High gas fees have been a top pain point for anyone interacting with Ethereum for a long time. These costs can make even simple transactions expensive, hindering the widespread adoption of decentralized applications (dApps) and other blockchain-based services. Layer 2 (L2) scaling solutions are changing the game. They do this by dramatically cutting gas fees and opening up new opportunities for Ethereum and the entire Web3 ecosystem. GreedyChain.com provides the whole Blockchain story for Blockchain addicts. Read deeper, side-by-side Layer 1 comparisons, expert takes on Layer 2 scaling, elementary introductions to cross-chain bridges, developments in DeFi, major NFT trends and much more.
Layer 2 scaling solutions are revolutionizing the blockchain ecosystem. They provide a strong solution to the scaling limits baked into Layer 1 blockchains such as Ethereum and Bitcoin themselves. These are the second-layer solutions that allow you to settle transactions off-chain. You can still take advantage of the security and decentralization of the main chain. Layer 2 solutions handle transactions in batches off the main chain and only settle on-chain after processing multiple transactions. This tactic is a huge reduction in congestion and fuel prices.
The impact of these solutions is substantial. Even if some L2 solutions are able to provide “instant” transaction confirmations. They give an economic incentive that your transaction will be processed in the next L2 block. For instance, the cost of swapping tokens on Uniswap through Optimism can be under $1. By comparison, the cost of doing the same on Layer 1 could be over $20. Decentralized finance (DeFi), once the domain of hardcore crypto enthusiasts, is rapidly becoming the coffee shop alternative. This change creates the possibility for innovative new use cases that previously were unfeasible due to cost.
Layer 2 minimizes latency, increases engagement, and facilitates instant payments or algo trades at the speed of light. Applications can interoperate easily within an L2 instance and can transact across L2s via cross-chain messaging solutions. Getting to know Layer 2 will prepare you for what’s next in the rapidly growing landscape of the Web3 ecosystem. It provides a myriad of scaling solutions, each one focused on different use cases.
The Power of Layer 2 Solutions: A Deep Dive
There are multiple types of layer 2 solutions, each built with different trade-offs in security, speed, and expense in mind. Some of the most popular types include:
Rollups: These bundle hundreds or thousands of transactions into one cryptographic proof, which is then verified on the main chain. This significantly reduces the amount of data that needs to be processed on Layer 1, leading to lower gas fees. Optimistic rollups (like Optimism and Arbitrum) assume transactions are valid unless proven otherwise, while zero-knowledge rollups (zk-rollups) use advanced cryptography to ensure validity without revealing the underlying data.
State Channels: These allow participants to conduct multiple transactions off-chain and then only submit the final state to the main chain. This is ideal for applications with frequent interactions between a limited number of parties.
Plasma: This involves creating child chains that are connected to the main chain. Transactions are processed on these child chains, and only the root hash is recorded on the main chain.
Validium: Similar to zk-rollups, Validium uses zero-knowledge proofs but stores transaction data off-chain. This can lead to even lower gas fees but introduces a different set of security considerations. Certain L2 technologies (such as validium, side chains, and Arbitrum SCSC) are able to keep all L2 data within the L2 instance and off of L1.
Just how effective Layer 2 solutions have been at easing the congestion is clearly shown in the data. This hasn’t necessarily been the case, for instance the average fee on zkSync and Zora dropped following the Ethereum upgrades last month. According to Dune Analytics, median gas fees on Starknet fell to a record low of 0.40 cents. They dropped from roughly $6 on March 1, right before Dencun went live, to about $0.04 post-upgrade. That’s a huge reduction in costs, opening up the Ethereum platform to so many more people and potential applications.
For example, in the seven days leading up to the Berlin upgrade in April 2021, Ether rose 7.5%. On that date, April 14, 2021, ETH was around $2,043. The share price jumped about 3%, closing at $2,520 on April 15, 2021, the day of the upgrade.
Use Cases and Industry Adoption
Layer 2 solutions are already seeing significant adoption across industries and use cases. Some notable examples include:
DeFi: Layer 2s are making DeFi more accessible by reducing transaction costs. Platforms like Uniswap, Aave, and Compound are deploying on Layer 2 to offer cheaper and faster trading, lending, and borrowing.
