What is Layer 2

Today, Ethereum is the platform with the most number of smart contracts and DApps, the largest amount of locked crypto assets and the greatest transaction volume. With the explosive growth of the cryptocurrency market in recent years, the order of magnitude of on-chain activities such as transfers and contract calls is also increasing. However, even when the market is weak, users still face the problem of network congestion and high gas cost, leading to impaired user experience. The scalability issue of ETH is certainly one of the key topics of concern for the community.

Ethereum scaling solutions

Ethereum scaling solutions can be divided into two main directions: Layer1 (L1) and Layer2 (L2).

Layer1, also known as ETH 2.0, is an on-chain upgrade that focuses on the transition of the underlying consensus from POW to POS, as well as the sharding mechanism. Through the change in mechanism, network nodes do not need to store the entire contents of the chain and can use their computing power more efficiently, thus freeing up a larger network capacity.

However, due to the difficulty of implementation, the rollout of Eth 2.0 must be done in stages over the next few years. With no clear timeline for the completion of the upgrade, Layer2 scaling has now become a greater focus for the market.

Layer2 is an off-chain improvement solution that does not affect the public ETH chain itself. All transactions can be processed on the Layer 2 network and Layer1 is only used when necessary, thus achieving the purpose of completing large volumes of transactions quickly and inexpensively.

If we compare ETH to a highway, Layer2 is equivalent to the viaduct built on top of this highway, which can help to divert traffic from a congested blockchain.

Key technologies of Layer2

Technical solutions for Layer 2 networks have also evolved in recent years:

State Channel

The State Channel model is similar to Bitcoin’s Lightning Network. In simple terms, both parties of the transaction construct a channel under the chain that can transfer money to each other, and final result is only broadcasted to the chain after all relevant transactions are completed.

The earliest state channel project on ETH was the Raiden Network. As that solution had more limitations and it required both parties to be in long-term transactional demand, it is at a standstill today.

Plasma

Plasma is one of the earliest solutions proposed by Vitalik Buterin. It is somewhat similar to a sidechain and operates independently of ETH, but uploads all the block hashes processed in Plasma to the main blockchain contract for verification. Hundreds and thousands of transactions can be processed simultaneously off the chain, and only a few dozen bytes’ worth of final transactions will be uploaded.

However, one of the problems with this solution is that its dependency on the honesty of the nodes on Plasma and accuracy of data uploaded to the main chain. To prevent the risk of malicious nodes, users can only withdraw their funds after a challenge period of up to 7-14 days, which also brings a considerable challenge to the implementation of this solution.

Rollups

Rollup should be said to be the hottest and most favored means of expansion today, and there has even been arguments t in the industry that the success of the Rollup directly determines the sustainability of ETH.

Although Rollups also processes transactions on Layer2, it records the necessary data for each transaction on Layer1, such as the transferor, payee, amount, etc., which is more secure than Plasma.

How does recording every transaction ensure that it is more scalable than Layer1? Here, it can be understood that it compresses the transaction data, using a tree structure in the contract to record the state of each account, and only contains transaction records. Signature verification is done in the Layer 2 network so that the original data is can be compressed when it is transmitted to the main chain.

For solving the data consistency problem, two different technical routes have gradually evolved, namely the Optimistic rollup and ZK rollup.

Optimistic is somewhat similar to Plasma. As the word implies, it optimistically defaults all uploaded data to be free of fraud and challenges are issued only if there are problems. Because of the time needed to resolve possible disputes, users currently have to wait at least a week or so to withdraw funds from Layer 2 Optimistic Rollup networks such as Optimism.

The ZK Rollup uses zero-knowledge proof technology, and smart contracts judge the accuracy of data by verifying that proof. While users can quickly withdraw funds, its main problem is that it requires the network to have strong arithmetic power to generate zk proofs. The zkSync project, which implements ZK rollup, is currently deployed in the ETH main network.

Closing thoughts

Rollups are the most mainstream solution in the Layer2 expansion of ETH, and there are more and more related Layer2 network projects already deployed, including the gradual emergence of cross-chain bridges to open up various chains. It should be noted that whether Layer1 or Layer2, these solutions are not mutually exclusive and need to complement each other in the future to improve the network processing capacity of Ethereum.

Disclaimer: Trading crypto involves significant risk and can result in the loss of your invested capital. The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. MEXC Learn solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.

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