Scaling Ethereum with Layer 2 Solutions: An Overview

You have probably heard of Optimism, Arbitrum, and Zksync and maybe even used them, but do you know what layer 2 is? How does it work? Why might we need more than just layer 1? Well, we will be going over everything necessary to understand layer 2s.

Layer 2 origin

To understand where it all started, we must go back to 2019 when nobody cared about crypto or blockchain. Our great lord and savior, Vitalik Buterin, released an article explaining the scalability of blockchain. In this article, he coined the term Blockchain Trilemma.

The Blockchain Trilemma discusses the challenges that developers face in creating a blockchain that is scalable, decentralized and secure — without compromising on any facet.

Scalability, Security, and Decentralization are often referred to as the “three pillars” of blockchain technology. Developers believe that a single blockchain can only achieve at most two of these properties simultaneously.

It is impossible to design a blockchain system that is both highly decentralized and able to process numerous transactions per second because the decentralized nature of the system means that many participants need to reach a consensus on the state of the network, which can be time-consuming. Similarly, achieving both high levels of security and scalability is difficult because the more secure a system is, the more resources are required to maintain it, which can limit its ability to scale.

This trade-off is known as the blockchain trilemma, and it is an ongoing challenge for developers to solve. Layer 2s are designed to solve the scalability issue. Layer 2s is a layer on top of the main blockchain (Settlement layer). It allows the main blockchain to process more transactions per second since it doesn't have to focus on decentralization and security.

So you must be wondering do layer 2s solve the trilemma? Well, no, they do not. Layer 2s do not solve the trilemma but only address the scalability issue. Furthermore, layer 2s sacrifice some level of decentralization and security. This is because layer 2s solutions rely on the main blockchain for security and often rely on a smaller number of participants to validate the transactions in the layer 2 solution, which can make them less decentralized than the main blockchain.

So, while layer 2 solutions can improve the scalability of a blockchain system, they do not entirely solve the blockchain trilemma, and the trade-offs between the three pillars of blockchain technology still need to be considered.

How does L2 work?

Layer 2s are scaling solutions that handle transactions off of Ethereum while using the decentralization and security of Ethereum. Layer 2 is an entirely separate blockchain that extends Ethereum. Layer 2s constantly communicates with Ethereum by executing bundles of transactions and submitting them to Ethereum to settle. This lets Ethereum handle security, data availability, and decentralization. In addition, layer 2s take the executional burden away from Ethereum and post finalized proofs back to Ethereum. Removing transactions from Ethereum makes Ethereum less congested and faster.

Rollups

Rollups are the current layer 2 solutions. Rollups roll up hundreds of transactions into a single transaction on Ethereum. The transaction fees are distributed across everyone in the rollup, making it cheaper than Ethereum.

There are two types of rollups:

• Optimistic
  An optimistic rollup is a way to scale Ethereum that involves moving execution and data off-chain. Optimistic rollups execute transactions outside of Ethereum but settle transactions on Ethereum. Optimistic rollups are considered “optimistic” because they assume off-chain transactions are valid and don't publish proofs of validity for transaction batches posted on-chain.
• Zero Knowledge Rollups
  Zero-knowledge rollups (ZK-rollups) also roll up transactions that are also executed off Ethereum. The difference between ZK-rollups and Optimistic rollups is that ZK-Rollups produce validity proofs to prove the correctness of their changes. The validity proof demonstrates with cryptographic certainty that the proposed changes to Ethereum's state are truly the end-result of executing all the transactions in the batch.

Optimistic Rollups examples

Optimistic rollups behave exactly like Ethereum; the only differences are that they are faster and cheaper. Anything that you can do on Ethereum, you can do on an optimistic rollup. Many dapps like Uniswap and SushiSwap have started migrating to a layer 2. Some examples are: Arbitrum, Optimism, Boba network and Celo.

Zero Knowledge Rollups examples

Zero Knowledge rollups also behave like Ethereum, they are faster but they don't store any of the transaction data. That's what makes them Zero Knowledge. Most dapps or applications have not yet migrated over to a ZK-Rollup but they are on their way. Some examples are : Zksync, Aztec network and Loopring.

What to do?

As an avid DeFi user you should be bridging toward these different chains. Chains like Arbitrum and Zksync do not have tokens yet. I am 99% sure they will airdrop tokens to users based on usage and volume on chain. Optimism for example gave users $1000 for just using the chain, some users received as much as $50.000. There are multiple chains that are being released in 2023 and 2024, your job is to extract as much value as possible.