As the popularity of the Ethereum network is scaling at a massive pace, it has been becoming challenging to manage the crowded transactions from happening fast and easily. As the network gets busy, the gas fee also increases correspondingly, affecting users’ experience on Ethereum. To fill this loophole and realize the need for speed, a question was put into the light- “Is it necessary to record all the transactions on the main chain of Ethereum? Why not leverage the ability of the blockchain technology that can allow for processing the transactions off-chain and then subsequently record the data on the main chain of Ethereum in a compressed manner?
Technically speaking, the above is not a question but an intelligent solution in between the process of being translated into a practical reality via the Ethereum Layer 2 initiative, which runs on the top of the main chain of Ethereum. So, Layer 2 getting on the roll will off-load the transactions from the mainnet, process it off-chain, and then record the remaining transactions from the whole back to L1. As a result of interoperability between Layer 1 (mainnet) and Layer 2, the former (mainnet) shall be relieved from the possibility of network congestion and hiked gas prices.
The experts have estimated that the activation of Layer 2 shall enable the processing of 2000 to 4000 transactions per second on L2 itself. There is no doubt in the fact that Ethereum 2.0 and Layer 2 coming together could create a robust economic bandwidth in favor of the Ethereum project.
Different Types of Layer 2 Scaling Solutions
To better understand Layer 2 scaling, it is necessary to understand the different scaling solutions within it. Let’s have a look.
Sidechains are known as independent blockchains that operate separately from the main blockchain. Being a popular solution for Ethereum scaling, Sidechains rely on their own consensus algorithms and security properties, unlike the other Layer 2 solutions. Moreover, Sidechains run seamlessly alongside the Ethereum blockchain (main chain), making them sister chains. They leverage a two-way bridge for establishing a connection with the main chain.
Pros of using Sidechain
The best part of using Sidechains is that despite numerous transactions by the users, the main chain isn’t involved in anything apart from the deposit & the withdrawal. As the expense of transactions is less on a Sidechain than Ethereum itself, it results in scalability.
Cons of using Sidechain
Sidechains are less decentralized as compared to the main network. As the main chain doesn’t settle its consensus algorithm, its operators can maliciously stop users from fund withdrawal.
A popular Layer 2 solution- channels provide a way of facilitating numerous transactions off-chain while submitting merely two transactions to the main layer, i.e., Ethereum. Channels are categorized into two types – state channels and payment channels. For instance, Jini and Johnny want to send transactions regularly. They initiate the process by locking assets in a multi-sig contract. That can be the first entry on the settlement layer (main chain). Every time a transaction occurs between them, they make an off-chain transaction. If Jini wants to unlock her assets, she has to withdraw them from the channel. That would be the second (as well as the last) entry on the settlement layer (main chain).
Pros of using Channels
With its ability to seamlessly handle bidirectional payments between parties, a channel is known for providing high throughput at low costs. Moreover, it allows parties to transact with those having a common open channel.
Cons of using Channels
Channels are limited due to their inability to send assets off-chain to non-participants. Sometimes in the case of complex situations, users might end up locking a huge amount of capital.
Plasma is a Layer 2 solution that uses Merkle trees and smart contracts for its operation. This combination leads to the creation as well as communication of smaller versions of the main Ethereum chain. The smaller versions are known as child chains, whereas the Ethereum chain is the parent chain. As these chains can be easily built over other child chains, it gives rise to a tree-like structure. There occurs frequent interaction between child chains and the main chain when there’s a need to settle disputes or report dishonest nodes.
Pros of using Plasma
In Plasma, a unique ID is assigned to every unit of an asset, making it an ideal solution for payments. It empowers users to make claims and collect their funds from Ethereum even if the consensus mechanism doesn’t produce blocks. Moreover, the capital requirements of Plasma are way too low in comparison to State Channels.
Cons of using Plasma
One of the main concerns with Plasma is its “mass exit” issue. In case multiple users simultaneously exit the Plasma chain, the network gets congested, resulting in flooding of the root chain. The waiting periods for withdrawal in Plasma are usually long (between 7 to 14 days), which leads to a poor overall experience.
