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introduction
Decentralized finance (DeFi) is selling like hot cakes in the crypto world. It has so many advantages over centralized financial systems that it could lead to a paradigm shift of clients switching to DeFi.
Ever since Ethereum, one of the largest crypto coin developers, started producing decentralized applications, people saw its benefits. Little by little, this thriving digital money platform has made its way onto the decentralized network.
Ethereum ecosystem
The Ethereum blockchain runs on miners that process Ethereum transactions and produces blocks for a fee.
At first, transactions were small. However, today they have skyrocketed. Although a large number of transactions occur together, they are now coupled with insufficient storage space at Layer 1, causing networks to become congested and deadlocked.
In addition, Ethereum’s transaction processing speed currently stands at 15 transactions per second. This can prevent applications from operating at full bandwidth.
Another major problem in the Ethereum ecosystem is the high price of gas amid head-to-head competition and millions of transactions.
This led to an increase in trading costs on decentralized exchanges. This surge in transaction fee prices caused several people to stop trading Ethereum.
In order to make the conclusion of transactions economical again, a change was inevitably necessary.
Decentralized networks – the trilemma problem
Merchants face the blockchain trilemma and only have to settle for two of the three: security, decentralization, and scalability. All of these challenges culminated in the adoption and popularity of L2 or Layer 2 DeFi networks for cryptocurrencies.
For example, Bitcoin chooses security and decentralization for its customers and ends up compromising on scalability. The problem is that without L2 in DeFi networks, you cannot expect to have all three in your system.
How do L2 solutions come to the rescue?
Upgrading Ethereum Layer 1 (L1) with Ethereum Layer 2 makes the difference. The presence of a second layer of DeFi frees L1 in the following ways:
- Removes transactions from the chain
- Offloads the transaction to L2
- Allows transaction interaction
- Records the rest of the total transactions back to L1
This offers the following advantages:
- Higher transaction processing capacity
- Less gas
- Faster confirmation time
- ZK Rollups: Loopring implementation, Starkware, Matter Labs zkSync, Aztec 2.0
- Validium: Starkware implementation, Matter Labs zkPorter
- Plasma: implemented by OMG Network, Matic Network, Gazelle, Leap DAO
- State channels: implemented by Connext, Raiden, Perun
Layer 2 rise
Ethereum Layer 2 is an additional layer on top of the existing Layer 1 running on the previous network. It solves the most important problem L1-only users face: scalability. There have been several rounds of talks about transaction fees, congestion, processing time, etc. The introduction of L2 solutions solves these problems.
The following are the L2 proposals for Ethereum:
- Simpler and cheaper fees
- High processing power
- Faster confirmation
L2 solutions in Ethereum have attracted many mainstream users. An estimate shows that around 4,000 transactions can be processed in one second in L2. Most L2 solutions revolve around servers or nodes – validator, operator, sequencer, block producer, etc. In a blockchain, developers implement these solutions for companies, users or third parties.
Key L2 scaling solutions
payment channels
A payment channel or government channel is a bilateral communication between users that helps them interact on a blockchain. Lightning Network and Raiden are the commonly used government channels, used to execute multiple microtransactions within a timeframe, transfer data, appropriately reduce transaction fees, and subsequently reduce on-chain stress.
side chains
This is another L2 scaling solution that serves as an alternative to transferring tokens to the sidechain to complete the transactions. This technique is implemented at scale in the Matic network. This helps increase efficiency and reduce congestion—all without impacting the backbone protocol.
ZK rollup
Here, too, one of the up-and-coming scaling solutions is being implemented with ZK-Proofs. These are used to record and confirm ownership of detailed information without revealing the actual data. It’s quite similar to plasma. However, it bundles hundreds of transactions together and processes them more efficiently.
plasma
Plasma is like a collection of subchains that are similar to sidechains but unable to perform complex operations to increase security and keep the funds safe. Instead, it is a non-P2P proof-of-authority network that uses a single-tier construction, meaning that it or its child chains do not serve as a parent of any chain.
Is Polygon the savior?
Polygon, a rising star in India and among the world’s best crypto tokens, is another scalable and interoperable framework for blockchain.
It transforms the old Ethereum network into a full-fledged multi-chain system without any of Ethereum’s advantages, such as security and the ever-growing ecosystem. The most significant benefit of Polygon is that it is scalable and has many potential use cases such as: B. Interoperability to connect the Ethereum network with other Ethereum-compatible networks.
In its initial success, Polygon has already peaked at 7.4 million transactions in a day, more than giants like Ethereum.
Polygon also allows developers to customize specific properties of their blockchain networks, helping them to tweak specific constraints and limitations.
L1 vs L2: What’s the ultimate difference?
In the decentralized world, a layer 1 network refers to a blockchain like Bitcoin, Ethereum, etc. At the same time, a layer 2 protocol is a third-party integration that is added on top of a layer 1 blockchain to make it more efficient and more scalable.
Although the L1 solutions were designed to decentralize P2P transactions, they ultimately failed to solve the trilemma problem, and this is where the L2 solutions come in.
The main difference between these two is that L1 solutions are more secure and prefer to keep the network decentralized.
On the other hand, L2 continues to focus on confirmation time, transaction speed, and lower gas fees by handling all the main blockchain loads. Because it’s a third-party integration, there’s a slight trade-off in terms of L1 security and decentralization.
last words
While these two solutions may appear to compete with each other, the opposite is true. L1 and L2 are two sides of the same coin designed to co-exist and enhance the blockchain networks.
L2 helps remove barriers from L1, allowing him to reach his full potential and show his true raw power. There are many L2 solutions; each has its pros and cons.
On the other hand, Ethereum 2.0 is also underway, which just means that once it’s up and running, the days of L2 solutions may end as ETH 2.0 solves most of L1’s hurdles.
Until that day comes, we can only speculate.
Harsimran Kaur has more than seven years of experience in digital marketing, bitcoin and fintech. She is also the author of various blogs about digital marketing and advanced technologies, including blockchain. She has a very good understanding of blockchain technologies such as the Ethereum network (everything from DApps to smart contracts and the Ethereum Virtual Machine), the Bitcoin network, DeFi, yield farming and almost every other similar network.
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