Being known as the second-largest blockchain in terms of market capitalization, Ethereum has gained significant recognition for smart contracts and dApps. However, as more applications have been built during a recent period on the network, its problems have multiplied. Scalability is one of those problems: the network cannot rapidly, nor inexpensively, withhold a very large number of transactions. Layer-2 blockchains come into the scene here.
Due to the congestion in the main Ethereum network (Layer 1), some of the Ethereum Layer-2 solutions came to existence so as to lessen the pressure. In this article, we are going to dive into Layer-2 blockchains, how they function, and what makes them different from Layer-1 blockchains. We shall also examine their place in the wider scope of Ethereum and how they can shape the future of decentralized technology.
How Do They Work?
Layer-2 blockchains actually operate as a set of protocols that communicate with the Ethereum mainnet but do most transaction processing off-chain. Therefore, instead of having all transactions recorded directly on Ethereum's main blockchain (Layer-1), several of these transactions happen on these alternate Layer-2 networks. After a large amount of transactions is finished, then they are sent on to the Ethereum mainnet as one collective transaction.
This cuts down on congestion on Ethereum while also speeding up the time taken for a transaction and lowering its cost. Essentially, Layer-2 is like a complementary layer for Ethereum which assists in streamlining the execution of smart contracts and transactions.
Features of the Layer-2
- Scalability: By completing off-chain transactions or aggregating on-chain transactions in a single batch, Layer-2 solutions give Ethereum the throughput to handle a much greater number of transactions per second (TPS).
- Cost Reduction: The Layer-1 transaction fees can be quite high during congestion. Layer-2 solutions reduce this phenomenon by cutting down operations that would need to be executed directly on the Ethereum network.
- Security: Layer-2 solutions inherit the strong security model of Ethereum Layer-1 since they operate atop the Layer-1. This ensures that the decentralization and immutability of the Ethereum blockchain remain intact.
Layer-1 vs Layer-2 Blockchains
The Ethereum Layer-2 solutions can be well understood only after an explanation is given about the difference between Layer-1 and Layer-2 blockchains.
What Are Layer-1 Blockchains?
It is basically the main blockchain-therefore being referred to as "Layer-1"-the primary network where transactions can be recorded directly. Ethereum, on its end, is a Layer-1 blockchain, as it is the main network on which smart contracts are executed, and transactions are recorded on the ledger while enforcing some degree of security.
Layer-1 blockchains such as Ethereum have strong decentralization and security, but with such advantages often come problems with scalability; as more users are joining the network and demand grows, transaction throughput tends to slow and fees tend to rise. Here is where Layer-2 blockchains come in to counter these issues.
What Is the Difference Between Layer-1 and Layer-2?
- Functionality: Layer-1 blockchains perform all activities within the blockchain, including transaction validation, consensus, and smart contract execution. Layer-2 sits atop Layer-1, conducting off-chain transactions while only sending relevant data to the base chain when necessary.
- Scalability: Layer-1 networks like Ethereum become congested with an increase in user activity, resulting in slow transaction speeds and high gas fees. Layer-2 solutions counteract this by conducting transactions off the chain and occasionally interacting with Layer-1.
- Transaction Costs: Gas is required for transactions at Layer-1, with the price of gas positively correlated to the congestion of the network. Layer-2 cuts down on high frequency of on-chain transactions and so cuts down on costs.
- Security: Whereas Layer-1 blockchains very much secure the network by themselves, Layer-2 solutions inherit the security properties of the underlying Layer-1 blockchain and therefore can benefit from the strong decentralization and cryptographic security of Ethereum.
Types of Ethereum Layer-2 Solutions
There are multiple types of Layer-2 solutions for various scalability and cost issues. Some of the most common ones are:
Rollups
Rollups stand out as perhaps one of the most promising Layer-2 technologies. There are two types of rollups: Optimistic Rollups and ZK Rollups.
- Optimistic Rollups: By default, these accept transactions as valid and only investigate fraud if a challenge is brought forth. While these rollups put greater strain on scalability through mitigation of traffic over the Ethereum network, in certain cases they also post finality proofs to Layer-1.
- ZK Rollups: These validate transactions using zero-knowledge proofs. In general, ZK rollups are more efficient than their Optimistic counterparts as they can validate masses of data in the blink of an eye, or at least with a tiny proof size. However, this comes at the cost of increased complexity and a longer development time.
State Channels
State channels allow participants to transact off-chain and interact with the main Ethereum blockchain when required only. An ideal example would be something akin to the Lightning Network on Bitcoin that enables the quick transfers of micro-transactions. State channels can aid diverse applications, including payments, gaming, and dApps with minimal fees and very high speed.
Plasma
The Plasma method is a Layer-2 scaling mechanism whereby blockchains are considered 'children' that then interact with the Ethereum main network. These blockchains will carry out transactions independently and settle some in the Ethereum on an occasional basis. Basically, Plasma is the scaling solution with which we reduce transaction load in the Ethereum by effecting more efficient transaction processing.
Sidechains
Sidechains are independent blockchains interoperable to Ethereum. They will have their ASICs for consensus to be able to transfer assets and data between themselves and the Ethereum. Sidechains help in moving the transactions of the layer 1 Ethereum to their own chains and can be customized for use cases such as gaming or NFTs.
Conclusion
Ethereum Layer-2 blockchains remain among the most critical innovations that solve the scalability and high cost of Ethereum states. By moving the transaction processing off-chain or using more efficient systems like rollups and state channels, Layer-2 solutions provide a scalable alternative while preserving Ethereum's security and decentralization. Following their development, Layer-2 will remain necessary for decentralized applications, DeFi, and other innovations powered by blockchain to cement widespread adoptio