execution of the batch, a Zero-Knowledge Proof (SNARK) cryptographically proves the post-state root is correct. For every state transition, a SNARK must be generated via an operator. A smart contract will then verify this via the main chain.
Everyone will assume the state transition is correct after an operator rolls up transactions and posts the data to the main chain via signature. If there is a case where an incorrect state transition gets published, operators and users can revert the incorrect block. Slashing any malicious operator’s bond is also an option.
Transactions via the smart contract are accepted directly by the users. This prevents operators the ability to censor anyone.
Developers will be pleased to know that no new code will be needed when wanting to migrate dApps to Rollups. This is because Optimistic Rollups can be run on an OVM (Optimistic Virtual Machine). The same smart contracts that are executed on Ethereum can also be done via the EVM-compatible machine (OVM).
Polygon and Loopring take advantage of ZK Rollup technology whereas Optimism utilizes Optimistic Rollups.
Polygon (formerly Matic) aims to be a part of Ethereum’s Internet of Blockchains. As one of the more popular Layer-2 projects, Polygon functions as both a protocol and framework. The hope is to connect Ethereum-compatible blockchain networks by leveraging a multitude of technologies and scalability solutions.
These scalability solutions included Matic Plasma, ZK-Rollups, and Validum Chains. Standalone chains such as Sidechains, Enterprise Chains, and Matic PoS chains are also utilized. Optimized instances of Ethereum can be created and offer features such as sovereignty, flexibility, and scalability.
Before the integration of Layer-2 solutions, Polygon and Matic were successful projects. Now the engineers are investors are betting on all of these Layer-2 solutions to work.
Top players in the field on Polygon’s team include SushiSwap, Aave, 1inch, Graphlink, Umbrella Network, Kamrbia Open Innovation, and Mogul Productions.
With the leverage of Zero-Knowledge Proofs, Loopring serves as a Layer-2 scaling protocol. Things like non-custodial AMMs (Automated Market Maker), high-throughput, order-book exchanges, payment applications, and low cost are possible via the Zero-Knowledge Proofs.
Traders will love the faster settlements due to ZK-Rollups. Key off-chain computations are settled by Loopring exchanges. This is all done via a smart contract (includes account balances and order histories, etc.) managed by the Loopring protocol.
Trades that were first matched off-chain are settled and finalized by Loopring on the Ethereum blockchain. Costs are reduced and speed is increased (~2,000 trades/second) with this Loopring batching process. Other decentralized exchanges (DEX) on the Ethereum blockchain will take much longer to settle and finalize.
The Layer-2 scaling protocol Optimism was designed in mind with an effort to speed up transactions as well as make them more affordable.
The OVM solution was soft-launched earlier this year with Sythentix, a decentralized exchange. According to Synthentix and Optimism, users have saved approximately 10 million dollars of over 100,000 transactions. Popular decentralized exchange Uniswap is set to integrate the Optimism protocol as well.
(#4) OMG Network
Formerly OmiseGo, The OMG Network is a decentralized public network. High throughput and low-cost peer-to-peer (p2p) transactions are what you get here. Third parties who are looking to build scalable decentralized payment apps ought to look at the OMG Network.
The perks of the OMG Network include (but are not limited to) are the reduction of operating costs on Ethereum (by one-third) and the ability to process thousands of transactions per second.
The platform plans to launch its Proof-of-Stake (PoS) protocol shortly. Its native token (OMG) is used to pay for transaction fees. Due to Ethereum’s high transaction fees, OMG’s price saw an uptick when investors began to seek L2 solutions.
On the horizon for the OMG Network is the public testnet of OMGX (with Enya), a Layer-2 platform that supports staking, EVM, cross-chain liquidity, and compatible smart contracts.
Solidity developers can easily cross-compile their smart contracts with Arbitrum’s interoperability. Let’s take a look at the three components of Arbitrum—Compiler, EthBridge, and Validators. Arbitrum also takes advantage of rollup tech and has support from Alchemy. Partners include OKEx, Chainlink, and the Graph Protocol.
A set of Solidity-written smart contracts are compiled into a single executable file that is run on the AVM (Arbitrum Virtual Machine).
A bridge between Arbitrum and Ethereum networks, a dApp.
Validators will work primarily off-chain and monitor the state of the AVM. AVM doesn’t have a native token and has no plans of launching one anytime soon.
For yet another sidechain that offers fast and expensive transactions, xDAI has got your back. With a Proof-of-Stake (PoS) consensus mechanism, users can stake their xDAI (a stablecoin pegged to the US Dollar) tokens on the network as validators.
The xDAI ecosystem has partnered with SushiSwap, Unify, Chainlink, and many others. We look forward to seeing the development and growth xDAI has to offer.
If you’re searching for an alternative Ethereum’s Virtual Machine, you ought to take a look at Polkadot’s Parastate. Decentralized applications built on the Ethereum network will work seamlessly via pallets. There is also EWASM, a WebAssembly-flavored EVM. The EWASM will share accounts and the data structure of blocks with the EVM.
The Parastate platform offers a two token structure with STATE and pDOT. The native token of Parastate is STATE. The pDOT token is issued when users stake and lock their DOT tokens. Users do this to support and bid for Parastate parachine slot auction on Polkadot.
To solve the compatibility concern of legacy software stacks, Cartesi offers its Layer-2 solution. In addition to this, Cartesi looks to address transaction fees and scaling issues.
The Cartesi Machine allows for developers to run decentralized logic off-chain on a Linux ecosystem. Node operators are encouraged to engage with the network in a transparent fashion by being incentivized with the CTSI native token.
Partners of Cartesi include IOTA Foundation, Binance Smart Chain, and Travala.
The ZKSwap is a decentralized exchanged with an automated market maker. Powered by Zk-Rollup technology, the ZKSwap offers a Layer-2scaling solution. The platform has already launched on the Ethereum mainnet.
With consistently generated zero-knowledge proofs, ZKSwap transfers all tokens to Layer-2 and allows exchanges to execute with zero gas fees and unlimited scalability.
Skale is an open-source Layer-2 network that depends on elastic side chains which divert processing off Ethereum’s mainnet. Users will love the ~2,000 transactions per second per chain and sub-second block times.
On top of this Skale can support decentralized storage, machine learning via the EVM, full-state smart contracts, and execute Rollups.
Thousands of independent blockchains can be supported with high speeds and functionality all without compromising security or decentralization.
The Future of Layer-2
What is the future of Layer-2 solutions? Some signs of relief of Ethereum’s issue are already beginning to take place. This isn’t without some obstacles in the way.
For one, interoperability is still not where it needs to be. One dApp wanting to communicate with another dApp living on a different Layer-2 isn’t currently possible. A lack of liquidity is another reason for concern. Liquidity could be split amongst all of these different Layer-2 solutions. If this happens, an illiquid market could also be very volatile.
What do you think the future holds for these projects? Do you have one that you are bullish on? As you can see different technologies are solving different problems. We can’t wait to see what happens next.