Ethereum is a generalized public blockchain anyone can use to build decentralized apps, launch tokens, and spend digital currency. Its comprehensive capabilities make it a highly accessible virtual computer, which is probably why Ethereum does over 1 million transactions per day.
Mass adoption of Ethereum is a win for blockchain but is problematic for the user experience. Why? If you've used Ethereum at any point in 2021, you know it's slow and expensive.
Layer 2 scaling solutions are the answer to making Ethereum usable. Whereas an Ethereum transaction might take 10 minutes and a painful amount of ETH for gas fees, L2 transactions happen instantly with nearly-free fees.
Today there are three Layer 2 scaling solutions for Ethereum you should know about: Polygon Network, Optimism, and Arbitrum. But before we dive into those, let's talk more about how Layer 2 scaling works.
Layer 2 scaling solutions make using Ethereum cheaper and faster for everyone. Understanding how they work is easy when you define the Ethereum blockchain as Layer 1. Let's unpack this idea below.
The Ethereum network is the main or primary chain, meaning all transactions happening on the network are on-chain. As the primary chain, Ethereum doesn't have unlimited network capacity. Instead, its transaction throughput is limited to about 15 transactions per second.
Ethereum’s performance ceiling is why transactions become expensive and delayed when too many people use the network. Just like a freeway, too much traffic makes Ethereum congested and an overall pain to use.
To put Ethereum's scaling limits in perspective, consider that Visa handles around 2,000 transactions per second. The comparison isn't exactly fair since Visa is centralized and Ethereum is decentralized. However, viewing Ethereum's limitations versus centralized networks is important for understanding how scalable Ethereum needs to be for widespread use.
So, what's Ethereum to do? Ethereum 2.0 is the upgrade expected to significantly boost the network’s scaling performance, but it isn't due until 2023.
That's why Layer 2 scaling solutions have started popping up. Remember, Ethereum is Layer 1, so you can visualize an Ethereum-connected Layer 2 sitting to either side of the main chain.
The way L2s make the magic happen is like this 👇
In the end, everyone splits the transaction fee for the rollup block, which is why the microtransactions composing the rollup block are very cheap.
So, the takeaway is Layer 2 transactions are inexpensive, fast, and make Ethereum usable. For transaction-intensive applications like payments, DeFi yield farming, minting NFTs, and smart contracts, Layer 2s are game-changers.
The drawback to L2 scaling is that different sidechains are not interoperable with each other. At least not yet. Here's why it's a problem.
Imagine you're a liquidity provider for Uniswap on the Ethereum main chain. You're tired of paying high gas fees every time you add/remove liquidity and claim rewards. Suddenly, Uniswap opens markets on two different Ethereum sidechains — hooray!
Wait, no, not hooray. Because those sidechains can't communicate, you have to treat them as separate markets. In practice, this means splitting your liquidity between L2s or choosing one instead of the other.
What happens if sidechain A takes off (more users) and sidechain B never gains traction? You might miss out on juicy transaction fee rewards, so you'll have to allocate liquidity wisely.
Security is another concern. Generally, a main chain/Layer 1 blockchain like Ethereum is more secure than a smaller network because there is greater liquidity tied up in the consensus process. An upstart Layer 2 sidechain like Polygon Network can't afford the same security guarantees until its staked liquidity rivals or exceeds Ethereum.
In Q1 2021, Ethereum settled over $1.5 trillion worth of transactions. Let that settle in for a moment. For reference, Visa often settles $2 trillion per quarter.
Even more impressive is that Ethereum did all of its financial activity without real scalability. That shows how eager the public is to use Ethereum even if it's inconvenient, expensive, and slow.
Now you have to imagine what happens when using Ethereum is convenient, cheap, and fast. That's what Ethereum-connected Layer 2 sidechains offer. Given the volume of settlements on Ethereum, an effective Layer 2 can surpass Visa's financial activity.
Who are the top contenders in the Layer 2 scaling wars? Below, you'll find the best Layer 2 scaling solutions ranked in order of network activity.
Polygon Network is a Layer 2 blockchain project that started out as Matic, before rebranding. During its time as Matic, the project scored praise and financial investment from Coinbase Ventures, along with plenty of adoption from smaller projects.
However, it wasn't until the NFT boom that Matic started picking up steam. Once Matic rebranded to Polygon Network, the floodgates well and truly opened. Most major DeFi protocols deployed to Polygon, including names like Aave, Curve, and Sushi.
The Aave Polygon market helped propel the total value locked on Polygon to nearly $9 billion. QuickSwap, a Uniswap-like decentralized exchange on Polygon, launched into the network's deep liquidity stores to provide users a cheap alternative to Ethereum DEXes.
Transactions fees on Polygon are nearly free, a welcome change from the days of $100 gas fees on Ethereum. To sweeten the deal, Polygon even gives you free MATIC tokens when you bridge your assets — enough to pay for several transactions.
Long before Polygon Network caught on, Optimism was rumored to be the best Ethereum scaling solution in production. However, development delays cost Optimism the opportunity to hit the market before Polygon.
Luckily, Optimism's production delays haven't affected adoption rates. Uniswap, Synthetix, and the upcoming Lyra crypto options exchange are all on board. And that's without mentioning backing from a16z, the undisputed kingmakers of crypto.
The project's mainnet, Optimistic Ethereum (OΞ), is already live and hosting Uniswap V3. The Uniswap Optimism market has racked up $6.5 billion in total value locked — a good sum pointing to the early success of Ethereum L2s.
If you’re curious about trying Optimism, check out this nifty gas fee calculator to see how much gas you save versus using Ethereum.
Similar to Polygon and Optimism, Arbitrum is an Optimistic Rollup for scaling Ethereum smart contracts. In other words, Arbitrum makes Ethereum faster and cheaper to use, specifically for developers.
When thinking about Layer 2 protocols, it's easy to believe they only apply for end-users like crypto traders and yield farmers. However, decentralized app developers building on Ethereum, spend small fortunes on smart contract executions during test phases alone. Arbitrum is aimed at helping developers get their Ethereum-based projects off the ground at low costs.
Arbitrum One is the protocol's mainnet beta release. Right now, it's only available to app developers building on Ethereum but will see a full public release soon.
Plenty of big names feature as early Arbitrum collaborators. Uniswap, Sushi, and Consensys have all tested or launched on the protocol.
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