Recently, Ethereum has become one of the strongest players in the blockchain industry as a smart contract platform. The way this blockchain has dominated the industry is insane. This dominance is accompanied by a growing need for faster speeds, lower transaction fees, and scalability to support millions of users.
Ethereum mainnet, which is often referred to as Layer 1, has a throughput boundary and can get clogged up during times of high traffic, such as during DeFi manias or major NFT releases. During such times, gas fees can skyrocket to hundreds of dollars per transaction.
This bottleneck problem on blockchain has given rise to Layer 2 solutions, scalable applications that are built on top of ETH. These Layer 2 projects are designed to dramatically lower the transaction fees and improve the end-user experience, all without sacrificing security or the level of decentralization.
Why Ethereum Needs Layer 2 Now
The reason to use Ethereum is the trustless and secure environment it provides. But, with that security comes the tax of performance. Ethereum Layer 1 has limited throughput, processing about 15-30 transactions per second. As both the number of users and dApps increase, the network congestion and transaction fees increase.
Just try to create a fast-paced gaming dApp, real-time micropayments, or a busy decentralized exchange on a system where each transaction can potentially cost you $50 at high transaction times. It really is not practical for the vast majority of users or developers. The result? Slower adoption, user frustration, and developers choosing other platforms.
Layer 2 solutions solve this problem by handling an increasing share of Ethereum’s transactional traffic, reducing the need to rely on the congested mainnet. They anchor summaries or proofs of these transactions back onto Layer 1 and maintain the integrity and finality of their Layer 2 actions, while slashing costs and raising the speed of transfers.
Layer 2 solutions offer a much-needed performance boost today, but Ethereum’s long-term scalability vision also includes major upgrades, such as Ethereum 3.0. To understand how these upcoming changes could reshape the network, read our in-depth blog on whether Ethereum 3.0 will solve scalability challenges.
How Layer 2 Works: The Building Blocks
Layer 2 is a broad term describing a family of technologies and protocols that work with the Ethereum base layer to enable scaling. Such L2 solutions want to make transactions more efficient while keeping the results secured by the Ethereum mainnet.
A simpler way to think of it:
- Off-chain processing: L2 solutions process transactions off the Ethereum blockchain.
- Smart contract anchoring: Data, rules, and state transitions on L2s are anchored on Ethereum using smart contracts.
- Data batching: L2s batch multiple off-chain transactions into a single on-chain transaction, significantly lowering gas costs.
- Settlement & security: In spite of being off-chain, the final state transitions of the games are committed on the Ethereum blockchain, ensuring trustlessness and decentralization.
The Types of Layer 2 Solutions
There is not one size for all solution. Developers can select from various L2 architectures depending on use cases:
State Channels
State channels are one of the first generations of L2 scalability. It lets several parties lock the money on-chain and freely transact off-chain. These off-chain transactions are instantaneous and cost practically nothing. Afterwards, participants close the channel, and the final state is recorded on the Ethereum network. This approach is appropriate in applications with frequent transactions like gaming or micro-payments.
Sidechains
Sidechains run independently of Ethereum’s consensus, using their own validator networks. They maintain compatibility via bridges but are not secured by Ethereum directly. Polygon is perhaps the best-known example of a sidechain, with the ability to conduct fast and affordable transactions. Nonetheless, since security is managed independently, it is necessary for the user to trust the sidechain’s validator set.
Rollups
Today, rollups are the most promising and used L2 solution. They group several transactions together and write a single compressed digest or proof to Ethereum.
Optimistic Rollups: These rollups assume transactions are valid unless proved otherwise. Validators have a certain time, called the “challenge period,” to challenge transactions. Optimism and Arbitrum are the best examples of Optimistic Rollups.
Zero-Knowledge Rollups (ZK-Rollups): These produce cryptographic proofs (referred to as SNARKs or STARKs) to immediately attest to the fact that all transactions that were batched are indeed valid. ZK-Rollups are more complicated but offer faster finality and better privacy. Famous ones are zkSync, StarkNet, and Loopring.
Different kinds of rollups have different tradeoffs in performance, compatibility, but also code complexity. For example, Optimistic Rollups are more EVM compatible, and ZK-Rollups are designed for high-velocity, high-frequency ecosystems.
Benefits Beyond Speed
Faster transaction times and lower gas fees are some of the most recognizable features of Layer 2, but there are other strategic advantages to businesses and developers as well:
- Lower Barrier to Entry: The low fees allow more users to access dApps and services, even for micropayments or just casual interactions.
- Better UX: Faster confirmation means fast and reliable user experiences, which is essential for gaming, DeFi, or NFT marketplaces.
- High-Volume Scalability: You will be able to build applications that process thousands of transactions per second (something Layer 1 cannot handle).
- Sustainability: L2s also reduce the environmental load on Ethereum by decreasing what’s uploaded to the chain.
Real-World Adoption and Use Cases
Layer 2 is not just a theoretical solution anymore; it is driving real-world innovation.
- DeFi Platforms: Layer 2 enables you to trade, borrow, and farm more quickly and cheaply.
- Gaming Ecosystems: Game developers are leveraging L2 to build real-time, gasless NFT interactions and in-game economies.
- NFT Marketplaces: They can mint, buy, and trade NFTs at a much lower cost, unlike on Layer 1, where those same activities are prohibitively expensive.
- Enterprise Solutions: Companies are implementing private Layer 2 networks for secure, scalable tracking and processing of supply chain data.
Trade-Offs and Considerations
As great as Layer 2 is, developers and users need to understand what it cannot do:
- Withdrawal Lags: With optimistic rollups, you need a challenge window, which is usually around a week to complete transactions.
- Security Variance: Sidechains are not secured by Ethereum’s security directly; therefore, they are less secure from attacks unless they are rigorously audited.
- Complicated User Journeys: Handling assets across a variety of different chains and bridges is often complex to navigate, but wallet solutions are getting better.
- Liquidity Fragmentation: As assets and users are fragmented across different L2s, DeFi protocols require bridges or aggregators to pool liquidity together.
- Centralization Risks: Many rollups are still dependent on centralized sequencers, which raises concerns about censorship and downtime.
The Road Ahead: Ethereum’s Rollup-Centric Vision
Ethereum’s core developers, including Vitalik Buterin, have published a rollup-centric roadmap. This vision places Layer 2 at the center of Ethereum’s scaling strategy. This strategy will remain relevant even after the entire sharding process is implemented.
Even though sharing will enhance the availability of the data, Layer 2 solutions will keep on serving as the backbone for most of the dApp activity. One significant step on this journey is Proto-Danksharing (EIP-4844), which introduces data blobs to make it cheaper for rollups to post transaction data to Ethereum.
In addition, one of the highest priorities is to decentralize the sequences employed by a number of L2 platforms. The work that projects such as Espresso and Astria are doing is exploring mechanisms for making the infrastructure more modular, so we can remove such central points of failure.
Final Thoughts: The L2 Era Is Here
Layer 2 protocols are not just temporary fixes, but they are the foundation of Ethereum’s next growth phase. Whether it is using Optimistic Rollups or advanced ZK tech, L2 provides the performance, efficiency, and scalability.
Ethereum needs to deliver on its promise as the world’s decentralized computer. This is why industry leaders such as Aave are already putting significant development resources into L2, and user adoption is growing literally every day: it’s not a question of whether you will be using Layer 2, it’s a question of when. And the smartest time to begin is now.