As users prefer a solution as brilliant as Ethereum in terms of security but relatively fast and inexpensive too, that’s where Rollups could solve the purpose. Rollups are known for compressing transactions, rolling them up, and adding them to a single block for submitting on the main chain. Thus, it helps to minimize congestion on the Ethereum network while maximizing the pace of the transactions. As the transactions are processed off the main chain, it plays a crucial role in adding scalability. The Rollups are divided into two categories:
The ZK (Zero-Knowledge) Rollups make use of validity proofs. It ensures that every batch involves a SNARK (succinct non-interactive argument of knowledge) for effortlessly grouping transactions. This is cryptographic proof that is used for proving the effectiveness of post-state root after the execution of the batch. Operators need to generate a SNARK for each transition that the main chain can later verify.
Pros of ZK Rollups
In ZK Rollups, the fees per transfer are less, and it’s known to be faster than Plasma. As there’s less data, it results in increased throughput and high scalability.
Cons of ZK Rollups
The biggest issue with ZK Rollups is its initial setup which promotes centralization. Also, future hacking threats might arise due to quantum computing.
Being the close cousins to ZK Rollups, Optimistic Rollups sit alongside the main chain and send transactions directly to Ethereum as call data. By overcoming the limitations of Plasma, Channels, and Sidechains, Optimistic Rollups allow whistleblowers to easily detect and report frauds using the data available on Layer 1. So, it’s not possible for any validator to steal the funds of a user.
Pros of Optimistic Rollups
The biggest advantage of Optimistic Rollups is they are EVM-compatible. It works at a speed of 200-2000 transactions per second which improves the user experience.
Cons of Optimistic Rollups
Its throughput is limited as compared to ZK Rollups.
Top 5 ETH Layer 2 Projects
Since you are now aware of different Layer 2 scaling solutions, it is the right time to understand the top 5 ETH Layer 2 projects.
Polygon is a framework used in constructing and connecting blockchain networks that are based on Ethereum. It provides the developers with all the necessary tools and equipment that can help them to build optimized instances of Ethereum. These instances can merge the top-notch features of blockchain, such as scalability and flexibility, with Ethereum’s security. You might not know, but Polygon is growing exponentially with its Layer 2 solution and is also being used by multiple projects like Aavegotchi, Sushiswap, Quickswap, etc.
The native token of Polygon, i.e., MATIC, is trading at $1.56 at the time of writing this post. The following chart provides an insight into the all-time growth of the native token-
Ethereum 2.0 is yet to be implemented entirely, but Polygon has successfully achieved scalability where every Sidechain on it is capable of processing 2^16 transactions per block.
- Comparatively low transaction fees
- Faster transactions every second
- Polygon is EVM compatible.
- It offers staking rewards.
- Staking contracts are stored with a multi-sig without timelock.
- The competition from other scaling solutions is high.
Loopring is another project (non-custodial trading platform) in the line which is fostering the implementation of the Layer 2 scaling protocol. Built on the top of the Ethereum blockchain, it makes use of innovations like zkRollups and on-chain data access (OCDA). A report recently published by Delphi Digital has identified Loopring as one of the top contenders helping with Layer 2 implementation as it has amassed around $590 million in volume in this year itself.
It also offers zero-knowledge proofs, a blockchain innovation that compiles the transactions together to achieve better efficiency to help anyone develop a scalable non-custodial DEX. Many decentralized exchanges are using Loopring’s L2 scaling protocol to provide better services to their users.
The native token of Loopring, i.e., LRC, is trading at $0.353241 when writing this post. The following chart provides an insight into the all-time growth of the native token-
- Loopring provides innovations like zkRollups and on-chain data access (OCDA)
- Its latest iteration, i.e., Loopring 3.0, has pushed up the performance without any tradeoff in security.
- The founding members of Loopring share an impressive experience working with tech giants like Google and PayPal.
- Loopring is operating in a circle that is filled with tough competition.
- The native token has experienced a downfall in price.
xDai chain is a sidechain based on Ethereum and set on an initiative to help users with fast and inexpensive transactions. The project was founded back in the year 2018 and relies upon a limited validator configured for security. It makes use of POSDAO, a version of delegated Proof of Stake that helps in providing reduced fees and enables faster processing of transactions.
