Source - Finextra Research

What are Ethereum Layer 2 Solutions

Layer 2 refers to technologies that allow an application to scale by processing transactions outside of the Ethereum Mainnet (layer 1) while preserving the same security and decentralisation as the mainnet. Layer 2 solutions boost throughput (transaction speed) while also lowering gas costs. Immutable X, Polygon, and Polkadot are three popular Ethereum layer 2 solutions.

Source – Finextra Research

Layer 2 solutions are significant because they provide scalability and greater throughput while maintaining the Ethereum blockchain’s integrity, allowing for complete decentralisation, transparency, and security while lowering carbon emissions (less gas, means less energy used, which equates to less carbon.)

Although the Ethereum blockchain is the most commonly utilised and likely the most secure, it is not without flaws. The Ethereum Mainnet is notorious for its long transaction times (13 per second) and high gas fees. Layer 2s, which are built on top of the Ethereum blockchain, ensure that transactions are secure, fast, and scalable.

Each system has its own set of advantages and disadvantages to consider, including throughput, gas costs, security, scalability, and, of course, functionality. At the moment, no one layer 2 solution can meet all of these requirements. However, there are layer 2 scaling techniques known as rollups that try to improve all of these qualities.

Rollups are layer 2 scaling solutions that offload transaction processing off the main Ethereum network while still posting transaction data to layer 1.

A layer 2 rollup has three components:

  • Outside of layer 1, transactions are carried out.
  • On layer 1, data and proof of transactions are stored.
  • A rollup smart contract which is encountered on layer 1, can enact proper transaction execution on layer 2, while using the transaction data that has been stored on Layer 1.

Finally, rollups require users to stake a bond in the rollup smart contract, incentivizing them to correctly verify and execute transactions.

Rollups are advantageous because they lower transaction prices, enhance transaction throughput, and broaden participation. There are two types of rollups, each with its own set of security features:

  1. Optimistic rollups presume transactions are valid by default and only computation, using a fraud proof, when a challenge is issued.
  2. Zero-knowledge rollups perform computations off-chain and transmit a proof of validity to the main chain.

Ethereum layer 2 solutions have the potential to drastically alter the blockchain ecosystem. Layer 2 solutions ensure that users may preserve all of the security features found on the Ethereum Mainnet while also transacting swiftly and for little to no cost.

This type of technology may entice more individuals to try out the Ethereum blockchain and all of its features. Also, bear in mind that many layer 2 solutions are still in beta, so you should do your homework and always be curious and cautious while experimenting with different layer 2 solutions.