Layer 2 & Scalability: Still Hype or Now Substance?

One of the most common criticisms of the early Blockchain solutions was that they were slow. That slowness was often combined with large transaction fees. 

application built on Ethereum gets popular, transaction fees on the network go up to tens of dollars! 

Layer 2 (or L2) solutions have come up as a practical solution to this scalability mess. As opposed to Layer 1 (L1) solutions, which try to improve the performance of the blockchain protocol itself, L2 solutions run on top of the L1 blockchain. They inherit the security properties of the underlying blockchain and provide greater throughput (or transaction processing capacity), lower transaction fees and faster transaction confirmations.

Over the years, blockchain projects have employed L2 scaling techniques such as State channels, Sidechains, Plasma and ZK Rollups to various degrees of success. In this article, we’ll look at popular L2 scaling techniques along with some of the recent developments in the field of L2 scaling.

Payment (State) Channels

When it comes to Bitcoin scaling, the first name that comes to mind is Lightning Network. The project employs payment channels, which allow the majority of transactions to be settled off-chain, leaving only the final state of the nodes to be recorded on the blockchain.

Payment channels are a subset of what are known as state channels, which can support not only payments but also general ‘state updates’ and data broadcast.

Lightning Network reduces the need to open a channel with every party on the network that is involved in the transaction, further reducing the number of on-chain transactions and reducing the cost and time
required for transactions.

Sidechains

Matic Network has been a trusted name when it comes to L2 scaling solutions on Ethereum for considerable time now. To increase throughput, Matic creates a two-way peg between the main blockchain and Matic’s proprietary sidechain, dividing the workload between the two.

V Systems, a blockchain infrastructure project aimed at providing high network throughput and security for Web3.0 applications, recently launched their own version of payment channels. Known as xLumi, this modified version of payment channel can power fast and secure micropayments on the blockchain.

ZK Rollup is a relatively new L2 scaling technology. Loopring, a protocol for developers to build high-throughput, non-custodial, orderbook-based exchanges on Ethereum, leverages on ZK Rollups. As proof of concept, Loopring has created a DEX that achieves 2,000+ TPS using ZK Rollups.

In cryptography, a Zero- Knowledge Proof (ZK Proof) is a method by which one entity (the ‘prover’) can prove to another identity (the ‘verifier’) that they have the knowledge of particular information without revealing the information itself. ZK proofs are the fundamentals on which various privacy techniques have been developed.

Meanwhile, a Rollup is an L2 scaling solution similar to Plasma, allowing hundreds of side chain transactions to be processed offline with only a single hash of the side chain block being included in the main blockchain. However, while Plasma creates one transaction per transfer, ZK Rollups bundle hundreds of transfers into a single transaction.

In ZK Rollup, all funds are held by a smart contract on the main chain while it performs computation and storage off-chain. Validity of the side chains is ensured by ZK proofs, which enables the protocol to compress the aggregated transactions and reduces the amount of information that is written in the main chain.

Recently, Loopring unveiled gasless transfers from L2 to L1 environment. With this feature enabled, users will no longer be constrained by being only able to transact with other L2 protocols; they would now be able to transfer assets from Loopring L2 accounts to any Ethereum L1 wallet.

So, is L2 the way ahead?

While a bunch of new blockchain projects are adapting the L2 way of life, not everyone is convinced that L2 is the way ahead. ParaState, a Polkadot project which provides a smart contract virtual machine for writing Ethereum-compatible smart contracts in popular programming languages and running them on Polkadot, believes that L2 is inferior to L1 scaling.

In many cases, L2 solutions require developers to learn and use new programming languages to builds DApps on the new chain. Moreover, use-case scenarios which involve interaction with multiple L2 protocols built on
the base chain can dampen the user experience while also leading to higher transaction fees overall.

ParaState believes that L1 solutions are inherently more secure, feature-rich, and stable. Unlike popular scaling solutions like Matic, ParaState wants developers to make use of all the tools and features available on Ethereum.

Harmony, a fast, secure and highly scalable blockchain for deploying Web3.0 applications, is another such example. By integrating sharding with PoS consensus mechanism, Harmony provides fast finality (<2s) through its L1 framework itself.

So, hopefully you know a little more about what scalability has become in a short amount of time, and how it’s still a massively promising area of development. As a disclaimer, I own none of the projects discussed.