The xDai is growing rapidly as it has partnered with diverse platforms to help them with the power of the Layer 2 scaling protocol. Some of the platforms that have integrated the xDai Sidechain include Chainlink, HOPR, SushiSwap, Ankr, Ramp Network, CardStack, Unifty, and many more.
The native token of xDai, i.e., STAKE, is trading at $9.12 when writing this post. The following chart provides an insight into the all-time growth of the native token-
- The multi-chain staking token (STAKE) from xDai can be used by additional sidechains, making xDai STAKE the first multi-chain enabled staking token.
- xDai is production-ready, and multiple Dapps are already running on it.
- Trading activities are gas-free because of meta transactions.
- Experienced traders can engage with perpetual protocol’s architecture on xDai without relying upon proxy and layer.
- It is designed and developed to be user-friendly.
- To get started, the traders would need to deposit the funds, which is contrary to the idea of trading directly. This contributes to the complexity a little bit.
- The compatibility is lost by transitioning the vAMM to xDai.
- Its bridge to Ethereum is operated by a few chosen parties that are not completely decentralized.
Arbitrium is a product of Off-chain Labs that has established interoperability with Ethereum to help Solidity developers easily cross-compile the smart contracts they have made. Arbitrium platform is made of three core components, i.e., Compiler, Validators, and EthBridge. If you don’t know what a compiler is, then you should know that it compiles a set of smart contracts written in Solidity into one executable file that can be operated on the top of the Arbitrum Virtual Machine (AVM).
On the other side, EthBridge is a dApp that has been deployed on Ethereum and works as a bridge to connect Arbitrium and Ethereum networks. As far as the Validators go, they are responsible for working completely off-chain while maintaining a track of AVM’s state. One should also not forget that the project has not launched its native token yet and has no plan of releasing it anytime soon.
- Arbitrium supports a sidechain combination of transactions known as rollup technology.
- Arbitrium has partnered with multiple incorporations such as Graph Protocol, OKEx, ChainLink, and many more.
- Arbitrium can not only operate unmodified EVM contracts but unmodified Ethereum transactions as well.
- Arbitrium has been developed to reduce the L1 gas footprint while minimizing the transaction costs simultaneously.
- Arbitrium is highly complex, especially for individuals who are new to the cryptocurrency ecosystem.
- Most of the competitors of Arbitrium have released their native token, but the same is yet to happen with this project.
ZKSwap is an automated market maker (AMM) DEX protocol and offers a dynamic Layer 2 scaling solution based on zkRollup technology for enhanced performance DeFi applications and better user experience of DEX. It is developed by L2Lab and recently granted a $1.7 million investment from SNZ Capital.
Today, ZKSwap offers 100x more capacity than Uniswap (a leading DEX) and offers the transactions to be executed at 1/100th of the gas fee leviable on Ethereum Layer 1 (mainnet). The high throughput and reduced transaction fee has been achieved because of the ZKSpeed, which can –
- Merge various zero-knowledge proofs
- Process PLONK algorithm parallelly.
- Categories off-chain data
- To achieve higher efficiency, ZKSwap also makes use of GPU-compatible algorithms.
The native token of ZKSwap, i.e., ZKS, is trading at $0.742683 at the time of writing this post. The following chart provides an insight into the all-time growth of the native token-
- ZKSwap allows you to transfer and exchange the ETH and ERC-20 token on L-1 (mainnet) with 100 TPS.
- ZKSwap supports 30 tokens now but is planning to extend to 100 as per the community voting decision.
- ZKSwap achieves higher efficiency by making use of GPU-compatible algorithms.
- ZKSwap provides liquidity mining and staking incentive programs for additional income streams.
- The users are required to set up a separate L2 wallet.
- Dealing with an event of L1 to L2 transaction or vice-versa is comparatively slower than other projects.
With the continuous rise in the scalability concerns related to Ethereum, L2 projects can play a crucial role in solving such different issues. While the projects mentioned earlier will dramatically change the existing scenario of the blockchain system, it will take some time for them to launch their solutions ultimately.
- Different Types of Layer 2 Scaling Solutions
- Top 5 ETH Layer 2 Projects