There has been much discussion about the future of Layer 2 solutions (e.g., Lightning Network, zk-SNARKs) and how they may be able to handle scaling issues for cryptocurrencies and blockchain technology in general. What are some representative projects that offer a glimpse into what these Layer 2 ecosystems might look like?
The “ethereum layer 2 scaling solutions” is a concept that has been developed in the Ethereum ecosystem. Layer 2 scaling solutions are a new way to scale decentralized applications by using off-chain transactions.
From Q3 to Q4, the TVL of Ethereum Layer 2 projects climbed 600 percent, reaching a high of $7.17 billion on Nov. 25. Arbitrum ($2.4 billion) has the highest TVL as of December 11, followed by dYdX ($980 million) and Boba Network ($770 million).
TVL Share by Layer 2 Protocols: Footprint Analysis
As Ethereum’s user base expands, network congestion and high gas prices are becoming a major issue for apps. As Ethereum’s popularity grows, resolving the issue has become a primary priority. On Oct. 26, Vitalik Buterin gave a talk titled “A rollup-centric Ethereum roadmap,” hinting that Layer 2 is the future of Ethereum scaling.
What exactly is Layer 2?
The goal of layers is to reduce congestion on the Ethereum network by increasing its capacity. Layer 2 is a scaling technique that builds on Layer 1 and enhances it.
- Layer 1: Enhancements to the blockchain itself, such as on-chain scaling, which consists of solutions that increase block size or data structure, sharding methods, and segregated witness to boost transaction processing capacity.
- Layer 2: Rather than changing the block size and other rules of Layer 1 (the mainnet) directly, a second layer under the chain (i.e. Layer 2) is built, which includes state channels, sidechains, Plasma, and Rollup, where some transactions are processed to share the mainnet’s pressure and interact with it as needed, i.e. off-chain scaling.
What is the relationship between Layers 1 and 2? They’re similar to the connection between a parent firm and a subsidiary. Layer 2’s major technological goal is to forward certain Ethereum transaction data requests to Layer 2 for processing. Layer 2 returns transaction information across the chain to Layer 1 after processing in order to relieve transaction strain on Layer 1 and obtain low gas cost transaction outcomes.
Layer 2 is also an expansion of Layer 1, overcoming the limits of Layer 1’s original functionality and inheriting Ethereum’s security without jeopardizing Layer 1’s unique capabilities.
Layer 2 scaling solutions
State channels and side chains were the two major techniques in the early days of Layer 2. Layer 2 engineers, on the other hand, discovered that state channels could not be decentralized, that anonymity was required for privacy protection, and that sidechains kept asset control off-chain, which was a major worry for asset security. As a result, neither was suitable for scaling in Layer 2.
Layer 2 has taken use of these traits to constantly increase its growth possibilities. A good solution ensures data security, transaction authenticity and anonymity, and quick exit cycles.
Layer 2 TVL Growth Rate Footprint Analytics
There are now 19 Layer 2 initiatives, including DEX kinds and other networks, according to Footprint Analytics. With total TVL up 11,400 percent from the start of the year to far, they remain the most notable developments in the crypto industry. The fast expansion of Layer 2 is directly tied to its scaling technology solutions, which now include Plasma, Optimistic Rollup, ZK Rollup, and Validium.
Layer 2 TVL Protocols Footprint Analysis (Latest Day)
1. Plasma protects assets, but the lack of knowledge is a hindrance.
Plasma is an off-chain scaling solution that focuses on the mainnet engaging with the fewest off-chain transactions possible, and it improves transaction throughput by using child chains reporting to the parent chain (i.e. Ethereum) (the number of requests the system can process per unit of time).
Plasma is one of the first OMGX Network Ethereum scaling initiatives that implement the Layer 2 idea, which is based on the following concepts.
- Users move assets from Ethereum to the Plasma chain when the Plasma chain is built outside of Ethereum, a procedure that involves mainnet funds to be delivered to a smart contract that runs the Plasma chain. After that, you may interact with that asset.