NFTs: NFT platforms like OpenSea use Polygon to mint and trade collectibles quickly and affordably. This has enabled artists and creators to reach a wider audience and has fueled the growth of the NFT market.
Gaming: Layer 2s are essential for blockchain gaming, where frequent microtransactions are common. By reducing gas fees, Layer 2s make it possible to create engaging and immersive gaming experiences without burdening players with high costs.
Payments: Layer 2s enable faster and cheaper payments, making them ideal for everyday transactions. This could pave the way for wider adoption of cryptocurrency payments in retail and other industries.
If a third-party operator runs the L2 instance, they may have flexibility in how they accept payment for L2 transactions. This includes being open to accepting payment in any currency, including good old fashioned fiat. If a company chooses to operate its own private L2 instance, they will always have the option to keep the details of their transactions private. There are few successful use cases for L2s that only benefit a single entity. A new technology known as zkzk-rollup, like Aztec 2.0, allows for confidential transactions built directly into Layer 2. This does not mean that other people using the same L2 instance can’t read your transactions however.
Choosing the Right Layer 2 Solution
Here are some factors to consider:
Security: How secure is the Layer 2 solution? Does it rely on a centralized operator, or is it fully decentralized?
Cost: What are the gas fees on the Layer 2 solution? How do they compare to Layer 1 fees?
Speed: How fast are transactions processed on the Layer 2 solution?
Compatibility: Is the Layer 2 solution compatible with the applications and tools you want to use?
Ecosystem: How active and vibrant is the ecosystem around the Layer 2 solution? Are there many developers and users?
Scaled-up Layer 2 solutions are currently solving blockchain’s issues with speed, cost, and scalability. After the Eth2 migration, all L1 and L2 transactions would be final after some period of time, since they’d all be subject to Eth2 security. Compounding the L1 situation is how L2 introduces even more complexity to the equation. Now, transactions may need to be completed on both L2 and L1.
Ethereum's Competitive Edge: Responding to Rivals
The more people use Ethereum, the more difficult censorship is for an individual government to succeed. Building this public engagement will be the network’s best defense against the next blockade. During the week leading up to “the Merge,” Ethereum transitioned from a proof-of-work to a proof-of-stake consensus mechanism. In reality, ETH pumped 20% during that period.
Comparison with Solana and Other Blockchains
Ethereum's robust ecosystem and decentralized nature offer a strong foundation for long-term growth, setting it apart from competitors like Solana, which sometimes faces criticism regarding centralization.
Strategic Advantages of Layer 2 Solutions
Layer 2 solutions play a critical role in Ethereum’s scalability. They defend its fundamental principles of security and decentralization, providing it with a long-term strategic advantage in the everchanging blockchain ecosystem.
Layer 2: A Commitment to Efficiency and Growth
Layer 2 solutions solve this by taking the majority of the work off-chain, or in parallel, and returning results in near-instant time. Layer 2 solutions, such as Optimistic or Zero Knowledge Rollups, dramatically lower these costs by processing transactions off-chain or in batches.
Enhancements in Speed and Scalability
Ethereum is making use of Layer 2 technologies to increase their transaction processing speeds. This improvement further increases its overall scalability, making Ethereum better equipped to handle potential mass adoption.
Timeline for Implementation and Future Prospects
Ongoing developments and integrations of Layer 2 solutions promise a future where Ethereum can handle a much larger volume of transactions efficiently and cost-effectively, supporting a growing ecosystem of decentralized applications.
Layer 2 scaling solutions are changing the game for the blockchain ecosystem. They address the shortcomings of Layer 1 blockchains like Ethereum and Bitcoin. L2s like state channels, plasma validium and sidechains are the cheapest solutions out there. With rollups, the savings are less dramatic, though still considerable, because the transaction data is stored on L1.
Related @Starknet/X_Starknet conveyed an attention-grabbing chart to the X social media platform. Unsurprisingly, it draws attention down to a massive drop in transaction fees across most layer-2s such as Starknet, OP mainnet, Base, zkSync, and Zora.
The future of Ethereum is bright, and it’s all thanks to the advent of Layer 2 scaling solutions. By making gas fees more affordable and transaction speeds faster, these solutions are helping to make Ethereum more accessible, usable, and scalable. The Web3 ecosystem continues to grow at an unprecedented pace. Layer 2s will be instrumental in promoting innovation and increasing adoption.
