As the adoption of blockchain technology skyrockets, public networks are witnessing an influx of users like never before. Ethereum, renowned for its security, stands out as the most popular of these networks. Yet, this security comes with a trade-off – scalability and transaction costs. Although the anticipated migration to Proof-of-Stake promises to mitigate these issues, Ethereum’s scalability challenges and high fees persist.
However, a solution that offers better scalability, enhanced user experience, and lower fees is already here, and it’s known as Layer-2 networks. Layer-2 networks, or L2 networks, are built on top of existing Layer-1 networks like Ethereum and Bitcoin, leveraging their security while significantly enhancing their scalability and efficiency. These networks strike an impressive balance between maintaining security and decentralization and offering improved scalability and reduced fees.
Starting from the very beginning of the year 2023, the L2 solutions market has been growing sharply. As of May 2023, the TVL of the Layer 2 solutions market is estimated at $8,49 billion. Summing up the aforementioned, one central question arises: what is so sophisticated about L2 blockchain solutions? Let’s take a closer look at it.
Why Are Scaling Solutions Necessary?
Blockchain technology, despite its transformative potential, grapples with a few significant challenges. Scalability, transaction finality, and limited transaction throughput are the most prominent among these. Moreover, with growing network congestion, users often face enormous gas fees, which can be a deterrent for many. Security risks, coupled with the need for increased privacy, also persist as pertinent concerns in the realm of blockchain.
In this context, Layer 2 scaling solutions emerge as a beacon of hope. They are designed to tackle these issues head-on, offering an efficient way to enhance blockchain’s potential. For smart contract developers, these solutions can be particularly beneficial. By utilizing Layer-2 scaling solutions, developers can significantly improve scalability and throughput without making substantial changes to the smart contract code.
This ability to scale and increase transaction capacity while maintaining the integrity of the underlying smart contract is an instrumental advantage. Layer-2 solutions, thus, serve as a critical tool for overcoming the inherent limitations of blockchain technology, paving the way for its wider adoption and more innovative applications.
At the same time, it’s quite important to maintain the highest level of security for blockchain projects, regardless of the blockchain you build on. Blaize has published an article on how to create and deploy a secure smart contract. Feel free to discover the topic on our website.
What Are Layer 2 Scaling Solutions and How Do They Work?
Layer-2 scaling solutions are a form of blockchain technology designed to sit atop existing Layer-1 networks, such as Ethereum. Their primary goal is to enhance scalability and reduce transaction costs associated with the underlying network. They achieve this by processing transactions off-chain and subsequently storing these transactions in batches on the Ethereum network.
This approach brings significant benefits, the most noteworthy of which is near-instant transaction finality. Unlike on Ethereum where users often have to wait for extended periods for transaction acceptance or rejection, Layer-2 solutions offer a near-instantaneous response. This means that transactions on Layer-2 networks are processed and confirmed almost instantly, resulting in a vastly improved user experience.
Despite processing transactions off-chain, Layer-2 solutions ensure all data associated with transactions and blocks are posted on-chain on Ethereum. By doing so, these solutions inherit the robust security framework of the Layer-1 network. Validators in Layer-2 networks play a critical role in this context. Their main task is to maintain the validity of the blockchain state and ensure that invalid transactions are not accepted. This model thus enhances the scalability and speed of transactions while preserving the underlying network’s security and decentralization.
Mentioning L2 solutions, many people tend to imagine an Ethereum-like structure with multiple chain branches. However, the reality is that L2 emerges around various L1 chains.
For instance, platforms such as Polkadot and Cosmos were specifically designed to enable infinite scalability by incorporating L2 solutions. Avalanche, on the other hand, aims to provide a dedicated subnet for each dApp. Even Bitcoin has its own L2 called Stacks. It is interesting to note, that Solana is currently engaged in discussions regarding its plans for implementing L2 solutions. Additionally, dYdX is an excellent example of an L2 solution tailored for a single dApp, with StarkWare creating its own sidechain exclusively for that protocol.
Layer 1 vs. Layer 2: What are The Differences?
Layer-1, including networks like Ethereum, represents the base layer of blockchain technology. It possesses its own chain of blocks, rules for validating transactions, and mechanisms to add blocks to the chain, as well as security measures. On the other hand, Layer-2 is the next tier, constructed atop the base blockchain. It aims to boost the scalability, speed, and efficiency of the base layer while also utilizing its security and consensus mechanisms. Let’s delve into the key distinctions between these two layers:
Transaction Processing
Layer-1 networks process transactions on-chain, meaning every transaction is recorded directly onto the blockchain. This approach can restrict the number of transactions that can be processed simultaneously, leading to slower transaction speeds and higher fees during periods of high network congestion. The L2 solutions exhibit distinct mechanics. These mechanisms range from entirely off-chain processes to using dedicated subchains within the L2 system. This off-chain processing allows for faster, more efficient transaction processing, as transactions can be batched and processed in parallel.
