Complete Guide to Ethereum Layer 2 Solutions [Updated 2023]

Introduction

Before we begin, a little insight on the overall reason for the efforts put into making the scaling solutions. The main problem with the growing blockchain and crypto space is that there is a scarcity in processing transactions. What gives it a solid back up is Ethereum’s emphasis on decentralization and security. The reason may trigger a question of what the problem of scalability  affects. In short, it affects the overall network throughput and as a result affects the scaling ability of decentralized applications (dApps).

Did You Know? Scalability in blockchain refers to the ability of a system to handle the continued increase in usage without giving up on the functionality.

There is no second guessing that one of the most popular blockchain networks that is in use in today’s market is Ethereum. Data shows that as of May 2020, the total number of decentralized applications that are active on Ethereum is 2855. The number is excluding the various other applications which are under development. Addition onto that, the potential of the Ethereum network for boosting the DeFi (Decentralized Finance) space is also indicative of the possibilities for a huge upsurge in the total number of applications and users on the Ethereum network.

Why Do We Need Ethereum Layer 2 Solutions?

The evolution and the continued increase in the number of applications and users on the Ethereum network is responsible for surge in the load on the network. However, as the load increased the capacity of the Ethereum network stayed limited until the Merge finally took place last year; which is a boost that the ETH developers team gave the network to increase its scalability. With all the incidences, the cost of using the Ethereum network increased pretty significantly as more and more users started competing with each other for adding more transactions to the Ethereum network.

As a result for the same, layer 2 scaling solutions were put to use. One of the most important objective of increasing the scalability for the Ethereum network is to improvement in transaction speed along with the transaction throughputs. At the same time, the scaling solutions that are being worked upon should not in any way give way for any mistakes or compromise on the security or decentralization of the Ethereum network.

Moving on from scalability, the number of problems or issues faced by Ethereum also includes the concerns about the unreasonable gas prices and slower transactions on the layer 1 blockchain. As a result to all the existing issues, Ethereum now have two solutions, or rather options; better referred to as sharding and layer 2 solutions. Both of the solutions are working towards addressing the problems of scalability, high transaction fees, and delays in transaction settlement.

Additional Read: Ethereum Shanghai Upgrade 

What are Ethereum Layer 2 Solutions 

To describe Layer 2, they are the ones which work upon the base blockchains in order to increase the scalability and efficiency of the network. As a layer 2 scaling solution, the protocol requires transferring of some of the transactional load of the blockchain protocol in order to adjust the architecture of the system. Following that, the network handles the processing load and reports back to the main blockchain to then finalise the results.

Note: Ethereum Layer 2 solutions are a separate blockchain that extends the Ethereum network while inheriting the security guarantees that Ethereum provides within its ecosystem.

Layer 2 solutions basically stands for what their name give away. Layer 2 networks on Ethereum stay on the Ethereum network in the form of smart contracts. The layer 2 solutions do not generally need any modifications in the base level protocol for interacting with the main network. Besides working towards the Ethereum’s vision of bettering scalability, sustainability and security, the Ethereum layer 2 scaling solutions can also serve various other functions such as off-chain computation and scalability of payments.

Benefits of Ethereum Layer 2 Solutions

Understanding the meanings and the solutions of Ethereum Layer 2 it becomes imperative that we also take a quick look into the benefits that Ethereum Layer 2 solutions bring forth. They are:

• Lower Fees: The combination of multiple off-chain transactions into a single layer 1 transaction helps in a huge reduction of the transaction fees which makes Ethereum more accessible for all.
• Maintain Security: As layer 2 blockchains settle their transactions on Ethereum Mainnet, this allows users to enjoy the benefit from the security of the Ethereum network.
• Expand Use Cases: With the increase in transactions per second, lower fees, and new technology, projects has the capability to expand into new applications with improved user experience.

Read More: ETH Price Prediction

List of Top Ethereum Layer 2 Solutions 

Layer 2 Solutions	Crypto PROJECTs IN BRIEF
POLYGON (MATIC)	One of the most popular Ethereum based layer 2 scaling solutions running on the platform, thanks to its active partnerships and innovations.
LOOPRING (LRC)	Founded by an ex-Google software engineer, Daniel Wang, Loopring is a L2 solution on the Ethereum blockchain that seeks to make trading assets and making payments on the Ethereum platform faster and cheaper without sacrificing security of the network.
ARBITRUM	Founded by former US White House Chief Technology Officer, Ed Felton – Arbitrum is one of the fastest growing DeFi platforms in the market and is expected to even cross Polygon is this rate of progress continues.
OPTIMISM(OP)	Quite similar to Polygon, Optimism is yet another effort at improving the speed of Ethereum transactions and cut costs by settling them on another parallel blockchain using data compression techniques.
IMMUTABLE X	One of the most unique layer 2 solutions on this list, Immutable X is a blockchain platform that simplifies the creation of non-fungible token (NFT) projects for developers.
XDAI CHAIN	It has been live since late 2018 and uses a stablecoin called xDai as its native crypto to run the blockchain. According to the project themselves, transactions on the xDai chain are “very fast, very inexpensive, and require a single token (xDai).”
ZKSWAP (ZKS)	This is another very unique layer 2 scaling solution built on top of Ethereum blockchain. This is an automated market maker (AMM) type decentraliseds exchange (DEX) powered by a zkRollup technology.
SKALE	Skale is another open source, layer-2 scaling solution that tries to solve the scaling problem on Ethereum compatible blockchains be creating elastic sidechains that can be used by decentralised applications (dApps) can use to run their transactions.

LAYER 1 VS LAYER 2: DIFFERENCES

Criteria	Layer 1	Layer 2
Method of working	Changes to the underlying protocol	Distributing the transaction load among many blockchains
Implementation Approaches	Consensus protocol enhancement and sharding	Rollups, nested blockchain, sidechains and state channels
Qualities	Innovation in the design of consensus processes and native token	Boost network speed, programmability and lowering transaction prices
Limitations	Developers don’t make any modifications to the architecture	Users can make micro transactions without no exorbitant transaction fees

Read more: Layer 1 vs Layer 2 Scaling Solutions

Conclusion

The gaps existing in the Ethereum network in today’s date is the need for Ethereum to be able to incorporate more transactions per second without increasing the size of the nodes in the network. However, the best Layer 2 solutions have worked towards answering the answer on that to a certain extend. The solutions also provide the optimal answer for the increased load on the Ethereum network as they enable off-chain computation.

The Ethereum Layer 2 solutions are quite simply the next big thing that will ensure the resourceful utilization of blockchain networks. Important point to be noted is that many Ethereum layer 2 solutions are in the development or testing stages. Thus, it may take a while before the ecosystem can see a full-fledged layer 2 solutions dominating the Ethereum landscape.

Read more: Ethereum Virtual Machine explained

FAQs