This is enormously difficult and poses significant technological challenges. Rollups are layer 2 scaling solutions that perform transaction operations off the main Ethereum blockchain, but still post the transaction data onto layer 1. Considering the transaction data is on layer 1, rollups are secured by the same layer 1 security measures. Payment channels where thousands of transactions can take place and later be reported to the Bitcoin blockchain. Ethereum layer 2 solutions include namely state channels, Plasma, optimistic rollups, and Zk rollups. Several protocols have implemented these solutions to scale the Ethereum network.

Expanded use cases like gaming and NFTs are not effective with the current transaction speed and cost, Layer 2s help tackle these problems. Scalability in blockchain refers to the ability of a system to handle the continued increase in usage without giving up on the functionality. Our view is that Ethereum increasingly moves to being a settlement layer first and foremost, with the bulk of the data-intensive activity moving to L2 chains. If your transactions require code execution, it may be possible to use an approach like Baseline, wherein transactions between entities are conducted privately, and only ZK proofs of correctness are submitted to either L1 or L2. It is also possible to use an approach like Baseline, wherein transactions between entities are conducted privately, and only ZK proofs of correctness are submitted to either L1 or L2.

Layer-1 vs Layer-2 Blockchains

Lightning Network is the most popular example of an L2 payment channel for the Bitcoin blockchain. Layer 0 protocols are designed to give developers greater flexibility in how they design dapps by allowing them to also control the underlying infrastructure of their dapps, via their own blockchain. We create tools, assets, and ecosystems to seamlessly merge real-life and digital worlds within your Metaverse projects.It could be a multi-layer virtual space or a unique artwork item. However, the introduction of the Merge (i.e. its transition to PoS) is said to GMT ethereum layer 2 scaling solutions boost the blockchain’s performance, making some people think that the future of L2 solutions is up in the air since they are no longer needed. “Currently most production-grade ZK rollups are application specific, which means they have been designed for a specific use case like gaming, NFTs or DeFi. Deutsche Digital Assets is the trusted one-stop-shop for investors seeking exposure to crypto assets.

Sidechains are good for scalability because they are engineered with a different set of qualities that enables high throughput. For instance, the Polygon sidechain uses a proof of stake consensus algorithm for faster transactions. These off-chain protocols can aggregate multiple transactions into a single transaction and add to the main chain. This reduces pressure on the network and improves the potential of dApps to scale as usage grows. Users can withdraw funds immediately because validity proofs provide incontrovertible evidence of the authenticity of off-chain transactions. Zero-knowledge rollups bundle thousands of transactions off the main Ethereum chain and create cryptographic proof which is known simply as SNARK (succinct non-interactive argument of knowledge).

What are some downsides to scaling solutions?

Ethereum also experiences the concerns of unreasonable gas prices and slower transactions on the layer 1 blockchain. As of now, Ethereum has two distinct options in the form of sharding and layer 2 solutions for addressing the problems of scalability, high transaction fees, and delays in transaction settlement. Most Layer 1 blockchains are slow in terms of the number of transactions per second they can process. This is due the decentralized nature of blockchains — each transaction requires a new block to be created and then validated across the entire distributed database network. When data is centralized and is held by one entity, this process is a lot faster. So for example, Visa payments network, which is centralized and relies on their own database, can process 1,700 TPS because it doesn’t need to verify the transactions with other participants in the ecosystem.

Therefore the need for scaling solutions has increased in demand as well. Layer 2 is a collective term for solutions designed to help scale your application by handling transactions off the Ethereum Mainnet while taking advantage of the robust decentralized security model of Mainnet. Transaction speed suffers when the network is busy, making the user experience poor for certain types of dapps. And as the network gets busier, gas prices increase as transaction senders aim to outbid each other. The solution to this network congestion problem is simple—layer 2 networks attaching to Ethereum’s core, layer 1 chain.

Application specific layer 2s are projects that specialize in optimizing for a specific application space, bringing improved performance. Arbitrum is an Optimistic Rollup that aims to feel exactly like interacting with Ethereum, but with transactions costing a fraction of what they do on L1. A specific layer 2 instance may be open and shared by many applications, or may be deployed by one project and dedicated to supporting only their application. Conceptually we first categorize scaling as either on-chain scaling or off-chain scaling. Likewise, xDai transactions take under 5 seconds to complete, compared to minutes on Ethereum. Thanks to this performance, xDai partnered with various platforms, including SushiSwap, Unifty, Chainlink, CardStack, HOPR, Ankr, and Ramp Network.

https://www.beaxy.com/ 2 scaling solutions increase throughput without tampering with any of the original decentralization or security characteristics that are integral to the original blockchain. Blockchain technology offers tremendous benefits – decentralization, trustless interactions, high levels of security and immutable record-keeping. It has enabled a booming cryptocurrency ecosystem to develop and has underpinned consistent technological innovation.