Security
Layer-1 networks are generally more secure than Layer-2 networks, as each transaction is directly recorded on the blockchain and validated by the network’s nodes. Layer-2 networks, however, leverage the security of the Layer-1 network. Consequently, compromising the Layer-1 network’s security could also affect the Layer-2 network.
Consensus
Layer-1 networks employ a consensus mechanism, such as proof-of-work or proof-of-stake, to validate transactions and add them to the blockchain. In contrast, Layer-2 networks utilize different consensus mechanisms, like state channels or sidechains, to validate transactions off-chain. Furthermore, Layer-2 networks inherit the security aspects of the Layer-1 network’s consensus mechanism.
Decentralization
Layer-1 networks are generally more decentralized than Layer-2 networks, as every node on the network participates in the consensus mechanism and validates transactions. Layer-2 networks, however, may be more centralized as they rely on a smaller set of nodes to validate transactions.
Functionality
The functionality of Layer-1 and Layer-2 networks also varies significantly. Layer-1 networks, such as Ethereum, offer a robust platform for developing and executing smart contracts, providing a foundation for decentralized applications (DApps). Layer-2 networks, on the other hand, are designed to augment the functionality of Layer-1 networks, offering improved transaction throughput, reduced fees, and potentially expanded capabilities.
Advantages of Layer-2 Solutions
Layer-2 solutions bring a plethora of advantages to the table, overcoming the inherent limitations of Layer-1 blockchains. Let’s explore these benefits in detail:
Lower Fees
One of the key advantages of Layer-2 solutions is the significantly reduced transaction fees. By batching transactions off-chain and posting them on-chain in aggregate, Layer-2 solutions mitigate the high fees associated with executing transactions on Layer-1 networks like Ethereum. This feature makes Layer-2 networks more economically viable, particularly for applications involving a high volume of transactions.
Maintain Security
Layer-2 solutions inherit the security of their underlying Layer-1 network. This means that despite processing transactions off-chain, Layer-2 solutions maintain the robust security features of the main blockchain network. Transactions and block data are posted on-chain, ensuring the security and integrity of the network.
Scalability
Layer-2 solutions greatly enhance the scalability of the blockchain network. By processing transactions off-chain, these solutions significantly increase the network’s transaction throughput. This allows for faster and more efficient transaction processing, as transactions can be batched and processed in parallel.
Instant Transaction Finality
With Layer-2 solutions, users no longer need to wait for extended periods for transaction acceptance or rejection, as seen with Layer-1 networks like Ethereum. Layer-2 solutions offer a near-instantaneous response, meaning transactions on these networks are processed and confirmed almost instantly. This feature significantly enhances user experience.
Types of Layer-2 Scaling Solutions
Layer-2 scaling solutions come in different shapes and sizes, each addressing the scalability problem uniquely. Let’s delve into the most common types of Layer-2 solutions:
State Channels
State channels are one of the earliest forms of Layer-2 scaling solutions. They allow participants to transact with each other directly off-chain, with the blockchain serving as a judge in case of disputes. The participants open an off-chain channel by creating a multi-signature transaction on the blockchain, and they can transact with each other an unlimited number of times off-chain. Once they’re done transacting, they can close the channel and settle the net result on the blockchain. This solution significantly reduces transaction costs and increases speed but is best suited for situations where participants need to transact many times with each other.
Zero-Knowledge Rollups
Zero-knowledge rollups (zk-Rollups) are a type of Layer-2 solution that uses zero-knowledge proofs to bundle multiple transactions into a single one. This solution provides security by storing transaction data on-chain while computation is performed off-chain. zk-Rollups offer a significant increase in transaction throughput and a reduction in gas fees. Moreover, they provide the same level of security as the underlying Layer-1 network.
Optimistic Rollups
Optimistic Rollups are another form of Layer-2 scaling solution that leverages optimistic contracts on the Ethereum network. These rollups assume that all transactions are truthful and only require proof in case of disputes. By reducing the amount of computation required on-chain, Optimistic Rollups increase scalability and lower transaction fees.