- The Plasma chain operator (i.e. the Plasma chain maintainer) will batch the transactions inside that time period to create a block at regular intervals.
- The Plasma chain operator transmits the asset transaction status to the current owner of the asset and returns the outcome of the computation to the mainnet.
The Plasma chain scaling solution’s innovative feature is that it ensures asset relative safety and the ability to retrieve transaction outcomes on the mainnet even when the off-chain environment is unavailable. As a result, the mainnet transaction throughput is increased while the contact with the mainnet is reduced and the transaction gas price is reduced.
The Plasma mechanism, on the other hand, isn’t ideal.
- There is no data available. Because the master chain does not have access to all off-chain data, it can only be confirmed via a root hash (a typical binary tree structure consisting of a root node, a set of intermediate nodes and a set of leaf nodes.)
- Long period of withdrawal. Due to the lack of mainnet data, the exit method is complicated, requiring longer lead periods for fraud evidence, resulting in withdrawal cycles of 7 to 14 days or more.
- Extensions that are generic are tough to come by. In a technological framework, restricting the data structure of sub-chains increases the challenge.
OMG Network is a plasma project.
According to Footprint Analytics, OMG Network’s current TVL is $3.1 million, putting it at #14 among Layer 2 projects, which is modest in comparison to other projects and a stationary project in terms of trends.
However, the aforesaid difficulties of Plasma have steadily decreased the potentials of OMG Network as other solutions such as Optimistic Rollup in Layer 2 Projects have emerged. As a result, it has changed its name to Boba Network and used Optimistic Rollup scaling technologies to increase its growth potential.
The problems of unavailability of Plasma data are essentially solved by Optimistic Rollup and ZK Rollup.
2. On-chain transaction data is compressed via Optimistic Rollup.
Optimistic Rollup is a hybrid of Optimistic contracts and on-chain data availability that chooses to trust the validity of transaction packages presented by operators while punishing fraud.
When Layer 2 calculates the result back to Layer 1, if the verifier suspects the result is fraudulent, the verifier can issue a challenge, which causes the master chain to freeze the asset and perform transaction data and record verification to determine whether the transaction is genuine or fraudulent. Alternatively, if no validator has any reservations about the calculation’s outcome, the transaction is assumed to be authentic by the master chain.
This paradigm enhances on-chain efficiency, bundles many transactions for operation, saves time and gas prices, is more compatible, decreases developer labor, and better addresses Ethereum congestion.
The following are the drawbacks:
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- Validation is inefficient. Long challenge periods for assets to be placed and moved out come from the validation of fraud proof methods.
- It’s possible that funds will be frozen. If the verifier feels the result is fake, the master chain may freeze the verifier’s assets.
- ZK Rollup is more scalable. Transaction compression is rather poor.
Arbitrum and Boba Network are two optimistic rollup concepts.
The Arbitrum chain is now the Layer 2 leader, according to Footprint Analytics, while the Boba Network is a newer network that has grown fast in the previous month. They employ the Optimistic Rollup scaling approach, which allows for high throughput while retaining trust-free security and allowing developers to install and manage smart contracts at cheap cost.
ZK is number three. Rollup is a decentralized system that is challenging to design.
ZK Rollups are used to increase scalability by combining many money transfers into a single transaction. ZK-Rollups combine hundreds of transfers into a single transaction, while Plasma makes one transaction for each money transfer.
ZK Rollup has a greater transaction compression rate than Optimistic Rollup. This is mirrored in the fact that it checks the authenticity of a transaction packet using zero-knowledge proofs, in which the operator may persuade the verifier that an assertion is accurate without giving the verifier with any relevant information. This is accomplished in the following manner.
- Layer 2 adds account asset information once the user transfers in and locks assets.
- Users sign and transmit transactions on the Rollup network.
- Transactions are collected, packaged in bulk, and zero-knowledge proofs are generated.