Sidechains:

The main goal of scalability is to increase transaction speed , and transaction throughput , without sacrificing decentralization or security . On the layer 1 Ethereum blockchain, high demand leads to slower transactions and nonviable gas prices. Increasing the network capacity in terms of speed and throughput is fundamental to the meaningful and mass adoption of Ethereum. A Layer 2 is a scaling solution that sits on top of a layer 1 blockchain like Bitcoin or Ethereum.

• Sidechains will normally have fewer nodes than the L1 mainchain, which allows them to achieve consensus faster.
• A specific layer 2 instance may be open and shared by many applications, or may be deployed by one project and dedicated to supporting only their application.
• Loopring is an Ethereum layer 2 solution that utilizes zk-rollups to power decentralized trading and payment processing with high speed for extremely low fees.
• The ZK approach also results in greater data throughput because its type of rollup significantly reduces transaction volume.
• However, viewing Ethereum’s limitations versus centralized networks is important for understanding how scalable Ethereum needs to be for widespread use.
• Sidechains are unique blockchains that are attached to a “main-chain” using a two-way peg.

It features all the significant tools and components required by developers for creation of optimized Ethereum instances. The instances provide the complete package of standalone blockchain traits such as sovereignty and scalability. In addition, they also offer considerable improvements in flexibility for developers along with the security of Ethereum.

Layer 2 solutions were introduced because most Layer 1 cannot handle the high transaction volumes and become congested. Layer 2s create a way to increase transaction speeds, reduce fees and scale, while benefiting from the security of the main chain. Hence, L2s are important when it comes to mass adoption of blockchain technology, so it is cheaper and easier to transact and build apps, be it decentralized finance or gaming . However, Ethereum’s impressive adoption rate comes with scalability issues.

Ethereum is one of the most popular blockchain networks in use presently, and there are no doubts regarding this fact. The total number of decentralized applications on Ethereum as of May 2020 was 2855, with many more applications under development. In addition, the potential of Ethereum for boosting the DeFi space also indicates possibilities for a massive upsurge in the number of applications and users on the Ethereum network. The Layer-2 solutions introduced above are the industry’s initial attempt at solving scalability issues. In late 2022, Ethereum is slated to launch ‘The Merge’, encapsulating its next step in overcoming scalability issues. However, it is still unclear as to how this will change the landscape of blockchains and the impact it will have on Layer-2 scaling solutions.

These are similar to the concept of payment channels in Bitcoin’s Lighting Network, but instead of only being limited to payments, it supports general ‘state updates’. They simply minimise their use of ‘on-chain’ operations, reserved for only the necessary operations. They work by delegating the network processing “off-chain” to their own chain, processing it there, before settling the final balances on the base layer mainnet. Validiums are similar to ZK-rollups, performing computation off the main Ethereum layer, but major difference is that validiums use “off-chain data availability” instead of posting compressed data on the main chain like ZK-rollups. You can then transact freely on the sidechain, taking advantage of its superior transaction processing capabilities.

• They are known as Layer 1 solutions as they modify the core Ethereum protocol, and they rely on it for security.
• It also improves scalability because miners have fewer transactions to process and can work faster.
• Important data relevant to the smart contracts are requested less frequently than layer 1 blockchains.
• However, they have more trust assumptions than other scaling solutions, like ZK-rollups.
• One example of a sidechain is the Liquid Network, attached to Bitcoin’s main chain.

StarkNet is a permissionless decentralized ZK-rollup layer 2 solution for the Ethereum blockchain. Developers are now able to deploy their smart contracts permissionlessly on StarkNet’s testnet. The main advantage is the ability for dApps to achieve unlimited scale, while still benefitting from Ethereum’s composability and security.

When it comes to gaming and trading in-game ethereum layer 2 scaling solutions (i.e. NFTs), there tend to be lots of transactions at small values. If these transactions were to be processed on Layer 1 you would likely pay more in gas fees than you would for the asset itself. Hence, the batching of transactions that rollups utilise allows for these smaller value transactions to be processed efficiently. In comparison, centralized systems like Visa processes up to 20,000 transactions per second via the VisaNet electronics payment network. Achieving scalability in a highly decentralized network often requires high processing power due to the large number of validators in the network.

Withdrawals from layer 2 networks to the Ethereum mainnet can sometimes take several hours to 7 days to complete. Optimistic rollups experience the longest withdrawal times because it takes a while for verifiers to determine if there is any fraud in the transactions submitted to the network. Unlike payment or state channels, Sidechains are independent blockchains with their own set of validator nodes.