Author: Leandro Pereira
Translation: Huohuo, Plain Language Blockchain
Ethereum, the second largest cryptocurrency by market capitalization, is undergoing a major upgrade to its network by introducing one million new Layer 2 scaling solutions.
Layer 2 solutions aim to alleviate the network congestion and high transaction fees that have plagued Ethereum in recent years. This upgrade, known as Ethereum Improvement Proposal – EIP 1559, will also introduce a new fee structure that will burn a portion of transaction fees, thereby increasing the value of Ether over time.
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The new fee structure will greatly benefit Ether holders. Part of the transaction fees will be destroyed instead of just being rewarded to miners, which is expected to reduce the circulating supply of Ether. Over time, this is expected to drive up its value. This new fee structure aims to make transaction fees more stable and predictable, ultimately improving user experience and enabling a wider range of users to use Ethereum.
1. But why do we need so many L2 solutions?
Blockchain is built with layers, each with a specific purpose. The base layer, called Layer 1, is the foundation of the blockchain network. This is where transactions are processed and recorded on the distributed ledger.
While secure and decentralized, the Layer 1 blockchain has limitations in scalability and transaction speed due to the consensus mechanism used to validate transactions. This is where Layer 2 solutions come in.
Layer 2 refers to auxiliary frameworks or protocols built on top of the base blockchain to improve transaction speed and scalability. Layer 2 solutions do not directly process transactions on Layer 1, but instead handle off-chain transactions before bundling and settling them on the main chain. This helps reduce congestion on the base layer.
Some examples of L2 solutions include state channels, sidechains, and rollups.
- State channels handle off-chain transactions between two parties by opening payment channels.
- Sidechains are independent blockchains that run in parallel and are linked to the main chain.
- Rollups batch process off-chain transactions and generate cryptographic proofs to validate transactions on L1.
- Blockchain platforms like Cosmos, Polkadot, and Cardano refer to themselves as Layer 0 (L0) as they aim to serve as the foundation for building interconnected blockchains in the network.
These Layer 0 blockchains are specifically optimized to allow different Layer 1 chains and Layer 2 solutions to interact and communicate through the shared security and interoperability of the underlying Layer 0.
They also enable developers to create custom L1s for specific use cases, leveraging the shared security and interoperability of the underlying Layer 0. By coordinating cross-chain messaging and transactions, the L0 network can achieve greater overall transaction throughput across the blockchain ecosystem.
L0 allows security to be obtained from the entire network rather than each chain having to protect itself in isolation. Hence, “shared security” can provide stronger protection.
Therefore, L0 is not only a single chain, but also the foundation of the blockchain internet.
2. Returning to the advantages of L2…
Some of the main advantages of L2 solutions include:
Increased throughput and transaction speed compared to direct transactions on L1. This is key to dApp scalability.
Lower transaction fees for users compared to paying Gas fees on L1.
Enhanced scalability due to offloading transaction processing from the main chain.
Why is there an increase in multiple L2 blockchains instead of a single standardized approach?
What I want to say is that different use cases – state channels, Plasma, rollups, and other L2 technologies are optimized for certain types of transactions, assets, or blockchain interactions. No one solution can achieve the best results in all cases.
For example, state channels are best suited for quick micro payments, e-commerce transactions, and gaming use cases. Some platforms include Raiden Network for Ethereum and Counterfactual for NFT transfers.
Plasma – optimized for more complex smart contracts and applications involving liquidity pools. An example is Polygon Plasma, an Ethereum network scaling solution designed to increase speed and reduce transaction costs. It works by creating multiple sidechains, each capable of processing transactions independently of the main Ethereum blockchain.
Use cases can also include Optimistic Rollups (OR) and ZK-Rollups (ZKR).
Due to the efficiency of bundled transfers, OR is ideal for decentralized trading platforms and applications focused on NFTs. For example, Synthetix and Loopring utilize Optimistic Rollups. ZKR is well-suited for privacy-focused transactions such as anonymous payments and transfers. Ethereum’s ZKSync 2.0 uses ZK-Rollups for low-cost, private transactions.
