Michaël van de Poppe - 23 March 2022
Ethereum: the importance of scaling
In the past few months, I have written all about new blockchain networks and their features. Some of those have grown significantly over the past year, reaching multiple billions in market value. They have thrived, because of the lack of scaling on Ethereum. Hopefully, these issues are solved with the integration of L2s on the Ethereum network. Currently, Ethereum hosts thousands of dApps and handles over a million transactions per day. All this activity has led to network congestion and users paying high fees per transaction. Layer 2 solutions help Ethereum scale.
Ethereum is built on a Proof-of-Work consensus algorithm and each node in the network has to process every single transaction. This requires a lot of computing power and resources that slows down the number of transactions the network can handle.
Due to the rise of DeFi back in 2020 and the growth of the industry in both users and projects over the past two years, the network has become almost unusable by the average person. This explains the growth of alternative blockchain networks like BSC, Cosmos, and Avalanche.
However, there is light at the end of the tunnel. For some years now, developers have worked on scaling solutions for Ethereum and this year some of those have been rolled out. These scaling solutions are known as Layer 2s and are the subject of today’s blog.
L1s and L2?
First of all, let’s get some terminology out of the way. Layer 1 blockchains (L1s) are the main blockchain architectures. Examples of Layer 1s are Ethereum, Bitcoin, but also NEAR, Polkadot, Cosmos, Avalanche, and Fantom.
Layer 2s or Layer 2 solutions are secondary frameworks built on top of an existing Layer 1 blockchain. The Layer 2 solution allows for transactions to happen without congesting the Layer 1 blockchain. Through various innovative solutions, the transactions are settled on the Layer 1 blockchain but do not hinder the processing power.
There are different types of Layer 2 solutions present. They each have different purposes and features as pictured in the image below.
The first type are sidechains. The name explains the solution already: sidechains are separate blockchains that run parallel to the Layer 1 blockchain. A sidechain has its own consensus mechanism and could have other customizable features.
An example of a sidechain to Ethereum is Skale Network. The downside to sidechains is the lack of decentralization as they rely on their own consensus mechanism and bootstrapping enough validators is a hard task.
In the past, sidechains were considered as Layer 2s. However as they have their own consensus mechanism they are not really a Layer 2, but more of a separate blockchain.
Rollups are the second type of scaling solutions. There are currently two main sub-categories within rollups: Optimistic rollups and Zero-Knowledge (ZK-) rollups. This solution bundles the transactions made on the L2 in a single transaction and that one is settled on the main Layer 1 chain. This solution has the potential to bundle thousands of transactions which can then be handled as a single transaction on Layer 1.
Currently, the rollup scene of Ethereum is heating up. There are multiple L2s already live and in total $5.89bln worth of digital assets are living on those rollups.
The most dominant rollup is Optimistic rollup Arbitrum with just under $2.5bln on-chain.
Two highly anticipated L2 rollup solutions are in their last stages of release: zkSync and Starkware. Both projects use Zero-Knowledge for their solution. Currently, zkSync is live and StarkWare has released its StarkNet Alpha. The validity proof execution of a transaction allows for more reliable data validation and faster confirmation times than in Optimistic rollups.
Transactions fees on these L2s are significantly lower; often cheaper than one dollar. Furthermore, the transaction finality is extremely fast, while transactions on Ethereum take a few minutes to settle.
L2s are relatively new still and adoption is growing fast. It takes time for existing projects to adjust their code and properly deploy on Layer 2s. Yes, there are quite a few protocols already running on existing L2s, but still not the desired amount to make it a fully functional ecosystem.
Over the coming months, I expect many well-known protocols to deploy on L2s, especially with the launches of zkSync and StarkWare this month. The presence of Ethereum-based protocols on new L2s is important for the network as it is lifting pressure off Ethereum mainnet. This is important for the health and future of the Ethereum ecosystem.
In this blog post, I explained to you some key terminology used in the crypto space: scaling, L1s, and L2s. The launch of L2s is important for the well-being of Ethereum as the network congestion and current fee rates are pushing smaller pLayers off the network. Crypto should be open for anyone and unfortunately, under current circumstances, this is hardly sustainable.
Layer 2s are becoming increasingly more important. Especially, as more projects are launching on L2s, bringing more activity to those solutions. L2s are important to help Ethereum become scalable again and drive the high fees down to a more reasonable level.
Another important milestone for Ethereum in terms of scalability is Ethereum 2.0 that is expected to go live in 2022. This would bring Proof-of-Stake to the network and also help the network with scaling. With Ethereum 2.0 scaling solutions, like Layer 2s will still be relevant and used.
There are currently multiple highly anticipated scaling solutions live, among others are Arbitrum, Optimism, zkSync and StarkNet Alpha. Personally, I am very much pleased with the experience on zkSync. You can already deposit Ethereum to their chain via their site https://zksync.io/.
See you next week.