- The transaction package and zero proof of knowledge are broadcast to the master chain by the operator.
- The smart contract uses zero-knowledge proofs to verify the transaction packet’s validity, then modifies the values and conducts the transfer operation.
The benefits are as follows:
- Getting to the point of decentralization
- Uplink efficiency is high.
- Transaction compression rates that are higher
- Validation efficiency is high, and there is no validation waiting time.
- Improved security and privacy. ZK Rollup technique assures that the data given to the master chain is genuine and legitimate, and Zero-Knowledge Proof does not divulge transaction information.
The following are the drawbacks:
- The time and effort required to generate zero-knowledge proofs.
- Customizing an application is complex, and compatibility is limited.
dYdX is a ZK Rollup project.
dYdX is developing a reliable and professional exchange for trading crypto assets, with the goal of allowing users to control their transactions and, eventually, the exchange itself.
DYDX Token Price Analysis by Footprint Analytics
dYdX is a popular DeFi derivative that was one of the first to use ZK Rollup technology. Overall data performance: TVL has been in the top two Layer 2 projects since August, with a current TVL of US$976 million and a negative trend in its Token (DYDX) pricing, which is now at US$9.04 with a market value of US$570 million.
4. Validium is a low-security hybrid scaling solution.
Validium is a hybrid scaling solution that gives consumers the option of using either the ZK Rollup or Validium modes. Validium’s data, unlike ZK Rollup’s, remains beneath the chain, but ZK Rollup’s data availability is on the chain.
Validium is probably more suited for applications that don’t need as much trust (for example, gaming DApps), but ZK Rollup is better suited for situations that demand more security, such as payments and exchanges.
DeversiFi and ImmutableX are two Validium projects.
DeversiFi TVL & ImmutableX TVL Footprint Analyses
According to Footprint Analytics, DeversiFi, the biggest current Validium-based decentralized exchange, achieved a record high TVL of over 100 million on 4 December, claiming to be the simplest method to access DeFi possibilities on Etheruem: invest, trade, and transfer tokens without incurring gas costs.
ImmutableX, the first Layer 2 of NFT on Ethereum, offers zero-gas costs and rapid transaction scalability for games, applications, and markets. In the Layer 2 rankings, it is presently ranked #7.
Summary
Over the years, layer 2 scaling methods have been improved and iterated in order to establish a safe solution for scaling on Ethereum, addressing issues like congestion and excessive gas prices. They’ve established themselves as the go-to technological option for scaling blockchain applications.
The DeFi market, NFT, and virtual worlds, among other things, are all being driven by Layer 2’s technical innovation and quick growth. Layer 2 will most likely become the future of Ethereum scaling as network capacity increases and transactions become more efficient.
The following material is only a personal opinion, and it is not intended to be used as financial advice. Feedback is requested if there are evident flaws in understanding or data.
This is the author’s original work; please cite the source of the replica. The author’s permission is required for commercial reproduction. Unauthorized commercial reproduction, extract, or other uses will be examined for legal ramifications.
Footprint Analytics is the source of this report.
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Layer 2 is an ecosystem of projects that are trying to solve scaling problems. Layer 1 is the blockchain and layer 2 is the application layer. The projects in Layer 2 are representative of what’s happening on the whole ecosystem. Reference: layer 1 crypto projects.
Frequently Asked Questions
What is Layer 2 scaling solutions?
A: Layer 2 scaling solutions are features that will allow the game to run and display at higher resolutions than your monitor or television allows.
What is l2 Crypto?
A: L2 Crypto is a decentralized platform for trading, investing and storing cryptocurrencies that are built on the Ethereum blockchain.
What are Ethereum layers?
A: Ethereum layers are the different levels of security an account has, starting with Normal and going up to Triple. The higher the number, the more secure your accounts is.
Related Tags
- types of layer 2 solutions
- layer 2 blockchain
- ethereum scaling problem
- layer 2 crypto coins list
- plasma layer 2
