The year 2021 has been a bright year for layer-2 scalability solutions. We have witnessed how Polygon (Matic network) has grown despite the market crash reaching an all-time high and crossing both the $1 and $2 milestone in the same month. While Polygon is leading the charts for layer-2 scalability solution and onboarding more and more Defi projects to its platform on a daily basis, there are two other major players that have shown strong potential in layer-2 scalability space and have recently backed by the most prominent VCs in the circle and adopted by major DeFi projects. In this article, we will understand the need for a layer-2 scalability solution and look at the top 3 such solutions.
What is a layer-2 scalability solution?
Layer-2 refers to a secondary framework or protocol that is built on top of an existing blockchain. The main goal of these protocols is to solve the transaction speed and scaling difficulties that are being faced by the major cryptocurrency networks.
Those who have built a decentralized application on the ethereum layer-1 blockchain, know that in its current manifestation, it isn’t quite ready. Transactions on layer-1 ethereum blockchain are slow and take a very long time to clear and paying for every basic function is expensive. Not to mention the poor user experience faced by developers in building applications on layer-1. The majority of these problems essentially boil down to a general scalability problem. And both poor throughput and high cost have been massive barriers to any meaningful adoption of layer-1.
The reason behind Ethereum’s scalability challenge is that each node in the network has to process each transaction. Each node performs the job of verifying that the miners’ work is valid. They play an integral role within the network as they’re the main check on the miners if they decide to act maliciously. Similarly, each node keeps an accurate copy of the current network state, meaning they don’t need to rely on a third party to confirm the balance of every account and smart contract.
There are both on-chain and off-chain solution exists to solve the layer-1 challenges but off-chain solutions have proven to provide much more scalability and usability as compared to its on-chain counterpart that has limited scope for both. Also the main chain doesn’t need to go through any structural change because the layer-2 is added as an extra layer to provide high throughput without sacrificing network security. This is the main reason that off-chain solutions have picked up as the go-to option for scaling ethereum based blockchains.
Two major examples of layer-2 solutions are the Bitcoin Lightning Network and the Ethereum Plasma. Despite having their own working mechanisms and particularities, both solutions are striving to provide increased throughput to blockchain systems.
Lightning Network is based on state channels, which are basically attached channels that perform blockchain operations and report them to the main chain. State channels are mainly used as payment channels. On the other hand, the Plasma framework consists of sidechains, which are essentially small blockchains arranged in a tree-like structure and performs all operations independently.
So in the context of layer-2, blockchain transactions and processes take place independent from the main chain. And at some logical checkpoint, it gets merged to the main chain. That’s why we often refer to this technique as “off-chain” scaling solutions.
Important to note that ethereum is also on track to release ETH 2.0 by end of 2022. It promises to increase the speed, efficiency, and scalability of the Ethereum network, enabling it to address the bottlenecks of its parent chain. ETH 2.0 has some fundamental changes in its structure and design as compared to its parent chain. The two major changes are the “proof of stake” consensus protocol and the “sharding” mechanism for data management across the network.
Despite ETH 2.0 planned rollout, the adoption of the layer-2 solution seems inevitable and one can argue that ETH 2.0 launch is still close to 2 years later in the timeline and there is only theoretical proof of its efficiency. On the other hand, the well-established layer-2 solutions have already proven their efficiency and been adopted by major DeFi players in the ecosystem.
Top 3 ethereum layer-2 scalability solution
There are many layer-2 solutions in the market today and they provide different types of solutions: some help scale payment, some are used for scaling smart contract, and some offload computation to off-chain. But one feature that is common among all is that they move most of the work off-chain and use permissionless blockchain as anchors to ensure security. Let’s look the top 3 layer-2 scalability solution that has caught industries major attention in 2021.
Polygon (Previously Matic Network)
Leading the layer-2 market, Polygon (previously Matic network) is an Indian startup started in 2018 by Sandeep Nailwal, Anurag Arjun, and Jayanti Kanani. Polygon has grown 123x in value to become one of the most valuable crypto projects in the world with a total market cap of nearly $14 billion at press time.
Polygon took the best of Ethereum and built solutions on top of it to solve its core problems of scalability, slow finality, and high gas fees and provided additional layers of functionality for its end customer to choose from.
Polygon allows developers to choose any kind of scaling solutions based on their application needs. They can also combine them in a different way with the option to switch them at any point depending on the network’s current tasks spectrum. Broadly, polygon offers two types of Ethereum-compatible chain networks: secured chains and stand-alone side chains.
Developers can choose whether they want their project to take the maximum from the Ethereum advantages, or use only some of these features and be more independent and flexible instead. There is no right or wrong here, and the choice should only depend on the specific dApp and its requirements.
Polygon is backed by billionaire Mark Cuban, who recently made an undisclosed investment in the growing startup.
Offchain Labs, the company behind Arbitrum, is a spun-out research project from Princeton University. It officially started in 2018 and has built a strong community of developers and contributors.
Arbitrum also uses optimistic rollups, which attempt to remove the need for zero-knowledge proofs by changing the consensus mechanism. Instead of verifying each transaction, the network assumes that all are correct, making users intervene only if they see an incorrect transaction. This enables the chain to reduce fees by more than 50x for most workloads.
Arbitrum launched to mainnet on May 28, 2021, and over 250 teams have requested early access to the platform. Both major Decentralized exchanges (DEX) SushiSwap and UniSwap have shown interest to move to the Arbitrum in its latest effort to avoid ethereum’s costly network fees and to get faster transaction settlement.
Optimism layer-2 scalability solution
Optimism is another Ethereum layer-2 scaling solution company founded by Jinglan Wang, Karl Floersch, Kevin Ho in 2019. Optimism is currently completing a phased rollout and will be ready for large-scale production later this year. The platform has been running testnets in partnership with DeFi platform Synthetix.
Optimism uses optimistic rollups to achieve far lower fees, far lower latency, and far greater throughput when compared to ethereum layer-1. It also provides a world-class development experience for users to build applications on its platform.
Optimism has shown huge potential and been backed by none other than Andreessen Horowitz who has led a recent $25M round in the startup.
It is evident that layer-2 summer is here and we will keep seeing more startup coming in the space and more and more project getting onboarded to layer-2 for better user experience and of-course lower feed and higher transaction speed.