Sidechains, Parachains
Sidechains are independent blockchains that run parallel to the main chain. They have their own consensus mechanisms and block validation processes, allowing for faster and cheaper transactions. Sidechains are interoperable with the main chain; assets can be transferred between the two via bridging mechanisms. However, the security of a sidechain depends on its own network and consensus, making it potentially less secure than the main chain.
The most widespread examples are:
- Polkadot parachains are independent and sovereign blockchains that operate in parallel to the main Polkadot network. They are designed to enhance scalability and interoperability within the Polkadot ecosystem. Parachains are connected to the Polkadot Relay Chain, which serves as the central hub for consensus and security.
- Cosmos SDK Sub-Chains: in the context of the Cosmos blockchain ecosystem, sub-chains refer to independent blockchains created using the Cosmos Software Development Kit (SDK). These sub-chains, also known as zones, are sovereign and can have their own consensus mechanisms, governance models, and token economics. Sub-chains in the Cosmos ecosystem provide scalability by allowing developers to build specialized blockchains that cater to specific use cases while benefiting from the overall security and interoperability offered by the Cosmos network.
- Avalanche subnets refer to a feature implemented within the Avalanche blockchain platform. Subnets are dedicated segments or partitions within the Avalanche network that allow for parallel processing and handling of transactions. Each subnet can be assigned to a specific decentralized application (dApp), enabling efficient scalability by processing transactions in a highly parallelized manner.
Plasma
Plasma is a framework for building scalable applications where only a small portion of transactions are processed on the Ethereum mainnet. The rest are handled off-chain on child chains, each potentially having its own consensus mechanism. Plasma chains allow for high transaction throughput at low cost but are generally more complex to implement and require more active user involvement for securing assets.
What are the Best Layer 2 Solutions?
While many Layer-2 solutions are available, some stand out due to their effectiveness and wide adoption. These include Polygon, Optimism, Arbitrum, Starknet, zkEVM, Metis, and Gnosis Chain. Each of these solutions provides unique features that cater to different needs but all share a common goal: enhancing the scalability and efficiency of the underlying Layer-1 blockchains.
For instance, Polygon offers a multi-chain system compatible with Ethereum, enabling fast and low-cost transactions. Similarly, Optimism provides an Ethereum-compatible Layer-2 solution, utilizing Optimistic Rollups to increase transaction speed and reduce costs.
Speaking about Bitcoin, a good example of L2 solution is Stacks. It provides a framework for developers to build smart contracts and dApps)on top of the secure and established Bitcoin network. By leveraging Stacks as an L2 solution, developers can enhance the scalability and throughput of their applications while maintaining the security and finality of transactions on the Bitcoin blockchain.
In order to evaluate the best Layer-2 solutions, it’s important to compare different platforms based on a number of parameters. Let’s take a look at how Polygon, Optimism, Arbitrum, Starknet, zkEVM, and Gnosis Chain stack up against each other:
| Parameter / Platform | Polygon | Optimism | Arbitrum | Starknet | Metis | zkEVM | Gnosis Chain |
| Solution Type | PoS sidechain | Optimistic Rollup | Optimistic Rollup | zk-Rollup | Optimistic Rollup | zk-Rollup | zk-Rollup |
| Transaction Speed | High | Moderate | Moderate | High | Moderate | High | Moderate |
| Security | Relies on own validators | Inherits Ethereum’s security | Inherits Ethereum’s security | Inherits Ethereum’s security | Inherits Ethereum’s security | Inherits Ethereum’s security | Inherits Ethereum’s security |
| Decentralization | Moderate | High | High | High | High | High | High |
| Ease of Use | High | High | High | Moderate | High | Moderate | Moderate |
| Fees | Low | Lower than Ethereum | Lower than Ethereum | Low | Lower than Ethereum | Low | Lower than Ethereum |
| Mainnet Launch | Live | Live | Live | Not yet live (as of 2023) | Live | Not yet live (as of 2023) | Live |
Each of these Layer-2 solutions has its own strengths and areas of focus, and the best solution for a particular use case depends on the specific requirements of that use case. For example, Polygon might be the best choice for a project that values speed and low fees, while Optimism or Arbitrum could be the preferred option for a project that places a high value on security and the benefits of optimistic rollups.
Future of L2 Blockchains
The future of Layer-2 blockchain solutions is intertwined with the development and advancement of Layer-1 networks, such as Ethereum or Bitcoin. As Layer-1 blockchains evolve and improve in scalability, Layer-2 solutions will also reap the benefits, inheriting all core features and improvements of their underlying Layer-1 blockchains.
