Author: Leandro Pereira
Translation: Huohuo, vernacular blockchain
Ethereum, the second-largest cryptocurrency by market capitalization, is set to undergo a major upgrade to its network that will introduce 1 million new layer 2 scaling solutions.
The Layer 2 solution aims to alleviate the network congestion and high transaction fees that have plagued Ethereum in recent years. Known as the Ethereum Improvement Proposal - EIP 1559, the upgrade will also introduce a new fee structure that will burn a portion of transaction fees, thereby increasing the value of Ethereum over time.
The latest fee structure will greatly benefit Ethereum holders. A portion of transaction fees will be burned rather than simply awarded to miners, which is expected to reduce the supply of Ethereum in circulation. This is expected to drive up its value over time. This new fee structure is designed to make transaction fees more stable and predictable, ultimately improving the user experience and making Ethereum accessible to a wider range of users.
1. But why do we need so many L2s?
Blockchains are built in layers, with each layer having a specific purpose. The base layer, called Layer 1, is the foundation of a blockchain network. This is where transactions are processed and recorded on a distributed ledger.
While secure and decentralized, layer 1 blockchains have limitations in scalability and transaction speed due to the consensus mechanism used to validate transactions. This is where layer 2 solutions come in.
Layer 2 refers to auxiliary frameworks or protocols built on top of the base blockchain to increase transaction speed and scalability. Instead of processing transactions directly on Layer 1, Layer 2 solutions process transactions off-chain before bundling and settling them on the main chain. This helps reduce congestion on the base layer.
Some examples of L2 solutions include state channels, sidechains, and rollups.
State channels process transactions between two parties off-chain by opening a payment channel. Sidechains are independent blockchains that run in parallel and are linked to the main chain. Rollups batch off-chain transactions and generate cryptographic proofs to verify transactions on L1. Blockchains such as Cosmos, Polkadot, and Cardano refer to themselves as Layer 0 (L0) because they are designed to serve as the foundation for building multiple interconnected blockchains in a network.
These layer 0 blockchains are specifically optimized to allow different layer 1 chains and layer 2 solutions to interoperate and communicate through the layer 0 foundation.
They also allow developers to create customized L1s for specific use cases, leveraging the shared security and interoperability of the underlying Layer 0. By coordinating messaging and transactions across chains, L0 networks can achieve greater overall transaction throughput across the entire blockchain ecosystem.
L0 enables security to be obtained from the entire network, rather than each chain having to protect itself in an isolated island. Therefore, "shared security" can provide stronger protection.
Therefore, L0 is not just a single chain, they are the foundation of the Internet of Blockchains.
2. Back to the advantages of L2…
Some key benefits of L2 solutions include:
Improved throughput and transaction speed compared to transacting directly on L1. This is key to dApp scalability.
Users pay lower transaction fees compared to paying gas fees on L1.
Since transaction processing is offloaded from the main chain, scalability is enhanced.
Why is there a proliferation of multiple L2 blockchains rather than a single standardized approach?
What I am saying is that each L2 technology is optimized for certain types of transactions, assets, or blockchain interactions, for different use cases — state channels, Plasma, rollups, etc. There is no single solution that is best across the board.
For example, state channels are best suited for fast micropayments, e-commerce transactions, and gaming use cases. Some of these platforms include Raiden Network for Ethereum and Counterfactual for NFT transfers.
Plasma — is optimized for more complex smart contracts and applications involving pools of funds. An example is Polygon Plasma, a scaling solution for the Ethereum network that aims to increase its speed and reduce transaction fees. It works by creating multiple sidechains, each capable of processing transactions independently of the main Ethereum blockchain.
Use cases may also include Optimistic Rollups (OR) and ZK-Rollups (ZKR).
Due to the efficiency of bundled transfers, OR is well suited for decentralized exchanges and NFT-focused applications. For example, Synthetix and Loopring utilize Optimistic Rollups. ZKR is well suited for privacy-focused transactions such as anonymous payments and transfers. Ethereum's ZKSync 2.0 uses ZK-Rollups for low-cost, private transactions.