Sidechains can build faster and more customized blockchains for enterprise use cases. For example, RSK sidechain achieves Bitcoin-like functionality through smart contracts, while Validium is suitable for confidential DeFi applications and blockchain interoperability. The privacy protocol Railgun uses Validium for anonymity.
As you can see, each L2 technology serves different purposes. By leveraging methods that are suitable for their target use cases, applications can optimize transaction throughput, costs, and user experience.
By allowing multiple L2 solutions to coexist, there is more room for experimentation, evolution, and customization based on application needs, avoiding single points of failure where one dominant L2 solution could severely impact the entire ecosystem due to technical issues or hacker attacks. Diversification of solutions can mitigate risks.
Applications may need to combine multiple L2 solutions for different parts of their backend or transaction flows. Interoperability enables this composability.
Different development teams are simultaneously creating Layer 2 designs without a centralized institution enforcing standards. This brings more diversity.
Competition and funding dynamics – each L2 is competing for adoption by dApp developers. This drives innovation as solutions try to stand out in the market.
Still in the early stages – blockchain itself is still in its maturing stage. Over time, as platforms, technologies, and demands evolve, we are likely to see more integration and standards emerging around Layer 2.
The surge in Layer 2 solutions provides flexibility, reduces systemic risks, and supports customization for this rapidly evolving industry. However, in the long run, increasing coordination and interoperability protocols can bring more structure to this emerging field.
3. Challenges Exist as Well
When implementing L2 blockchains, we must consider some challenges:
- Increased complexity in design and security considerations.
- Potential security trade-offs and centralization risks depending on L2 designs.
- Fragmentation across multiple L2 solutions instead of a unified ecosystem.
- Technological barriers for users to adopt new processes for handling transactions.
- Layer 2 solutions are crucial for making blockchain networks scalable to accommodate larger transaction volumes and users. However, integrating Layer 2 in a secure and decentralized manner needs to be considered. In the long run, the right Layer 2 solution can unlock important functionalities and use cases for blockchain.
4. Can We Say L1 is Consensus and L2 is Transactions?
This may be a good way to think about it, but let me provide some additional details:
Layer 1 is where the core consensus mechanism operates to verify transactions and add new blocks to the blockchain. It establishes trust and security for the network. However, Layer 1 also deals with transactions embedded in the blockchain. The issue is that conducting transactions directly on Layer 1 can be slow and expensive due to restrictions like block size and the need to pay high gas fees.
This is where Layer 2 comes in – it first processes transactions off the main blockchain, enabling faster and cheaper transactions.
Thus, L2 solutions essentially batch many transactions together and settle them with the security of Layer 1, while avoiding its inherent limitations in terms of speed and cost. In this sense, both layers handle transactions, but L2 is optimized for transaction throughput, user experience, and lower costs.
As an analogy, Layer 1 is like the Federal Reserve’s bank settlement system, while Layer 2 is similar to the Visa/Mastercard payment network that interacts with consumers and merchants.
TLDR: Layer 1 handles consensus, security, and some basic-level transactions, while Layer 2 specifically addresses transaction scalability. But they work together to provide the overall utility of blockchain.
5. So, do we need more L2?
Very simply, my answer is no. In the long run, we may not need so many L2 solutions to proliferate in the blockchain field. While diversity and flexibility may be beneficial in the early stages, too many isolated or scattered Layer 2 protocols may ultimately hinder mainstream adoption.
In an ideal scenario, as the industry matures and leading practices emerge, there will be more coordination and standardization. This could result in the emergence of mainstream cross-compatible Layer 2 frameworks tailored for specific functionalities such as payments, decentralized trading platforms, NFT applications, etc.
Interoperability standards and modular design will enable these solutions to seamlessly work together. This can provide a good balance between customization, risk reduction, and a unified user experience.
All Layer 2 experiments may be necessary initially, but they are not necessarily the optimal solution in the long run. Some standardization and integration can help unlock the true potential of Layer 2 to expand blockchain technology with flexibility and coherence across applications.