Demand for blockchain technology is increasing rapidly, as is the total value locked (TVL) in Layer-2 solutions. As this trend continues, Layer-2 networks will become the de facto choice for users seeking to benefit from faster, cheaper transactions. Every day, new decentralized finance (DeFi) projects are being launched on Layer-2 blockchains, underlining their growing importance and relevance in the blockchain space.
Looking ahead, the future of Layer-2 is not just about scalability and cost reduction. Privacy and security of users’ data will also become central themes. Zero-knowledge networks, such as Starknet and zkEVM, are gaining popularity due to their ability to protect user data while still providing the benefits of blockchain transparency.
In these networks, transactions are verified without revealing any details about the transaction itself, thereby enhancing user privacy. This privacy feature is becoming more and more important as the issue of data protection continues to gain prominence in the digital world.
In conclusion, Layer-2 solutions will continue to evolve and adapt, driven by the increasing demand for scalable, secure, and privacy-preserving blockchain technology. As Layer-1 networks like Ethereum continue to grow and mature, so too will Layer-2 solutions, bringing us ever closer to the vision of a truly scalable, secure, and user-friendly blockchain ecosystem.
Summary
In the rapidly evolving landscape of Layer 2 solutions, having a reliable and experienced partner is crucial for navigating the technical challenges and making the most of the opportunities. Blaize is a leading blockchain development and smart contract security audit company based in Ukraine, ready to guide you through the intricate world of Layer-2 solutions.
With a wealth of experience in the field, Blaize has the expertise to help you launch your own Layer-2 blockchain, offering bespoke solutions tailored to your specific needs. We understand that every project is unique, and our dedicated team of experts is ready to collaborate with you to build a Layer-2 solution that fits your vision and requirements.
Moreover, Blaize can support you in launching any type of project on Layer-2. Whether it’s a decentralized application (Dapp), a DeFi platform, or an NFT marketplace, we have the technical knowledge and experience to help you succeed in your endeavors.
Interoperability is another crucial aspect of Layer-2 solutions. Blaize can assist in building bridges between Layer-1 and Layer-2 networks, ensuring seamless interaction between different blockchains. This is essential for creating a cohesive and efficient blockchain ecosystem.
Last but not least, security is at the heart of all we do. Blaize can help you increase the security of your blockchain or Dapp through comprehensive security audits. Our team of security experts will meticulously inspect your blockchain infrastructure and smart contracts, identifying potential vulnerabilities and providing recommendations to enhance security.
At Blaize, we’re passionate about helping our clients leverage the power of blockchain technology, and we’re ready to assist you in your journey toward adopting and optimizing Layer 2 solutions. Let’s build the future of blockchain together.
For more information about our work, visit our website and explore our past projects and case studies.
Frequently Asked Questions
What is Layer-2 scaling solution, and how does it help blockchains?
Layer-2 scaling solutions are a type of blockchain technology designed to improve transaction speed and reduce costs. They operate on top of Layer-1 networks like Ethereum, processing transactions off-chain to achieve better scalability and lower transaction fees. They are particularly beneficial for smart contract developers as they offer improved scalability and throughput without necessitating significant changes to the smart contract’s code.
What is a Layer-2 blockchain network, and how does it differ from Layer-1 in terms of scalability and security?
A Layer-2 blockchain network is a secondary framework or protocol built on top of an existing blockchain (Layer-1). The primary difference between Layer-1 and Layer-2 lies in transaction processing, security, consensus mechanisms, and decentralization levels. Layer-2 solutions offer higher scalability and instant transaction finality, but they rely on the security of the Layer-1 blockchain.
What are some examples of Layer-2 scaling solutions, and how do they compare in speed and cost?
Examples of Layer-2 scaling solutions include State Channels, Zero-Knowledge Rollups, Optimistic Rollups, Sidechains, and Plasma. Each type has its unique advantages. For instance, Metis, Polygon, Optimism, Arbitrum, Starknet, zkEVM, and Gnosis Chain are all Layer-2 solutions, each differing in speed, cost, and security.
What are the benefits of Layer 2 solutions, and how do they enhance Ethereum Layer 2 scaling solutions?
The key benefits of Layer-2 solutions include lower fees, higher scalability, instant transaction finality, and the ability to deploy smart contracts without major changes. For Ethereum, Layer-2 scaling solutions help handle more transactions per second, significantly reducing transaction costs and congestion on the Ethereum network.