Sidechains enable faster, more customized blockchains for enterprise use cases. For example, the RSK sidechain enables Bitcoin-like functionality with smart contract capabilities, while Validium is suitable for confidential DeFi applications and blockchain interoperability. Privacy protocol Railgun uses Validium to achieve anonymity.
As you can see, each layer 2 technology serves a different purpose. By leveraging an approach that fits their target use case, applications can optimize transaction throughput, costs, and user experience.
With multiple L2 solutions coexisting, there is more room for experimentation, evolution, and customization based on application needs, avoiding centralized points of failure where the failure of one dominant L2 solution due to technical issues or hacker attacks will severely impact the entire ecosystem. By diversifying solutions, risks can be reduced.
An application may need to combine multiple L2s for different parts of its backend or transaction flow. Interoperability enables this composability.
Different development teams are creating Layer 2 designs simultaneously, without a centralized body enforcing standards. This leads to even more diversity.
Competition and funding dynamics — Each L2 is competing for adoption by dApp developers. This drives innovation as solutions try to differentiate themselves in the market.
Still in the early stages — blockchain itself is still maturing. Over time, as platforms, technology, and demand evolve, we’ll likely see more consolidation and standards emerge around Layer 2.
The proliferation of layer 2 solutions provides flexibility, reduces systemic risk, and enables customization for this rapidly innovating industry. But in the long term, increased coordination and interoperability protocols can help bring more structure to this emerging space.
3. There are also challenges
When implementing an L2 blockchain, there are a few challenges we must consider:
Increased complexity of design and security considerations. Potential security tradeoffs and centralization risks depending on L2 design. Fragmentation across multiple L2 solutions rather than a unified ecosystem. Technical barriers for users to adopt new processes for processing transactions. Layer 2 solutions are critical to enabling blockchain networks to scale to accommodate larger transaction volumes and users. But consideration needs to be given to integrating Layer 2 in a secure and decentralized manner. In the long run, the right Layer 2 solution can unlock important features and use cases for blockchains. 4. So can we say that L1 is consensus and L2 is transactions?
That's probably a good way to think about it, but let me provide some additional details:
Layer 1 is where the core consensus mechanism runs, validating transactions and adding new blocks to the blockchain. It builds trust and security for the network. However, Layer 1 also handles transactions embedded in the blockchain. The problem is that transacting directly on Layer 1 can be slow and costly due to limitations such as block size and the need to pay high gas fees.
This is where Layer 2 comes in – it processes transactions through the main blockchain first, allowing for faster and cheaper transactions.
Therefore, L2 solutions essentially batch many transactions together and leverage the security of Layer 1 for final settlement while avoiding its inherent limitations in speed and fees. In this sense, both layers process transactions, but L2 is optimized for transaction throughput, user experience, and lower costs.
To use an analogy, Layer 1 is like the Federal Reserve’s bank settlement system, while Layer 2 is similar to the Visa/Mastercard payment network that interacts with consumers and merchants.
TLDR: Layer 1 handles consensus, security, and some base-level transactions, while Layer 2 specifically handles transaction scalability. But they work hand in hand to provide the overall utility of the blockchain.
5. So, do we need more L2?
Very simply, my answer is no. In the long run, we don’t necessarily need so many L2 solutions to proliferate in the blockchain space, and while diversity and flexibility may be beneficial in the early stages, too many isolated or fragmented layer 2 protocols may ultimately hinder mainstream adoption.
Ideally, over time, as the industry matures and leading practices emerge, there will be more coordination and standardization. This could lead to the emergence of a few mainstream cross-compatible layer 2 frameworks tailored for certain functions (such as payments, decentralized exchanges, NFT applications, etc.).
Interoperability standards and modular design will enable these solutions to work together seamlessly. This can provide a good balance between customization, risk reduction and a unified user experience.
All Layer 2 experiments may be necessary initially, but not optimal in the long run. Some standard consolidation and integration can help unlock the true potential of Layer 2 to scale blockchain technology with flexibility and cohesion across applications.
